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American Express Co – ‘10-K’ for 12/31/07 – EX-13

On:  Thursday, 2/28/08, at 5:21pm ET   ·   For:  12/31/07   ·   Accession #:  1193125-8-42043   ·   File #:  1-07657

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 2/28/08  American Express Co               10-K       12/31/07   10:2.5M                                   RR Donnelley/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                       HTML    547K 
 2: EX-10.13    Form of Award Agreement for Executive Officers        15±    60K 
 3: EX-10.14    Form of Award Agreement for Executive Officers         9±    40K 
 4: EX-12       Computation in Support of Ratio of Earnings to      HTML     22K 
                          Fixed Charges                                          
 5: EX-13       Portions of the Company's 2007 Annual Report to     HTML   1.75M 
                          Shareholders                                           
 6: EX-21       Subsidiaries of the Company                            6±    30K 
 7: EX-23.1     Consent of Pricewaterhousecoopers LLP               HTML     10K 
 8: EX-31.1     Certification of Kenneth I. Chenault, Chief         HTML     12K 
                          Executive Officer                                      
 9: EX-31.2     Certification of Daniel T. Henry , Chief Financial  HTML     12K 
                          Officer                                                
10: EX-32.1     Section 906 CEO and CFO Certifications              HTML     11K 

Table of Contents

EXHIBIT 13

PORTIONS OF 2007 ANNUAL REPORT TO SHAREHOLDERS

Table of Contents

2007 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY

FINANCIAL REVIEW

The financial section of American Express Company’s (the Company) Annual Report consists of this Financial Review, the Consolidated Financial Statements and the related notes that follow. The following discussion is designed to provide perspective and understanding to the Company’s consolidated financial condition and results of operations. Certain key terms are defined in the Glossary of Selected Terminology, which begins on page 62.

EXECUTIVE OVERVIEW
American Express Company is a leading global payments and travel company. The Company’s principal products and services are charge and credit payment card products and travel-related services offered to consumers and businesses around the world. The Company’s businesses are organized into two customer-focused groups, the Global Consumer Group and the Global Business-to-Business Group. The Global Consumer Group offers a range of products and services including charge and lending (i.e., credit) card products; consumer travel services; and stored value products such as Travelers Cheques and prepaid products. The Business-to-Business Group offers business travel, corporate cards and other expense management products and services; network services and merchant acquisition and merchant processing for the Company’s network partners and proprietary payments businesses; and point-of-sale, back-office, and marketing products and services for merchants. The Company’s various products and services are sold globally to diverse customer groups, including consumers, small businesses, middle-market companies, and large corporations. These products and services are sold through various channels including direct mail, on-line applications, targeted sales forces, and direct response advertising. 
     The Company’s products and services generate the following types of revenue for the Company:

• Discount revenue, which is the Company’s largest revenue source, represents fees charged to merchants when cardmembers use their cards to purchase goods and services on the Company’s network;
   
• Cardmember lending finance revenue, which represents interest income earned on outstanding balances related to the cardmember lending portfolio;
   
• Net card fees, which represent revenue earned for annual memberships;
   
• Travel commissions and fees, which are earned by charging a transaction or management fee for airline or other travel-related transactions;
   
• Other commissions and fees, which are earned on foreign exchange conversion fees and card-related fees and assessments;
   
• Securitization income, net, which is the net earnings related to cardmember loans financed through securitization activities; and
   
• Other revenue, which represents insurance premiums earned from cardmember travel and other insurance programs, revenues arising from contracts with Global Network Services’ (GNS) partners including royalties and signing fees, publishing revenues, and other miscellaneous revenue and fees.

In addition to funding and operating costs associated with these types of revenue, other major expense categories are related to marketing and reward programs that add new cardmembers and promote cardmember loyalty and spending, and provisions for anticipated cardmember credit and fraud losses. 
     The Company believes that its “spend-centric” business model (which focuses on generating revenues primarily by driving spending on its cards and secondarily by generating finance charges and fees) has significant competitive advantages. Average spending per cardmember, which is substantially higher for the Company versus its competitors, represents greater value to merchants in the form of loyal customers and higher sales. This enables the Company to earn a premium discount rate and thereby invest in greater value-added services for merchants and cardmembers. As a result of the higher revenues generated from higher spending, the Company has the flexibility to offer more attractive rewards, other incentives to cardmembers, and targeted marketing programs to merchants, which in turn create an incentive to spend more on their cards.
     The Company creates shareholder value by focusing on the following elements:

• Driving growth principally through organic opportunities and related business strategies, as well as joint ventures and selected acquisitions;
   
• Delivering returns well in excess of the Company’s cost of capital; and
   
• Distributing excess capital to shareholders through dividends and stock repurchases.

Overall, it is management’s priority to increase shareholder value over the moderate to long term by achieving the following long-term financial targets, on average and over time:

• Earnings per share growth of 12 to 15 percent;
   
• Revenues net of interest expense growth of at least 8 percent; and
   
• Return on average equity (ROE) of 33 to 36 percent.

The ROE target reflects the success of the Company’s spend-centric business model and its effectiveness in capturing high spending consumer, small business, and corporate cardmembers.

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AMERICAN EXPRESS COMPANY

     For 2007, 2006, and 2005, the Company met or exceeded management’s targets for revenues net of interest, earnings per share, and ROE, illustrating the success of investments made over the past few years. Reported ROE was 37 percent, 35 percent and 25 percent (prior to the completion of the Ameriprise spin-off discussed below, the Company’s ROE target was 18-20 percent) for 2007, 2006, and 2005, respectively. Refer to page 41 for discussion of the Company’s outlook for 2008.

REPORTABLE OPERATING SEGMENTS
During 2007, the Company’s segments were realigned within the two major customer groups. Accordingly, U.S. Card Services (USCS) and International Card Services (ICS) are aligned within the Global Consumer Group and Global Commercial Services (GCS) and Global Network & Merchant Services (GNMS) 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.
     U.S. Card Services issues a wide range of card products and services to consumers and small businesses in the United States, and provides consumer travel services to cardmembers and other consumers.
     International Card Services issues proprietary consumer and small business cards outside the United States.
     Global Commercial Services offers global corporate payment and travel-related products and services to large and mid-sized companies.
     Global Network & Merchant Services segment operates a global general-purpose charge and credit card network, which includes both proprietary cards and cards issued under network partnership agreements. It also manages merchant services globally, which includes signing merchants to accept cards as well as processing and settling card transactions for those merchants. This segment also offers merchants point-of-sale and back-office products, services and marketing programs.
     Corporate & Other consists of corporate functions and auxiliary businesses, including the Company’s publishing businesses, Travelers Cheques and other prepaid products, American Express International Deposit Company, and the continuing portions of American Express Bank Ltd. not being sold to Standard Chartered PLC as discussed below.

VISA SETTLEMENT
On November 7, 2007, the Company announced that it entered into an agreement with Visa, Inc., Visa USA, and Visa International (collectively Visa) to remove Visa and certain of its member banks as defendants in the Company’s lawsuit against MasterCard International, Inc. (MasterCard), Visa and their member banks. The lawsuit alleges MasterCard, Visa and their member banks illegally blocked the Company from the bank-issued card business in the United States. The settlement agreement with Visa has been approved by Visa USA’s member banks.
     Under terms of the settlement agreement reached with Visa, the Company will receive an aggregate maximum payment of $2.25 billion. The initial amount due March 31, 2008, of $1.13 billion ($700 million after-tax) was recorded as a gain in the fourth quarter of 2007. The remaining payments, payable in installments of up to $70 million ($43 million after-tax) per quarter over the next four years, are subject to achieving certain quarterly performance criteria within the U.S. Global Network Services business the Company is optimistic it will achieve. Given the performance criteria associated with the installment payments, the Company will recognize these payments in income when the performance criteria is achieved. Related to the settlement, the Company recognized litigation expense of $74 million ($46 million after-tax) related to the settlement. Both the Visa settlement gain and the related litigation expense are included in other, net expenses within continuing operations in the Consolidated Statements of Income and within the Corporate & Other segment.

DIVESTITURES AND ACQUISITIONS
The Company announced or completed the following divestitures during 2007, 2006, and 2005.

AEB and AEIDC
On September 18, 2007, the Company entered into an agreement to sell its international banking subsidiary, American Express Bank Ltd. (AEB) and American Express International Deposit Company (AEIDC), a subsidiary that issues investment certificates to AEB’s customers, to Standard Chartered PLC (Standard Chartered) for the approximate value of $1.1 billion, subject to certain regulatory approvals. Standard Chartered will pay the Company an amount equal to the net asset value of the AEB businesses that are being sold at the closing date plus $300 million. At December 31, 2007, this would have amounted to approximately $819 million. The Company also expects to realize an additional amount representing the net asset value of AEIDC, which was also contracted to be sold to Standard Chartered 18 months after the close of the AEB sale, through a put/call agreement. As of December 31, 2007, the net asset value of that business was $232 million. This value is expected to be realized through (1) dividends from the subsidiary to the Company and (2) a subsequent payment from Standard Chartered based on the net asset value of AEIDC on the date the business is transferred to them.
     For 2007 and all prior periods presented, the operating results, assets and liabilities, and cash flows of AEB (except for certain components of AEB that are not being sold) have been removed from the Corporate & Other segment and reported

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AMERICAN EXPRESS COMPANY

within the discontinued operations captions in the Company’s Consolidated Financial Statements. AEIDC will continue to be included in continuing operations within the Corporate & Other segment until such time as AEIDC qualifies for classification as a discontinued operation, which will occur approximately one year prior to its transfer to Standard Chartered. Beginning with the third quarter of 2007, AEIDC’s investment portfolio was reclassified to Trading from Available-for-Sale due to the impact on the holding period of AEIDC’s investments as a result of the related AEB sale agreement.
     This Financial Review and the Notes to the Consolidated Financial Statements have been adjusted to exclude discontinued operations unless otherwise noted. Refer to Note 2 for further discussion of AEB as a discontinued operation.

