American Express 2003 Annual Report Download - page 65

Download and view the complete annual report

Please find page 65 of the 2003 American Express annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 116

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116

(p.63_axp_ financial review)
Management monitors other principal DAC assumptions, such as persistency, mortality rates, interest margin and mainte-
nance expense level assumptions, each quarter. Unless management identifies a material deviation over the course of the
quarterly monitoring, management reviews and updates these DAC assumptions annually in the third quarter of each year.
When assumptions are changed, the percentage of estimated gross profits or portion of interest margins used to amortize
DAC might also change. A change in the required amortization percentage is applied retrospectively; an increase in amor-
tization percentage will result in an increase in DAC amortization expense while a decrease in amortization percentage will
result in a decrease in DAC amortization expense. The impact on results of operations of changing assumptions with respect
to the amortization of DAC can be either positive or negative in any particular period and is reflected in the period in which
such changes are made. As a result of these reviews, AEFA took actions in both 2003 and 2002 that impacted DAC balance
and expenses.
In the third quarter of 2003, based on its detailed review, AEFA took certain actions that resulted in a net $2 million DAC
amortization expense reduction (a $22 million reduction in human resources expense and a $20 million increase in other
operating expenses) reflecting:
•A $106 million DAC amortization reduction resulting from extending 10–15 year amortization periods for certain Flex
Annuity contracts to 20 years.
•A $92 million DAC amortization increase resulting from the recognition of a premium deficiency on AEFA’s Long-Term
Care (LTC) business.
•A $12 million net DAC amortization increase across AEFA’s universal life, variable universal life and fixed and variable
annuity products.
In the third quarter of 2002, AEFA completed a comprehensive review of its DAC-related practices and took actions that
resulted in a net $44 million increase in expenses (a $1 million reduction in human resources expense and a $45 million
increase in other operating expenses) reflecting:
•A $173 million DAC amortization increase resulting from resetting the customer asset value growth rate assumptions for
variable annuity and variable life products to anticipate near-term and long-term growth at an annual rate of 7%.
•A $155 million DAC amortization reduction from revising certain mortality and persistency assumptions for universal
and variable universal life insurance products and fixed and variable annuity products to better reflect actual experience
and future expectations.
•A $26 million operating expense increase from the revision of the types and amounts of costs deferred, in part to reflect
the impact of advisor platform changes and the effects of related reengineering. This revision, which resulted in an
increase in ongoing expenses, continued to impact 2003 results.
DAC balances for various insurance, annuity and other products sold by AEFA are set forth below:
December 31, (Millions) 2003 2002
Life and health insurance $1,602 $1,654
Annuities 2,013 1,656
Other 382 473
Total $3,997 $3,783