Divestitures with GNS Network Arrangements
On May 31, 2007, the Company completed the sale of its merchant-related activities in Russia to Russian Standard Bank (RSB), for approximately $27 million ($18 million after-tax) net gain in the Global Network & Merchant Services segment. $23 million ($15 million after-tax) of the gain relates to the merchant-related activities sold and is reported as a reduction to other, net expenses in the Company’s continuing operations. $4 million ($3 million after-tax) of the gain relates to the issuance of the GNS license and is reported as other revenue in the Company’s continuing operations. 
     During the third quarter of 2006, the Company completed the sale of its card and merchant-related activities in Malaysia to Maybank, and its card and merchant-related activities in Indonesia to Bank Danamon for combined proceeds of $94 million. The transactions generated a gain of $33 million ($24 million after-tax), and are reported as a reduction to other, net expenses in the Company’s continuing operations ($23 million in the International Card Services segment and $10 million in the Global Commercial Services segment).
     On June 30, 2006, the Company completed the sale of its card and merchant-related activities and international banking activities in Brazil to Banco Bradesco S.A. (Bradesco), for approximately $470 million. The transaction generated a net after-tax gain of $109 million. $144 million ($131 million after-tax) of the gain relates to the card and merchant-related activities sold and is reported as a reduction to other, net expenses in the Company’s continuing operations ($91 million in the International Card Services segment, $28 million in the Global Commercial Services segment, and $25 million in the Global Network & Merchant Services segment). A $48 million ($22 million after-tax) loss related to the sale of the Company’s international banking activities to Bradesco is reported in discontinued operations for banking activities the Company exited in Brazil. 
     The Company will continue to maintain its presence in the merchant-related businesses within Russia and in the card and merchant-related businesses within Malaysia, Indonesia, and Brazil through its Global Network Services arrangements with the acquirers and its retention of agreements with multinational merchants.

Ameriprise, TBS and Other Divestitures
On September 30, 2005, the Company completed the spin-off of Ameriprise Financial, Inc. (Ameriprise), previously known as American Express Financial Corporation, the Company’s former financial planning and financial services business. In addition, the Company completed certain dispositions including the sale of its tax, accounting, and consulting business, American Express Tax and Business Services, Inc. (TBS). The operating results, assets and liabilities, and cash flows related to Ameriprise and certain dispositions (including TBS) have been reflected as discontinued operations in the Consolidated Financial Statements.

Acquisitions and Other Transactions
On September 30, 2007, the Company purchased all the outstanding common shares of AMEX Assurance Company (AAC), a subsidiary of Ameriprise, for $115 million. During the third quarter of 2005, the Company recorded a $115 million liability related to the share purchase agreement with Ameriprise to purchase all of the shares of AAC, within a period not to exceed two years from the spin-off date of September 30, 2005. The Company had previously consolidated AAC as a variable interest entity within the U.S. Card Services segment since the spin-off of Ameriprise and therefore there is no impact on the Company’s Consolidated Financial Statements from this 2007 acquisition.
     On December 31, 2006, the Company acquired Harbor Payments, Inc. (Harbor Payments) for approximately $150 million, which was paid primarily in the Company’s common stock. Harbor Payments is a technology provider that specializes in electronic invoice and payment capabilities. The acquisition is reflected in the Global Commercial Services segment.

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2007 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY

FINANCIAL SUMMARY
A summary of the Company’s recent financial performance follows:

See Consolidated Results of Operations, beginning on page 34, for discussion of the Company’s results.
     The Company follows U.S. generally accepted accounting principles (GAAP). In addition to information provided on a GAAP basis, the Company discloses certain data on a “managed basis.” This information, which should be read only as a supplement to GAAP information, assumes, in the Consolidated Selected Statistical Information and U.S. Card Services segment, there have been no cardmember lending securitization transactions. These managed basis adjustments, and management’s rationale for such presentation, are discussed further in the U.S. Card Services section below under “Differences between GAAP and Managed Basis Presentation.” 
     Certain reclassifications of prior period amounts have been made to conform to the current presentation throughout this Annual Report.
     Certain of the statements in this Annual Report are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. See Forward-Looking Statements at the end of this discussion.

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AMERICAN EXPRESS COMPANY

CRITICAL ACCOUNTING POLICIES

The Company’s significant accounting policies are described in Note 1 to the Consolidated Financial Statements. The following chart provides information about four critical accounting policies that are important to the Consolidated Financial Statements and that require significant management assumptions and judgments.

RESERVES FOR CARDMEMBER LOSSES

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AMERICAN EXPRESS COMPANY

RESERVES FOR MEMBERSHIP REWARDS COSTS

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2007 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY

ASSET SECURITIZATIONS

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2007 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY

INCOME TAXES

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AMERICAN EXPRESS COMPANY

AMERICAN EXPRESS COMPANY
CONSOLIDATED RESULTS OF OPERATIONS

SUMMARY OF THE COMPANY’S FINANCIAL PERFORMANCE

SELECTED STATISTICAL INFORMATION

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AMERICAN EXPRESS COMPANY

AMERICAN EXPRESS COMPANY

SELECTED STATISTICAL INFORMATION (CONTINUED)

* * *

The following discussions regarding Consolidated Results of Operations and Consolidated Liquidity and Capital Resources are presented on a basis consistent with GAAP unless otherwise noted.

CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2007
The Company’s 2007 consolidated income from continuing operations rose $437 million or 12 percent to $4.0 billion and diluted earnings per share (EPS) from continuing operations rose $0.47 or 16 percent to $3.39. Consolidated income from continuing operations for 2006 increased $549 million or 18 percent from 2005 and diluted EPS from continuing operations for 2006 increased $0.49 or 20 percent from 2005.
     The Company’s 2007 consolidated net income increased $305 million or 8 percent to $4.0 billion, and diluted EPS increased $0.37 or 12 percent to $3.36. Consolidated net income for 2006 and 2005 was $3.7 billion. Net income for 2007 included a loss of $36 million from discontinued operations compared to $96 million and $672 million of income from discontinued operations in 2006 and 2005, respectively.
     The Company’s revenues and expenses, including provisions for losses and benefits, are affected by changes in the relative values of non-U.S. currencies to the U.S. dollar. The currency rate changes increased the growth rates of revenues net of interest expense, total expenses, and provisions for losses and benefits by approximately 2 percent in 2007 and 1 percent in 2006.
     Results from continuing operations for 2007 included:

• A $1.13 billion ($700 million after-tax) gain for the initial payment due March 31, 2008, from Visa as part of the litigation settlement;
   
• $140 million of tax benefits primarily related to the resolution of prior years’ tax items and the treatment of prior years’ card fee income;
   
• An $80 million ($50 million after-tax) gain in connection with the initial adoption of Statement of Financial Accounting Standards (SFAS) No. 155, “Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements No. 133 and 140” (SFAS No. 155);
   
• A $63 million ($39 million after-tax) gain relating to amendments to the Company’s U.S. pension plans, effective July 1, 2007, that reduced projected pension obligations to plan participants;
   
• A $685 million ($430 million after-tax) charge related to enhancements to the method of estimating Membership Rewards liability;
   
• A $438 million ($274 million after-tax) credit-related charge due to experienced deterioration of credit indicators in the latter part of 2007. This fourth quarter charge was split between U.S. Card Services’ cardmember lending

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AMERICAN EXPRESS COMPANY

and cardmember receivables of $288 million and $96 million, respectively, and included $54 million relating to a reduction in the fair market value of the Company’s retained subordinated interest in securitized cardmember loans;

• $211 million ($131 million after-tax) of incremental business-building costs;
   
• $81 million ($41 million after-tax) third quarter 2007 initial charge related to the sale of certain AEIDC securities and the reclassification of the AEIDC investment portfolio from Available-for-Sale to the Trading investment category as a result of the related AEB sale agreement’s impact on the holding period for these investments;
   
• $74 million ($46 million after-tax) of Visa litigation-related costs; and
   
• A $50 million ($31 million after-tax) contribution to the American Express Charitable Fund.

Also included in the 2007 results, were $66 million ($43 million after-tax) of reengineering costs related to the Company’s business travel, prepaid services, international payments business and technology areas.

     Results from continuing operations for 2006 included:

• $177 million ($155 million after-tax) of gains related to the sales of the Company’s card and merchant-related activities in Brazil, Malaysia, and Indonesia;

• $68 million ($42 million after-tax) of gains related to a rebalancing program in the fourth quarter of 2006 to better align the maturity profile of the Travelers Cheque and Gift Card investment portfolio with its business liquidity needs;

• $174 million ($113 million after-tax) of charges associated with certain adjustments made to the Membership Rewards reserve models in the U.S. and outside the U.S.; and

• A $72 million ($47 million after-tax) reduction in cardmember lending finance revenue, and securitization income, net related to higher than anticipated cardmember completion of consumer debt repayment programs and certain associated payment waivers.

Also included in the 2006 results, were $152 million ($99 million after-tax) of reengineering costs related to business travel, operations, finance and technology areas and a favorable impact from lower early credit write-offs, primarily related to bankruptcy legislation enacted in October 2005 and lower than expected costs associated with Hurricane Katrina that were provided for in 2005, partially offset by a higher provision for losses in Taiwan due primarily to the impact of industry-wide credit issues.

     Results from continuing operations for 2005 included:

• Tax benefits of $239 million resulting from the resolution of previous years’ tax items and the finalization of state tax returns;
   
• A $112 million ($73 million after-tax) benefit from the recovery of September 11, 2001-related insurance claims; and
   
• A $49 million ($32 million after-tax) provision to reflect the estimated costs related to Hurricane Katrina.

Also included in the 2005 results were $273 million ($174 million after-tax) of reengineering costs related to business travel, operations, finance and technology areas and an increase in the provisions for losses related to increased bankruptcy filings resulting from the change in bankruptcy legislation.

Revenues Net of Interest Expense
Consolidated revenues net of interest expense for 2007 of $27.7 billion were up $2.6 billion or 10 percent from 2006 primarily due to increased interest income, higher discount revenue, greater net card fees, and higher securitization income, net, partially offset by increased interest expense and lower other revenues in 2007. Consolidated revenues net of interest expense of $25.2 billion for 2006 were $2.7 billion or 12 percent higher than 2005 due to increased discount revenue, greater interest income, higher other revenues, and increased securitization income, net, partially offset by greater interest expense. Consolidated revenues net of interest expense in 2006 also included a $72 million reduction in cardmember lending finance revenue and securitization income, net related to higher than anticipated cardmember completion of consumer debt repayment programs and certain associated payment waivers as well as a reclassification of certain card acquisition-related costs, beginning prospectively July 1, 2006, from other expenses to a reduction in net card fees.
     Discount revenue for 2007 rose $1.6 billion or 12 percent as compared to 2006 to $14.6 billion as a result of a 15 percent increase in worldwide billed business. The slower growth in discount revenue compared to billed business growth reflected the relatively faster growth in billed business related to GNS where the Company shares the discount revenue with third-party card issuing partners, and higher cash-back rewards costs and corporate incentive payments which are reported as reductions to revenue (contra-revenue). The 15 percent increase in worldwide billed business in 2007 reflected increases in average spending per proprietary basic card, growth in basic cards-in-force and a 49 percent increase in billed business related to GNS from 2006. The average discount rate was 2.56 percent, 2.57 percent, and 2.58 percent for 2007, 2006, and 2005, respectively. Over time, selective repricing initiatives, changes in the mix of business, and volume-related pricing

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AMERICAN EXPRESS COMPANY

discounts for merchants acquired by the Company likely will result in some erosion of the average discount rate.
     U.S. billed business and billed business outside the United States were up 13 percent and 22 percent, respectively, in 2007, due to an increase in average spending per proprietary basic card and growth in basic cards-in-force. The growth in the billed business both within the U.S. and outside the U.S. reflected increases within the Company’s consumer card business, small business spending, Corporate Services volumes and the increase in GNS business.
     The table below summarizes selected statistics for which increases in 2007 have resulted in discount revenue growth:

Assuming no changes in foreign exchange rates, total billed business outside the United States reflected low double-digit proprietary growth in Europe and Canada, high single-digit growth in Asia Pacific, and a small decline in Latin America. Assuming no changes in foreign exchange rates and excluding the impact of the sales in Brazil, Malaysia, and Indonesia during 2006, Asia Pacific and Latin America also exhibited double-digit proprietary growth, and total proprietary growth outside the United States was 11 percent.
     The increase in 2007 in overall cards-in-force within both proprietary and GNS reflected continued strong card acquisitions as well as continued favorable average customer retention levels. In 2007, 8.4 million cards were added in the U.S. and non-U.S. businesses combined. During 2006, discount revenue rose $1.5 billion or 13 percent to $13.0 billion compared to 2005 as a result of a 16 percent increase in worldwide billed business, partially offset by a lower average discount rate, relatively faster growth in billed business related to GNS, and higher cash-back rewards costs. The 16 percent increase in worldwide billed business in 2006 reflected increases in average spending per proprietary basic card, growth in cards-in-force, and a 48 percent increase in billed business related to GNS from 2005.
     Travel commissions and fees increased $148 million or 8 percent to $1.9 billion in 2007 reflecting a 13 percent increase in worldwide travel sales primarily driven by higher airline ticket prices. Travel commissions and fees in 2006 of $1.8 billion were unchanged from 2005 as a 6 percent increase in travel sales was offset by a moderately reduced level of transactions and lower average revenue per transaction, due in part to increased online bookings.
     Other commissions and fees increased $184 million or 8 percent to $2.4 billion in 2007 and $127 million or 6 percent in 2006 to $2.2 billion due to higher assessments, increases in foreign exchange conversion fees, and other service fees.
     Net card fees increased $56 million or 3 percent to $2.1 billion in 2007 due to card growth partially offset by the reclassification of certain card acquisition-related costs beginning July 1, 2006, from operating expenses to a reduction in net card fees. In 2006, net card fees decreased $39 million or 2 percent to $2.0 billion as the benefit of card growth was offset by the reclassification of certain card acquisition-related costs as mentioned above.
     Securitization income, net increased $18 million or 1 percent to $1.5 billion in 2007 due to a larger average balance of securitized loans, higher net gains from securitization, the $80 million impact of the initial adoption of SFAS No. 155 previously discussed, and a reduction in revenue a year ago from higher than anticipated cardmember completion of consumer debt repayment programs and certain associated payment waivers. These favorable impacts were partially offset by an increase in write-offs, a $54 million reduction in the fair market value of the Company’s retained subordinated interests in securitized cardmember loans, and greater interest expense due to a higher coupon rate paid to certificate holders. Securitization income, net increased $229 million or 18 percent to $1.5 billion in 2006 as a higher trust portfolio yield and a decrease in trust portfolio write-offs were partially offset by

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greater interest expense due to a higher coupon rate paid to certificate holders, a lower average securitization balance, and the impact of higher than anticipated cardmember completion of consumer debt repayment programs and certain associated payment waivers. 
     Other revenues in 2007 decreased $44 million or 3 percent to $1.6 billion as higher network, merchant, publishing, and insurance-related revenues were more than offset by the $105 million of charges recorded in the third and fourth quarters of 2007, related to the reclassification of AEIDC’s investment portfolio as previously mentioned and a positive impact in 2006 related to the rebalancing of the Company’s Travelers Cheque and Gift Card investment portfolio. Other revenues increased $372 million or 28 percent to $1.7 billion in 2006 primarily due to $68 million of gains related to the rebalancing of the Company’s Travelers Cheque and Gift Card investment portfolio as discussed previously, fees associated with transition services agreements with Ameriprise as well as higher network partner-related fees.
     Interest income rose $1.7 billion or 29 percent to $7.4 billion in 2007 primarily reflecting an increase in cardmember lending finance revenue, which grew $1.6 billion or 34 percent due to a 29 percent increase in average worldwide cardmember lending balances primarily reflecting spending growth on lending products and new cardmembers acquired, as well as a higher portfolio yield. During 2006, interest income increased $1.3 billion or 30 percent to $5.7 billion, reflecting an increase in cardmember lending finance revenue due to growth in average worldwide lending balances and a higher portfolio yield.
     Interest expense increased $1.1 billion or 40 percent to $3.8 billion in 2007, reflecting a $544 million or 35 percent increase in charge card and other interest expense and a $542 million or 45 percent increase in cardmember lending interest expense due to increased debt funding levels in support of growth in receivable and loan balances, respectively, and a higher effective cost of funds. Interest expense of $2.7 billion in 2006 was $761 million or 38 percent higher than 2005 reflecting a higher effective cost of funds and increased debt funding levels in support of growth in loans and receivable balances.

Expenses
Consolidated expenses for 2007 were $17.8 billion, up $835 million or 5 percent from $17.0 billion in 2006. The increase in 2007 was primarily driven by increased marketing, promotion, rewards and cardmember services expenses and higher human resources expenses, partially offset by lower other, net expenses. Consolidated expenses for 2006 were $17.0 billion, up $1.4 billion or 9 percent from $15.6 billion in 2005. The increase in 2006 was driven primarily by higher marketing, promotion, rewards and cardmember services expenses, increased human resources expenses, and greater professional services expenses. Consolidated expenses in 2007, 2006, and 2005 also included $66 million, $152 million and $273 million, respectively, of reengineering costs primarily within the Company’s business travel, prepaid services, international consumer and small business services, and technology areas in 2007 and within the business travel, operations, finance, and technology areas in 2006 and 2005.
     Marketing, promotion, rewards and cardmember services expenses increased $1.3 billion or 20 percent to $7.8 billion in 2007, reflecting a $685 million charge related to the Membership Rewards liability due to enhancements to the method of liability estimation as discussed above, a higher redemption rate, higher volume-related rewards costs, and incremental marketing and promotion and business-building costs, partially offset by the impact of charges in 2006 associated with adjustments made to the Membership Rewards reserve models.
     Marketing, promotion, rewards and cardmember services expenses increased $681 million or 12 percent to $6.5 billion in 2006 reflecting greater rewards costs and higher marketing and promotion expenses. The higher rewards costs continued to reflect volume growth, a higher redemption rate, and strong cardmember loyalty program participation. Rewards costs in 2006 included $174 million of charges related to certain adjustments made to the Membership Rewards reserve model in the United States and outside the United States. Marketing expenses reflected relatively high levels of spending related to various business-building initiatives, but lower costs versus 2005 related to the Company’s ongoing global “MyLife, MyCard^(SM)” advertising campaign, which was in a more active phase during 2005.
     Human resources expenses increased $398 million or 8 percent to $5.4 billion in 2007 due to a higher level of employees and merit increases, partially offset by the $63 million pension-related gain previously discussed and lower severance-related costs compared to 2006. The increased level of employees primarily reflected employee additions related to customer service volumes and initiatives and the acquisition of Harbor Payments, Inc. on December 31, 2006, and the acquisition of a travel services business in 2007. Human resources expenses in 2006 increased $295 million or 6 percent to $5.0 billion compared to 2005 due to merit increases and larger benefit-related costs, partially offset by a relatively flat level of employees and lower severance-related costs compared to 2005. Reengineering costs in 2007, 2006, and 2005, included $49 million, $111 million, and $195 million, respectively, of severance, of which $34 million, $89 million, and $159 million was restructuring-related and is included within human resources expenses. 
     Professional services expenses remained flat in 2007 compared to 2006 and increased $283 million or 14 percent in 2006 due to higher technology service fees, greater business and service-related volumes and increased credit and collection costs.

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     Other, net expenses in 2007 decreased $969 million or 71 percent to $389 million compared to 2006 driven by a gain of $1.13 billion related to the settlement of litigation with Visa, and the reclassification of certain card-acquisition costs to card fee revenue beginning July 1, 2006, partially offset by the $177 million gain related to the sale of the Company’s card and merchant-related activities in Brazil, Malaysia, and Indonesia in 2006, litigation expenses of $74 million related to settlement with Visa, and a $50 million contribution to the American Express Charitable Fund. Other, net expenses in 2006 increased $55 million or 4 percent to $1.4 billion compared to 2005 due to the September 11, 2001-related insurance settlement in 2005 and higher volume and technology-related costs in 2006 offset by the reclassification of certain card-acquisition costs to card fee revenue beginning July 1, 2006, and the 2006 gains on the sales of the Company’s card and merchant-related activities in Brazil, Malaysia, and Indonesia.

Provisions for Losses and Benefits
Consolidated provisions for losses and benefits in 2007 increased $1.3 billion or 43 percent over last year to $4.3 billion reflecting a $1.1 billion or 70 percent increase in the cardmember lending provision and a $205 million or 22 percent increase in the charge card provision. The increase in cardmember lending provision for losses was due to higher write-off and delinquency rates, increased loan volumes, and the charge for credit-related trends previously discussed. The increase in charge card provision was due to the additional charge for credit-related trends previously discussed and higher business volumes.
     Consolidated provisions for losses and benefits in 2006 increased $268 million or 10 percent over 2005 to $3.0 billion as the cardmember lending and other (including investment certificates) provisions growth of $274 million or 20 percent and $97 million or 26 percent, respectively, was partially offset by a $103 million or 10 percent decline in the charge card provision. The increase in the lending provision was driven by increased loan volumes globally and higher loss rates outside the United States, primarily in Taiwan, partially offset by the favorable impact of lower bankruptcy-related charge-offs and strong credit quality in the United States, and lower than expected costs related to Hurricane Katrina losses that were provided for in 2005. The other provision (including investment certificates) rose due to higher interest rates on larger investment certificate balances and increased merchant-related reserves. Compared to 2005, the charge provision reflected the lower loss rate, lower than expected costs for Hurricane Katrina losses that were provided for in 2005, and improved results from collection activities.

Income Taxes
The effective tax rate was 27 percent in 2007 compared to 30 percent in 2006 and 24 percent in 2005. The effective tax rate in 2007 as compared to 2006 included tax benefits of $140 million from Internal Revenue Service (IRS) settlements and resolution of prior years’ tax items and lower tax rates applied to the earnings of the Company’s non-U.S. subsidiaries, partially offset by an increase in state and local income tax. The effective tax rate in 2006 as compared to 2005 reflected higher state and local income taxes in 2006, and 2005 included the benefit related to the resolution of IRS audits of previous years’ tax returns.

Discontinued Operations
(Loss) Income from discontinued operations, net of tax, was ($36) million, $96 million and $672 million in 2007, 2006, and 2005, respectively. Loss from discontinued operations, net of tax, during 2007, primarily related to AEB’s results from operations, which included $71 million ($45 million after-tax) compliance-related remediation costs and $60 million pretax and after-tax of regulatory and legal expense, as well as businesses disposed of in previous years. Income from discontinued operations, net of tax, during 2006, reflected AEB results from operations, including an $88 million ($40 million after-tax) gain from the sale of its investment in Egyptian American Bank and a $48 million ($22 million after-tax) loss related to the sale of its international banking activities in Brazil, as well as a tax benefit related to Ameriprise upon finalization of the Company’s 2005 U.S. federal tax return and costs related to businesses disposed of in previous years. 2005 results from discontinued operations included the results of Ameriprise and certain other dispositions (primarily TBS) through September 30, 2005.

Impact of Credit and Capital Market Environment
Overview
In December, the Company began to feel the effects of the weakening U.S. economy as cardmember spending slowed and past-due and write-off rates in U.S. Card Services increased. In the latter part of 2007, there was also significant volatility in the capital markets, particularly for the valuations of mortgage-backed and other asset-backed structured products as well as in the issuance cost and availability of short-term, asset-backed debt for certain issuers.

U.S. Card Services cardmember lending and receivables
While overall cardmember spending for U.S. Card Services continued to be relatively strong and the Company benefited from a focus on the affluent sector of the market, the Company saw negative credit trends among U.S. consumers in the latter part of 2007, particularly in certain parts of California, Florida and other regions of the country most affected by the

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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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     Valuations of securities held within the Company’s investment portfolio will continue to be subject to changes in external market factors including default rates, rating agency actions, and the prices at which observable market transactions occur. The Company’s future results may be impacted by the valuation adjustments applied to these holdings.

Other Assets
As discussed in Note 6 of the Consolidated Financial Statements, other assets include an interest only-strip, which represents a retained interest in securitized cardmember loans. The Company records any change in the fair value of the interest-only strip in securitization income, net. As previously discussed in the Critical Accounting Policies section, the value of the interest-only strip may be impacted by changes in certain key assumptions including expected credit losses and the discount rate.

Liquidity
As discussed in more detail below, the Company’s reliance on diverse sources of funding, with wide ranges of maturities, and its contingent liquidity strategy allow for the continued funding of business operations through difficult economic, financial market and business conditions when access to regular funding sources could become diminished or interrupted. 
     While the credit market environment that began to emerge in the second half of 2007 included disruptions in the capital markets, the Company had access to sufficient financing through its existing funding sources to meet its business needs in 2007. Disruptions in the financial markets, however, resulted in a change of the Company’s debt funding mix in the second half of 2007, particularly considering maturity and floating rate versus fixed rate profiles. (See the Market Risk Management section for further discussion regarding the mix of floating and fixed rate funding.)
     Continued disruptions in 2008 in the financial markets could result in further changes in the funding mix. Specifically, a lack of investor demand in sectors of the debt capital market, such as for 1-to-5 year unsecured floating rate debt or the A-rated and BBB-rated tranches of the card securitization market, could alter the Company’s funding mix. In such cases, the Company would increase its issuance of longer-term unsecured debt or issue the AAA-rated tranches of its securitizations, where investor demand has been stronger. Through February in 2008, the Company issued approximately $3.7 billion of AAA-rated securitization certificates. It retained approximately $235 million of related A-rated securities and approximately $275 million of BBB-rated securities, as the Company had more cost-effective alternative sources of financing for these amounts. The Company will continue to evaluate its alternative sources of funding and seek the mix that achieves cost-efficiency consistent with its funding and liquidity strategies. 
     Credit ratings have a significant impact on the borrowing costs of the Company. There have been no changes in the Company’s credit ratings during 2007.

Outlook
In early January 2008, as the Company saw clear signs that the U.S. economy was weakening, the Company announced its expectations for slower growth in cardmember spending and weaker credit trends in the year ahead, and that these factors would lead to slower growth in earnings per share in 2008 than the Company has generated in recent years. The Company’s planning assumptions were based on a moderate downturn in the U.S. economy and a more cautious view of the business environment in the coming year. However, the situation is fluid and any significant change in the economic and credit environment could alter the Company’s 2008 outlook.

CONSOLIDATED CAPITAL RESOURCES AND LIQUIDITY

CAPITAL STRATEGY
The Company generates equity capital primarily through net income to fund current needs and future business growth and to maintain a targeted debt rating. The maintenance of a solid equity capital base provides the Company with a strong and stable debt rating, which facilitates uninterrupted access to diversified sources of financing to fund asset growth. The Company also has a contingency funding plan to help ensure adequate sources of financing in difficult economic or market environments and, in certain circumstances, adverse events affecting the Company.
     The Company believes allocating capital to growing businesses with a return on risk-adjusted equity in excess of its cost of capital will generate shareholder value. The Company retains sufficient earnings and other capital generated to satisfy growth objectives and maintain a solid equity capital base. To the extent capital exceeds business, regulatory, and rating agency requirements, the Company returns excess capital to shareholders through dividends and the share repurchase programs. 
     Assuming the Company achieves its financial objectives of 12 to 15 percent EPS growth, 33 to 36 percent ROE and at least 8 percent revenue growth, on average and over time, it will seek to return to shareholders an average of 65 percent of capital generated, subject to business mix, acquisitions and rating agency requirements.
     Important factors relating to ROE include the Company’s margins, the amount and type of receivables and other assets needed to generate revenue, the level of capital required to support its assets, and the mix between shareholders’ equity and other forms of financial capital that it holds as a result of its financing activities.

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     During 2007, the Company met its ROE target. In keeping with the Company’s objectives, regarding the return of excess capital to shareholders, the Board of Directors of the Company approved a 20 percent increase in the quarterly dividend on the Company’s common stock from $0.15 to $0.18 per share, paid February 8, 2008, to shareholders of record on January 4, 2008. During 2007, through dividends and share repurchases, the Company returned approximately 88 percent of total capital generated to shareholders in the form of $740 million in dividends and $3.6 billion of share repurchases. The Company was able to return a high percentage of its earnings and capital generated to shareholders during 2007 due in part to its balance sheet management activities that seek to optimize the level of shareholders’ equity required to support its growth.
     The Company maintains flexibility to shift capital across its businesses as appropriate. For example, the Company may infuse additional capital into subsidiaries to maintain capital at targeted levels, considering debt ratings and regulatory requirements. These infused amounts can affect both the capital and liquidity levels for American Express’ parent company (Parent Company). The Company maintains discretion to manage these effects, by issuing debt and reducing projected common share buybacks. Additionally, the Company may transfer short-term funds within the Company to meet liquidity needs, subject to and in compliance with various contractual and regulatory constraints.

SHARE REPURCHASES
The Company has a share repurchase program to return equity capital in excess of business needs to shareholders. These share repurchases both offset the issuance of new shares as part of employee compensation plans and reduce shares outstanding. The Company repurchases its common shares primarily by open market purchases. 
     Approximately 71 percent of capital generated has been returned to shareholders since inception of the share repurchase program in 1994. During 2007, the Company purchased 60 million common shares at an average price of $59.42. At December 31, 2007, there were approximately 105 million shares remaining under authorizations to repurchase shares approved by the Company’s Board of Directors.

CASH FLOWS

Cash Flows from Operating Activities
In 2007 and 2006, net cash provided by operating activities exceeded net income, primarily due to provisions for losses and benefits, which do not require cash at the time of provision. Similarly, depreciation and amortization represent non-cash expenses. In addition, net cash was provided by fluctuations in other operating assets and liabilities (including the Membership Rewards liability). These accounts vary significantly in the normal course of business due to the amount and timing of various payments. 
     For the year ended December 31, 2007, net cash provided by operating activities of $8.5 billion decreased compared to 2006. The decrease was primarily due to an outflow of cash resulting from fluctuations in the Company’s operating assets and liabilities offset by higher net income.
     Net cash provided by operating activities was higher in 2006 than 2005 due to fluctuations in other operating assets and liabilities. 
     Management believes cash flows from operations, available cash balances and short-term borrowings will be sufficient to fund the Company’s operating liquidity needs.

Cash Flows from Investing Activities
The Company’s investing activities primarily include funding cardmember loans and receivables, securitizations of cardmember loans and receivables, and the Company’s Available-for-Sale investment portfolio. 
     For the year ended December 31, 2007, net cash used in investing activities of $17.1 billion increased compared to 2006, primarily due to net increases in cardmember receivables and loans and cash used in investing activities attributable to discontinued operations offset by an increase in proceeds from loan and receivable securitizations.
     In 2006, net cash used in investing activities decreased from 2005 primarily as a result of cash retained by Ameriprise after the spin-off.

Cash Flows from Financing Activities
The Company’s financing activities primarily include issuing debt and taking customer deposits in addition to the sale and redemption of investment certificates. The Company also regularly repurchases its common shares. 
     In 2007, net cash provided by financing activities of $15.5 billion increased compared to 2006, primarily due to a net increase in debt and the net change in customers’ deposits, partially offset by a decrease in the issuance of shares and an increase in dividends paid.
     In 2006, financing activities provided net cash greater than in 2005 primarily due to a net increase in debt partially offset by an increase in share repurchases.

FINANCING ACTIVITIES
The Company is committed to maintaining cost-effective, well-diversified funding programs to support current and future asset growth in its global businesses. The Company’s funding plan is structured to meet expected and changing business needs to fund asset balances efficiently and cost-effectively. The Company relies on diverse funding sources, to help

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ensure the availability of financing in unexpected periods of stress and to manage interest rate exposures. In addition to the funding plan described below, the Company has a contingent funding strategy to allow for the continued funding of business operations through difficult economic, financial market and business conditions when access to regular funding sources could become diminished or interrupted. In 2007 and 2006, the Company had uninterrupted access to the money and capital markets.
     The Company’s proprietary card businesses are the primary asset-generating businesses, with significant assets in both domestic and international cardmember receivable and lending activities. Accordingly, the Company’s most significant borrowing and liquidity needs are associated with its proprietary card businesses. The Company generally pays merchants for card transactions prior to reimbursement by cardmembers. The Company funds merchant payments during the period cardmember loans and receivables are outstanding. The Company also has additional borrowing needs associated with general corporate purposes.
     The following discussion includes information on both a GAAP and managed basis. The managed basis presentation includes debt issued in connection with the Company’s lending securitization activities, which are off-balance sheet. For a discussion of managed basis and management’s rationale for such presentation, refer to the U.S. Card Services discussion below.

FUNDING PROGRAMS
The Company’s funding activities and liquidity planning are integrated into its asset-liability management activities. The Company’s assets and growth have been financed principally through the following sources: Long-term sources:

• Senior unsecured debentures,
   
• Asset securitizations,
   
• Long-term committed bank borrowing facilities in selected non-U.S. markets, and

Short-term sources:

• Commercial paper, and
   
• Bank notes, customers’ deposits, institutional certificates of deposit, and Fed Funds.

The Company’s current funding strategy is to maintain short-term debt outstanding to meet seasonal and other working capital needs, as well as to replace maturing long-term debt and finance business growth primarily through long-term unsecured debt and asset securitization issuances. During 2008, the Company has $11.8 billion of unsecured long-term debt and $4.7 billion of asset securitizations that will mature. The Company has, to date and over time, financed approximately one-third of its U.S. consumer and small business lending receivables through asset securitizations and a smaller proportion of its U.S. consumer, small business, and corporate charge card receivables through asset securitizations. The Company’s 2008 long-term issuance plan provides for the refinancing of maturities and funding business growth through a broad and globally diversified mix of maturities, markets, securities, and currencies, including issuance from both lending and charge receivables trusts. (Refer to the discussion above for a discussion of how the credit market environment could affect the mix of debt issuances.) 
     The Company’s short-term funding programs are used primarily to meet working capital needs, such as managing seasonal variations in receivables balances, and have not, on average, grown in size with its business growth. The ultimate amount and mix issued will depend on the Company’s needs and market conditions.
     General corporate purpose funding is primarily through the Parent Company and American Express Travel Related Services Company, Inc. (TRS). The Company funds its cardmember receivables and loans primarily through five entities. American Express Credit Corporation (Credco) finances the vast majority of worldwide cardmember receivables, while American Express Centurion Bank (Centurion Bank) and American Express Bank, FSB (FSB) principally fund cardmember loans originated from the Company’s U.S. lending activities. Two trusts are used by the Company in connection with the securitization and sale of U.S. receivables and loans generated in the ordinary course of the Company’s proprietary card businesses.
     The Asset/Liability Committees of Centurion Bank and FSB provide management oversight with respect to formulating and ratifying funding strategy and to ensure that all funding policies and requirements of the two banks are met.
     The Company’s debt offerings are placed either directly to investors, as in the case of its commercial paper program through Credco, or through securities brokers or underwriters. In certain international markets, bank borrowings are used to partially fund cardmember receivables and loans.

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     Diversity of funding sources by type of debt instrument, by maturity and by investor base provides additional insulation from unforeseen events in the debt market. The Company had the following consolidated debt, on both a GAAP and managed basis, and customer deposits outstanding at December 31:

Short-term debt is defined as any debt with an original maturity of 12 months or less. Credco’s commercial paper is a widely recognized name among short-term investors and is a principal source of short-term debt for the Company. Centurion Bank and FSB raise short-term debt through various instruments. The Company had the following short-term debt outstanding at December 31:

Average commercial paper outstanding was $7.8 billion in 2007 and 2006. Credco currently manages the level of short-term debt outstanding such that its back-up liquidity, including available bank credit facilities and term liquidity portfolio investment securities, is not less than 100 percent of net short-term debt. Net short-term debt, which consists of commercial paper and certain other short-term borrowings less cash and cash equivalents, was $7.9 billion at December 31, 2007. Based on the maximum available borrowings under bank credit facilities and term liquidity portfolio investment securities, Credco’s total back-up liquidity coverage of net short-term debt was 140 percent and 212 percent at December 31, 2007 and 2006, respectively. 
     The Company had short-term debt as a percentage of total debt at December 31 as follows:

Centurion Bank and FSB also raise customer deposits through the issuance of certificates of deposit to retail and institutional customers. As of December 31, 2007, Centurion Bank and FSB held $14.7 billion in customer deposits. 
     In 2007, debt with maturities primarily ranging from 2 to 10 years was issued in the U.S. and international markets. The Company’s 2007 offerings, which include those made by the Parent Company, Credco, Centurion Bank, FSB, American Express Receivables Financing Corporation LLC V (the Charge Trust) and the American Express Credit Account Master Trust (the Lending Trust) are presented in the following table on both a GAAP and managed basis:

The Company continues to issue debt with a wide range of maturities to reduce and spread out the refinancing requirement in future periods. The Company expects that its planned funding during 2008 will be met through a combination of similar sources to those on which it currently relies. However, the Company continues to assess its needs and investor demand and may change the mix of its existing sources as well as seek to add new sources to its funding mix. The Company’s funding plan is subject to various risks and uncertainties, such as disruption of financial markets, market capacity and demand for securities offered by the Company, regulatory changes, ability to sell receivables and the performance of receivables previously sold in securitization transactions. Many of these risks and uncertainties are beyond the Company’s control.
     At December 31, 2007, the Parent Company had an unspecified amount of debt or equity securities and Credco had

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an unspecified amount of debt available for issuance under shelf registrations filed with the SEC. In addition, TRS, Centurion Bank, FSB, Credco, and American Express Overseas Credit Corporation Limited, a wholly-owned subsidiary of Credco, have established a program for the issuance outside the United States of debt instruments to be listed on the Luxembourg Stock Exchange. The maximum aggregate principal amount of debt instruments outstanding at any one time under the program cannot exceed $10 billion.
     The Company’s equity capital and funding strategies are designed to maintain high and stable debt ratings from the major credit rating agencies, Moody’s, Standard & Poor’s and Fitch Ratings. Maintenance of high and stable debt ratings is critical to ensuring the Company has continuous access to the capital and credit markets. It also enables the Company to reduce its overall borrowing costs. At December 31, 2007, the Parent Company debt ratings were as follows:

The Company actively manages the risk of liquidity and cost of funds resulting from the Company’s financing activities. A downgrade of the Company’s debt ratings would increase its borrowing costs. Management believes a decline in the Company’s long-term credit rating by two levels would result in the Company having to significantly reduce its commercial paper and other short-term borrowings. Remaining borrowing requirements would be addressed through other means such as the issuance of long-term debt, additional securitizations, increased deposit taking, and the sale of investment securities or drawing on existing credit lines. This would result also in higher interest expense on the Company’s commercial paper and other debt, as well as higher fees related to unused lines of credit. The Company believes a two-level downgrade is highly unlikely due to its capital position and the strength of its franchise.

Asset Securitizations
The Company periodically securitizes cardmember receivables and loans arising from its card business. The securitization market provides the Company with cost-effective funding. Securitization of cardmember receivables and loans is accomplished through the transfer of those assets to a trust, which in turn issues certificates or notes (securities) to third-party investors collateralized by the transferred assets. The proceeds from issuance are distributed to the Company, through its wholly-owned subsidiaries, as consideration for the transferred assets. Securitization transactions are accounted for as either a sale or secured borrowing, based upon the structure of the transaction. 
     Securitization of cardmember receivables generated under designated consumer charge card and small business charge card accounts is accomplished through the transfer of cardmember receivables to the American Express Issuance Trust (Charge Trust). Securitizations of these receivables are accounted for as secured borrowings because the Charge Trust is not a qualifying special purpose entity (QSPE). Accordingly, the related assets being securitized are not accounted for as sold and continue to be reported as owned assets on the Company’s Consolidated Balance Sheets. The related securities issued to third-party investors are reported as long-term debt on the Company’s Consolidated Balance Sheets. At December 31, the Charge Trust held total assets of:

Securitization of the Company’s cardmember loans generated under designated consumer lending accounts is accomplished through the transfer of cardmember loans to a QSPE, the Lending Trust. In a securitization structure like the Lending Trust (a revolving master trust), credit card accounts are selected and the rights to the current cardmember loans, as well as future cash flows related to the corresponding accounts, are transferred to the trust for the life of the accounts. In consideration for the transfer of these rights, the Company, through its wholly-owned subsidiaries, receives an undivided, pro rata interest in the trust referred to as the “seller’s interest,” which is reflected on balance sheet as a component of cardmember loans. The seller’s interest is required to be maintained at a minimum level of 7 percent of the outstanding securities in the Lending Trust. As of December 31, 2007, the amount of seller’s interest was approximately 56 percent of outstanding securities, above the minimum requirement. When the Lending Trust issues a security to a third party, a new investor interest is created. The Company removes the corresponding cardmember loans from its Consolidated Balance Sheets, recognizes a gain on sale and release of credit reserves, and records an interest-only strip. From time to time, the Company may record other retained interests as well. The total investors’ interest outstanding will change through new issuances or maturities. The seller’s interest will change as a result of new trust issuances or maturities as well as new account additions, new charges on securitized accounts, and collections. As seller’s interest changes each period, the related allowance for loss will change as well. When a security matures, the trust uses a portion of the collections to repay the security, and as a result the investors’ interest decreases. In the monthly period that contains a maturity, new charges on securitized accounts have historically been greater than the portion of the collections required to repay the maturing security, and therefore, seller’s interest has increased in an amount greater than or equal to the decrease in investors’ interest.

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     The Company’s continued involvement with the securitized cardmember loans includes the process of managing and servicing the securitized loans through its subsidiary, TRS, for which it earns a fee. Any billed finance charges related to the transferred cardmember loans are reported as other receivables on the Company’s Consolidated Balance Sheets. At December 31, the Lending Trust held total assets of:

At December 31, the fair value of the interest-only strip and other retained interests were as follows:

See the Consolidated Liquidity and Capital Resources section and Note 6 to the Consolidated Financial Statements for details regarding the Company’s securitization trusts.
     Under the respective terms of the Lending Trust and the Charge Trust agreements, the occurrence of certain events could  result in either trust being required to pay down the investor certificates and notes before their expected payment dates over an early amortization period. An example of such an event is, for either trust, the failure of the securitized assets to generate specified yields over a defined period of time. 
     No such events have occurred during 2007 and 2006, and the Company does not expect an early amortization trigger event to occur prospectively. In the event of a paydown of the Lending Trust, $22.7 billion of assets would revert to the balance sheet and an alternate source of funding of a commensurate amount would have to be obtained. Had a total paydown of the Lending Trust hypothetically occurred at a single point in time at December 31, 2007, the cumulative negative effect on results of operations would have been approximately $973 million pretax to re-establish reserves and to derecognize the retained interests related to these securitizations that would have resulted when the securitized loans reverted back onto the balance sheet. 
     Virtually no financial statement impact would occur from a paydown of the Charge Trust, but an alternate source of funding for the $3.1 billion of securities outstanding at December 31, 2007 would have to be obtained. 
     With respect to both the Lending Trust and the Charge Trust, a decline in the actual or implied short-term credit rating of TRS below A-1/P-1 will trigger a requirement that TRS, as servicer, transfer collections on the securitized assets to investors on a daily, rather than a monthly, basis or make alternative arrangements with the rating agencies to allow TRS to continue to transfer collections on a monthly basis. Such alternative arrangements include obtaining appropriate guarantees for the performance of the payment and deposit obligations of TRS, as servicer. No such events have occurred during 2007 and 2006. 
     No officer, director, or employee holds any equity interest in the trusts or receives any direct or indirect compensation from the trusts. The trusts in the Company’s securitization programs do not own stock of the Company or the stock of any affiliate. Investors in the securities issued by the trusts have no recourse against the Company if cash flows generated from the securitized assets are inadequate to service the obligations of the trusts.

Parent Company Funding
Parent Company long-term debt outstanding was $6.7 billion and $6.0 billion at December 31, 2007 and 2006, respectively. During 2007, the Parent Company issued $1.5 billion of 6.15 percent fixed-rate Senior Notes due 2017.
     The Parent Company is authorized to issue commercial paper. This program is supported by a $1.2 billion multi-purpose committed bank credit facility. The credit facility will expire in 2010 and 2012 in the amounts of $500 million and $750 million, respectively. There was no Parent Company commercial paper outstanding during 2007 and 2006, and no borrowings have been made under its bank credit facility.

CONTINGENT LIQUIDITY STRATEGY
The Company seeks to ensure that it has adequate liquidity, that is cash and equivalents on hand, as well as access to cash and equivalents to continuously meet its business needs and satisfy its obligations. Liquidity is managed through the breadth of sources of its funding programs, as well as through the quality and liquidity of its funded assets.
     The Company balances the trade-offs between having too much liquidity, which can be costly and limit financial flexibility, with having inadequate liquidity, which may result in financial distress during a liquidity event. The Company considers various factors in determining the amount of liquidity it holds, such as economic and financial market conditions, seasonality in business operations, growth in its businesses, cost and availability of alternative liquidity sources, and regulatory and credit rating agency considerations. 
     The Company has developed a contingent liquidity plan that enables it to continuously meet its daily obligations when access to unsecured funds in the debt capital markets becomes impaired or they become inaccessible. This plan is designed to ensure that the Company and all of its main operating entities could continuously maintain normal business operations for a 12-month period in which its access to unsecured debt financing is interrupted. The hypothetical 12-month liquidity

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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. In addition, the Company maintains substantial flexibility to reduce its operating cash uses, such as through its share repurchase program, and the delay or deferral of certain operating expenses.
     The contingent liquidity plan includes access to diverse sources of alternative funding. Such sources include, but are not limited to, the Company’s liquidity investment portfolio, sale of consumer, commercial card, and small business loans and cardmember receivables through its existing securitization programs, committed bank credit facilities, intercompany borrowings, and sale of other eligible receivables. The Company estimates that, under a worst case liquidity crisis scenario, it has identified over $40 billion in alternate funding sources in a liquidity crisis.

Liquidity Investment Portfolio
During the normal course of business, funding activities may raise more proceeds than are necessary for immediate funding needs. These amounts are invested principally in high credit quality, highly liquid short-term instruments. In addition, the Company’s contingent liquidity plan includes access to a continuing liquidity portfolio in which proceeds raised from funding activities are invested in longer term, highly liquid instruments, such as U.S. Treasury securities and government sponsored entity debt. The invested amounts of the liquidity portfolio provide back-up liquidity, primarily for the commercial paper program at Credco, and also flexibility for other short-term funding programs at Centurion Bank and FSB. Instruments held within this portfolio will be of the highest credit quality and most liquid of investment instruments available. The Company can sell these securities or enter into sale/repurchase agreements to immediately raise cash proceeds to meet liquidity needs. At December 31, 2007, the Company held $5.1 billion of such securities under this program.
     Credco entered into securities lending agreements in June 2006 with other financial institutions to enhance investment income. At December 31, 2007, the liquidity investment portfolio included approximately $970 million of investment securities loaned under these agreements.

Contingent Securitization Capacity
A key source in the Company’s contingent liquidity plan is asset securitization. Approximately $25 billion of additional consumer loans, commercial card loans, small business loans and cardmember receivables could be sold over time to investors through the existing securitization trust in the event a liquidity crisis has occurred. The Company has added, through the establishment of the Charge Trust, the capabilities to sell a wider variety of cardmember receivable portfolios to further enhance the Company’s flexibility in accessing diverse funding sources on a contingency basis.
     The Company believes that the securitized financing would be available through many adverse conditions due to the structure and size of the card securitization market. Its liquidity plans expect that pricing, investor demand, and structural subordination levels for card securitizations would change under adverse conditions. Proceeds from secured financings completed during a liquidity crisis could be used to meet current obligations, to reduce or retire other contingent liquidity sources such as bank credit lines, or a combination of the two. However, other factors affect the Company’s ability to securitize loans and receivables, such as credit quality of the assets and the legal, accounting, regulatory, and tax environment for securitization transactions. Material changes in any of these factors may potentially limit the Company’s ability to securitize its loans and receivables and could introduce certain risks to the Company’s ability to meet its financial obligations. In such a case, the use of investment securities, asset dispositions, asset monetization strategies, and flexibility to reduce operating cash needs could be utilized to meet its liquidity needs.

Committed Bank Credit Facilities
The Company maintained committed bank credit facilities at December 31, 2007 as follows:

The Company’s committed facilities expire as follows:

The availability of the credit lines is subject to the Company’s compliance with certain financial covenants, including the maintenance by the Company of consolidated tangible net worth of at least $4.1 billion, the maintenance by Credco of a 1.25 ratio of combined earnings and fixed charges to fixed charges, and the compliance by Centurion Bank and FSB with applicable regulatory capital adequacy guidelines. At December 31, 2007, the Company’s consolidated tangible net worth was approximately $9.6 billion, Credco’s ratio of combined earnings and fixed charges to fixed charges was 1.38 and Centurion Bank and FSB each exceeded their regulatory capital adequacy guidelines.

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     Committed bank credit facilities do not contain material adverse change clauses, which may preclude borrowing under the credit facilities. The facilities may not be terminated should there be a change in the Company’s credit rating.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
The Company has identified both on- and off-balance sheet transactions, arrangements, obligations, and other relationships that may have a material current or future effect on its financial condition, changes in financial condition, results of operations, or liquidity and capital resources.

CONTRACTUAL OBLIGATIONS
The table below identifies on- and off-balance sheet transactions that represent contractually committed future obligations of the Company. Purchase obligations include agreements to purchase goods and services that are enforceable and legally binding on the Company and that specify significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction.

The Company also has certain contingent obligations to make payments under contractual agreements entered into as part of the ongoing operation of the Company’s business, primarily with co-brand partners. The contingent obligations under such arrangements were approximately $4.3 billion as of December 31, 2007.
     In addition to the off-balance sheet contractual obligations noted above, the Company has off-balance sheet arrangements that include guarantees, retained interests in structured investments, unconsolidated variable interest entities and other off-balance sheet arrangements as more fully described below.

GUARANTEES
The Company’s principal guarantees are associated with cardmember services to enhance the value of owning an American Express card. At December 31, 2007, the Company had guarantees totaling approximately $77 billion related to cardmember protection plans, as well as other guarantees in the ordinary course of business that are within the scope of FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45).
     See Note 13 to the Consolidated Financial Statements for further discussion regarding the Company’s guarantees.

CERTAIN OTHER OFF-BALANCE SHEET ARRANGEMENTS
At December 31, 2007, the Company had approximately $265 billion of unused credit available to cardmembers as part of established lending product agreements. Total unused credit available to cardmembers does not represent potential future cash requirements, as a significant portion of this unused credit will likely not be drawn. The Company’s charge card products have no pre-set limit and, therefore, are not reflected

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in unused credit available to cardmembers. As discussed in the Consolidated Liquidity and Capital Resources section, the Company’s securitizations of cardmember loans are also off-balance sheet. The Company’s cardmember receivables securitizations remain on the Consolidated Balance Sheets.
     See Note 14 to the Consolidated Financial Statements for discussion regarding the Company’s other off-balance sheet arrangements.

RISK MANAGEMENT

INTRODUCTION
The key objective of risk management at American Express is to drive profitable growth and provide exceptional customer experiences, while limiting the exposure to adverse financial impacts. By building analytical and technological capabilities, creating transparent limits on risk exposures, optimizing investment decision-making, and identifying unacceptable risks, risk management contributes to the Company’s efforts to create shareholder and customer value.
     In addition to business risk, the Company recognizes four fundamental sources of risk:

• Credit Risk;
   
• Market Risk;
   
• Liquidity Risk; and
   
• Operational Risk.

These risk types, which are described below, are interrelated and span the Company’s business units and geographic locations. Because of their nature and scope, the Company believes in managing and monitoring these risks centrally at the enterprise-wide level and/or at the business unit level, as appropriate. Further, management has adopted well-defined risk-taking principles to guide the Company’s business strategy, achieve long-term shareholder objectives and deliver outstanding customer experience.

PRINCIPLES
The Company’s risk management is based on the following three principles:

• Independence of risk management oversight;
   
• Management of risk exposures through Board-approved risk limits; and
   
• Ultimate business ownership for risk-return decision-making.

The Company’s risk management leaders partner with business unit managers in making risk-return decisions using standardized risk metrics with predictable outcomes. The measurement and reporting of these risks are performed independently by risk management leaders. Both risk and business unit managers remain jointly accountable for the outcome of risk-return decisions within the Board approved limits.

GOVERNANCE
The Company’s risk management governance begins with the Board oversight of risk management parameters. The Audit Committee of the Board approves the Company’s Enterprise-wide Risk Management Policy, which defines risk management objectives, tolerance, limits, and the governance structure. The Enterprise-wide Risk Management Committee (ERMC), supports the Board in its oversight function and works closely with the Operating Committee, composed of the Company’s most senior executives, to ensure that the Board-approved risk management objectives are fully implemented in all businesses across the Company. The ERMC leads the Company’s overall risk management activities and ensures compliance with the Enterprise-wide Risk Management policy by measuring and monitoring enterprise-wide risk, establishing subordinate risk policies and overseeing risk practices and risk committees across the Company.
     Daily risk management occurs at the business unit level where the processes and infrastructure necessary to measure and manage risk are integrated into business unit goals. Business unit managers, in partnership with independent risk management leaders, make decisions on how to optimize risk-return decisions and contain risk within established limits.
     The Company has also developed a process that provides increased scrutiny throughout the risk management governance structure and requires higher levels of approval for exposures above defined risk thresholds. The escalation process is designed to ensure that the large majority of transactions and initiatives can proceed within the existing business unit risk management processes, while risks that are either large or with enterprise-wide implications receive enhanced scrutiny.

ROLES AND RESPONSIBILITIES
The ERMC is chaired by the Company’s Chief Risk Officer. Given the key role of credit risk in the Company business model, the Chief Risk Officer directly supervises officers responsible for (1) credit risk management, (2) the centralized functional tasks of worldwide card fraud and information management, and (3) banking services. In addition, as the Chair of the ERMC, the Chief Risk Officer is responsible for monitoring and reporting on the Company’s risk profile, initiating appropriate actions to ensure adherence to the approved risk tolerance and escalation guidelines, as well as promoting best-in-class approaches to risk management throughout the Company.
     In addition to the Chief Risk Officer, the ERMC is composed of:

• The Chief Market Risk Officer;
   
• The Chief Operational Risk Officer;

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• The Chief Credit Officers representing all operating segments of the Company; and
   
• The enterprise-wide leaders of compliance, controllership, and information security.

As the most senior risk management entity, the ERMC draws on its significant expertise to analyze risk comprehensively and determine acceptable risk thresholds across the Company.
     In order to enhance its enterprise-wide risk assessment, the ERMC continues to upgrade risk management capabilities that help the Company make better business and investment decisions as well as strengthen measuring, managing and transparent reporting of risk. The ERMC also launches focused risk management initiatives to assess the sources of significant exposures.
     Under the ERMC leadership, committees governing each risk type are established. These committees are responsible for translating the ERMC guidance and enterprise-wide risk policies into policies and procedures for their corresponding risk types, managing and monitoring those risks, and strengthening risk capabilities.

CREDIT RISK MANAGEMENT PROCESS
Credit risk is defined as the risk of loss from obligor or counterparty default. Leadership for overall credit risk management at the Company rests with the Chief Risk Officer. Credit risks in the Company can be divided into two broad categories, each with distinct risk management tools and metrics: consumer credit risk and institutional credit risk.

CONSUMER CREDIT RISK
Consumer credit risk arises principally from the Company’s portfolio of consumer and small business charge cards, credit cards, lines of credit, and loans. Since such portfolio consists of millions of borrowers across multiple geographies, occupations, and social segments, its risk is substantially reduced through diversification. In addition, the Company benefits from the fact that the typical credit profile of its cardmembers is better than that of its many competitors, which is a combined result of brand positioning, underwriting, and customer management policies, premium customer servicing, and product reward features. The level of consumer credit risk losses is more driven by general economic and legal conditions than by borrower-specific events.
     General principles and the overall framework for managing consumer credit risk across the Company are defined in the Individual Credit Risk Policy approved by the ERMC. This policy is further supported by a highly organized structure of subordinate policies covering all facets of consumer credit extension, including prospecting, approvals, authorizations, line management, collections, and fraud prevention. These policies ensure consistent application of credit management principles and standardized reporting of asset quality and loss recognition. Moreover, consumer credit risk management is supported by sophisticated proprietary scoring and decision-making models.
     Credit underwriting decisions are made based on sophisticated evaluation of product economics and customer behavior predictions. The Company has developed unique decision logic for each customer interaction, including prospect targeting, new accounts, line assignment, balance transfer, cross sell, and account management. Each decision benefits from sophisticated modeling capability that uses the most up-to-date proprietary information on customers, including payment history, purchase data, as well as insights from data feeds from credit bureaus.
     In addition to the impact of improved risk management processes, the Company’s overall consumer credit performance has also benefited from the shifting mix of the portfolio towards products that reward the customer for spending. Rewards attract higher spending from premium customers, which in turn leads to lower credit loss rates.
     However, the Company’s objective of driving profitable growth may be accomplished by the launch of new products or of existing products in new markets, which may exhibit higher loss rates. Also, the consumer credit performance is impacted by external factors, such as general economic conditions, changes in legal environment, and competitive actions.

INSTITUTIONAL CREDIT RISK
Institutional credit risk arises principally within the Company’s corporate card services, merchant services, network services, and from the Company’s investment activities. Unlike consumer credit risk, institutional credit risk is characterized by a lower loss frequency but higher severity. It is affected both by general economic conditions and by borrower-specific events. The Company’s senior risk officers recognize that the absence of large losses in any given year or over several years is not necessarily representative of the risk of institutional portfolios, given the infrequency of loss events in such portfolios.
     General principles and the overall framework for managing institutional credit risk across the Company are defined in the Institutional Credit Risk Policy approved by the ERMC. The Institutional Risk Management Committee (IRMC) is responsible for implementation and enforcement of this policy and for providing guidance to the credit officers of each business unit with substantial institutional credit risk exposures, who in turn make investment decisions in core risk capabilities, ensure proper implementation of the underwriting standards and contractual rights of risk mitigation, monitor risk exposures, and determine risk mitigation actions. The IRMC formally reviews large institutional exposures to ensure compliance with ERMC guidelines and procedures. At the same time, the IRMC provides continuous guidance to business unit risk teams to optimize risk-adjusted returns on capital. A company-wide risk rating utility and a specialized airline risk group provide independent risk assessment of institutional obligors.

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MARKET RISK MANAGEMENT PROCESS
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 certificate businesses; and
   
• Foreign exchange risk in its international operations.

General principles and the overall framework for managing market risk across the Company are defined in the Market Risk Policy approved by the ERMC. Market risk is centrally managed by the Market Risk Committee, chaired by the Chief Market Risk Officer of the Company. 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. Derivative financial instruments 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 and related asset/liability management strategy and processes. Use of derivative financial instruments is incorporated into the discussion below as well as Note 12 to the Consolidated Financial Statements.
     Market exposure is a byproduct of the delivery of products and services to cardmembers. Interest rate risk is primarily generated by funding cardmember charges and fixed-rate loans with variable rate borrowings. These assets and liabilities generally do not create naturally offsetting positions with respect to basis, re-pricing, or maturity characteristics.
     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’s strategy is to lengthen the maturity of interest rate hedges in periods of low interest rates and to shorten their maturity in periods of high interest rates. Based on the expected 2008 debt funding requirements for worldwide charge card and fixed rate lending receivables, approximately 29 percent have been funded with fixed rate debt or hedged as of December 31, 2007. The Company may change the amount hedged and the hedge percentage may change based on changes in business volumes and mix, among other factors. 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. Non-trading interest rate derivative financial instruments, primarily interest rate swaps, with notional amounts of approximately $18 billion and $11 billion were outstanding at December 31, 2007 and 2006, respectively. These derivatives generally qualify for hedge accounting. A portion of these derivatives outstanding as of December 31, 2007, extend to 2017.
     The detrimental effect on the Company’s pretax earnings of a hypothetical 100 basis point increase in interest rates would be approximately $227 million ($205 million related to the U.S. dollar), based on the 2007 year-end positions. This effect, which is calculated using a static asset liability gapping model, is primarily determined by the volume of variable rate funding of charge card and fixed-rate lending products for which the interest rate exposure is not managed by derivative financial instruments.
     Foreign exchange risk is generated by cardmember cross-currency charges, foreign currency denominated balance sheet exposures, translation exposure of foreign operations, and foreign currency earnings in international units. 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 justified through various means, including the use of derivative financial instruments such as foreign exchange forward, options, and cross-currency swap contracts, which can help “lock in” the value of the Company’s exposure to specific currencies.
     At December 31, 2007 and 2006, foreign currency products with total notional amounts of approximately $15 billion and $10 billion, respectively, were outstanding. Derivative hedging activities related to cross-currency charges, balance sheet exposures, and foreign currency earnings generally do not qualify for hedge accounting; however, derivative hedging activities related to translation exposure of foreign operations generally do.
     With respect to cross-currency charges and balance sheet exposures, including related foreign exchange forward contracts outstanding, the effect on the Company’s earnings of a hypothetical 10 percent change in the value of the U.S. dollar would be immaterial as of December 31, 2007. With respect to foreign currency earnings, the adverse impact on pretax income of a 10 percent strengthening of the U.S. dollar related to anticipated overseas operating results for the next 12 months, including any related foreign exchange forward contracts entered into in January 2008, would hypothetically be $115 million as of December 31, 2007. With respect to translation exposure of foreign operations, including related foreign exchange forward contracts outstanding, a 10 percent strengthening in the U.S. dollar would result in an immaterial reduction in equity as of December 31, 2007.

LIQUIDITY RISK MANAGEMENT PROCESS
Liquidity risk is defined as the inability to access cash and equivalents needed to meet business requirements and satisfy the Company’s obligations. General principles and the overall framework for managing liquidity risk across the Company are defined in the Liquidity Risk Policy approved by the ERMC. The Company balances the trade-offs between maintaining too much liquidity, which can be costly and limit financial flexibility, with having inadequate liquidity, which may result in financial distress during a liquidity event. Liquidity risk is centrally

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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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     Human resources and other operating expenses, such as professional services, occupancy and equipment and communications, reflect expenses incurred directly within each segment. In addition, expenses related to the Company’s support services, such as technology costs, are allocated to each segment based on support service activities directly attributable to the segment. Other overhead expenses, such as staff group support functions, 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.

PROVISIONS FOR LOSSES AND BENEFITS
The provisions for losses and benefits include credit-related expenses and interest credited on investment certificates directly attributable to the segment in which they are reported.

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.

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RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2007 – GAAP BASIS
The following discussion of U.S. Card Services’ segment results of operations is presented on a GAAP basis.
     U.S. Card Services reported segment income of $1.8 billion for 2007, a $329 million or 15 percent decrease from $2.2 billion in 2006, which increased $415 million or 24 percent from 2005.

Revenues Net of Interest Expense
In 2007, U.S. Card Services’ revenues net of interest expense increased $1.6 billion or 13 percent to $14.2 billion due to increased cardmember lending finance revenue, higher discount revenue, net card fees and other, partially offset by higher interest expense. Discount revenue, net card fees and other of $10.4 billion in 2007, increased $1.0 billion or 11 percent from 2006, largely due to a 13 percent increase in billed business volumes in 2007 and higher other revenues. The increase in billed business reflected a 4 percent increase in spending per proprietary basic card and 7 percent growth in basic cards-in-force. Within U.S. Card Services, consumer billed business grew 12 percent and small business volumes rose 15 percent in 2007. In addition, discount revenue, net card fees and other reflected higher interest income on the Company’s loan to Delta referred to below. Cardmember lending finance revenue of $4.8 billion in 2007 was $1.3 billion or 39 percent higher than in 2006, primarily due to 34 percent growth in average owned lending balances, a slightly higher portfolio yield, in addition to the previously mentioned reduction in revenue resulting from higher than anticipated cardmember completion of consumer debt repayment programs and certain payment waivers in 2006. Cardmember lending interest expense and charge card and other interest expense of $1.5 billion and $964 million in 2007, rose $561 million or 59 percent and $197 million or 26 percent as compared to a year ago, respectively, reflecting higher effective cost of funds and debt funding levels in support of greater loan and receivable balances. Revenues net of interest expense of $12.6 billion in 2006 were $1.6 billion or 15 percent higher than 2005 as a result of higher cardmember lending finance revenue, increased discount revenue, net card fees and other, and greater securitization income, net, partially offset by increased interest expense.

Expenses
During 2007, U.S. Card Services’ expenses increased $822 million or 11 percent to $8.5 billion, due to higher marketing, promotion, rewards and cardmember services expenses, and greater human resources and other operating expenses. Expenses in 2007 and 2006 included $13 million and $23 million, respectively, of charges related to reengineering activities primarily within consumer and small business services.

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Expenses in 2006 of $7.7 billion were $1.0 billion or 16 percent higher than in 2005, primarily due to higher marketing, promotion, rewards and cardmember services expenses, and greater human resources and other operating expenses.
     Marketing, promotion, rewards and cardmember services expenses increased $695 million or 16 percent in 2007 to $5.1 billion, reflecting the increase to the Membership Rewards liability resulting from enhancements to the method of liability estimation, a higher redemption rate, and higher volume-driven rewards costs, partially offset by slightly lower marketing and promotion expenses and the charges associated with adjustments made to the U.S. Membership Rewards reserve model in 2006 discussed previously. Marketing, promotion, rewards and cardmember services expenses increased $614 million or 16 percent in 2006 to $4.4 billion, due to higher volume-related rewards costs, the charge associated with certain adjustments to the Membership Rewards reserve model in the United States discussed previously, and increased marketing and promotion costs. Human resources and other operating expenses of $3.4 billion in 2007 increased $127 million or 4 percent from 2006. The increase was due to higher technology and volume-related operating expenses partially offset by the previously discussed pension-related gain of $36 million in 2007 and the reclassification to revenues of certain card acquisition-related costs beginning in the third quarter of 2006 as discussed previously. Human resources and other operating expenses of $3.2 billion in 2006 increased $417 million or 15 percent from 2005. The increase was due to greater professional services expenses, increased human resources expenses, higher technology service fees, and generally higher volume-related and business-building expenses partially offset by the reclassification to revenues of certain card acquisition-related costs beginning prospectively July 1, 2006, as discussed previously.
     Provisions for losses increased $1.4 billion or 84 percent to $3.0 billion for 2007 compared to 2006, reflecting increased write-off and delinquency rates, the impact of loan growth, and the credit-related charge previously discussed. Provisions for losses decreased $33 million or 2 percent to $1.6 billion for 2006 compared to 2005 due to a comparatively lower level of bankruptcy-related charge offs, lower than expected costs for Hurricane Katrina losses that were provided for in 2005, as well as improved collections, and strong credit quality, partially offset by the impact of strong volume and loan growth.
     The effective tax rate was 33 percent for 2007 compared to 35 percent for both 2006 and 2005. The effective tax rate for 2007 reflected $74 million of tax benefits previously discussed.

DIFFERENCES BETWEEN GAAP AND MANAGED BASIS PRESENTATION
For U.S. Card Services, the managed basis presentation assumes that there have been no off-balance sheet securitization transactions, i.e., all securitized cardmember loans and related income effects are reflected as if they were in the Company’s balance sheets and income statements, respectively. For the managed basis presentation, revenue and expenses related to securitized cardmember loans are reflected in other commissions and fees (included in discount revenue, net card fees and other in the U.S. Card Services Selected Financial Information), cardmember lending finance revenue, cardmember lending interest expense, and provisions for losses. On a managed basis, there is no securitization income, net as the managed basis presentation assumes no securitization transactions have occurred.
     The Company presents U.S. Card Services information on a managed basis because that is the way the Company’s management views and manages the business. Management believes that a full picture of trends in the Company’s cardmember lending business can only be derived by evaluating the performance of both securitized and non-securitized cardmember loans. Management also believes that use of a managed basis presentation presents a more accurate picture of the key dynamics of the cardmember lending business. Irrespective of the on- and off-balance sheet funding mix, it is important for management and investors to see metrics for the entire cardmember lending portfolio because they are more representative of the economics of the aggregate cardmember relationships and ongoing business performance and trends over time. It is also important for investors to see the overall growth of cardmember loans and related revenue in order to evaluate market share. These metrics are significant in evaluating the Company’s performance and can only be properly assessed when all non-securitized and securitized cardmember loans are viewed together on a managed basis. The Company does not currently securitize international loans.
     On a GAAP basis, revenue and expenses from securitized cardmember loans are reflected in the Company’s income statements in securitization income, net, fees and commissions, and provisions for losses for cardmember lending. At the time of a securitization transaction, the securitized cardmember loans are removed from the Company’s balance sheet, and the resulting gain on sale is reflected in securitization income, net as well as an impact to provisions for losses (credit reserves are no longer recorded for the cardmember loans once sold). Over the life of a securitization transaction, the Company recognizes servicing fees and other net revenues (referred to as “excess spread”) related to the interests sold to investors (i.e., the investors’ interests). These amounts, in addition to changes in the fair value of interest-only strips, are reflected in securitization income, net and fees and commissions. The Company also recognizes cardmember lending finance revenue over the life of the securitization transaction related to the interest it retains (i.e., the seller’s interest). At the maturity of a securitization transaction, cardmember loans on the balance

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2007 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY

sheet increase, and the impact of the incremental required loss reserves is recorded in provisions for losses.
     As presented, in aggregate over the life of a securitization transaction, the pretax income impact to the Company is the same whether or not the Company had securitized cardmember loans or funded these loans through other financing activities (assuming the same financing costs). The income statement classifications, however, of specific items will differ.

U.S. CARD SERVICES