American Express 2003 Annual Report Download - page 83

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impairment for debt securities include issuer downgrade, default or bankruptcy. The Company also considers the extent to
which cost exceeds fair value, the duration and size of that gap, and management’s judgment about the issuer’s current and
prospective financial condition. Fair value is generally based on quoted market prices. However, the Company’s investment
portfolio also contains structured investments of various asset quality, including CDOs and secured loan trusts (backed by
high-yield bonds and bank loans), which are not readily marketable. As a result, the carrying values of these structured
investments are based on future cash flow projections that require a significant degree of management judgment as to the
amount and timing of cash payments, defaults and recovery rates of the underlying investments and, as such, are subject
to change. Investments also include investment loans, primarily commercial mortgage loans, carried at amortized cost net
of specific and unallocated reserves.
Separate Account Assets and Liabilities
Separate account assets and liabilities are funds held for the exclusive benefit of variable annuity and variable life insurance
contractholders. The Company receives investment management fees, mortality and expense assurance fees, minimum
death benefit guarantee fees and cost of insurance charges from the related accounts.
Deferred Acquisition Costs
Deferred acquisition costs (DAC) represent the costs of acquiring new business, principally direct sales commissions and
other distribution and underwriting costs that have been deferred on the sale of annuity, life and health insurance and, to
a lesser extent, property/casualty and certain mutual fund products. For annuity and insurance products, DAC are amor-
tized over periods approximating the lives of the business, generally as a percentage of premiums or estimated gross prof-
its or as a portion of the interest margins associated with the products. For certain mutual fund products, DAC are generally
amortized over fixed periods on a straight-line basis.
For annuity and insurance products, the projections underlying the amortization of DAC require the use of certain assump-
tions, including interest margins, mortality rates, persistency rates, maintenance expense levels and customer asset value
growth rates for variable products. Management routinely monitors a wide variety of trends in the business, including com-
parisons of actual and assumed experience. Management reviews and, where appropriate, adjusts its assumptions with
respect to customer asset value growth rates on a quarterly basis. Management monitors other principal DAC assumptions,
such as persistency, mortality rate, interest margin and maintenance expense level assumptions, each quarter. Unless man-
agement 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 may also change. A change in the required amortization
percentage is applied retrospectively; an increase in amortization percentage will result in an acceleration of DAC amorti-
zation while a decrease in amortization percentage will result in a deceleration of DAC amortization. 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.
Insurance and Annuity Reserves
Liabilities for reported and unpaid life insurance claims are equal to the death benefits payable. For disability income and
long-term care claims, unpaid claim liabilities are equal to benefit amounts due and accrued. Liabilities for incurred but
not reported claims are estimated based on periodic analysis of the actual reported claim lag. Where applicable, amounts
recoverable from reinsurers are separately recorded as receivables. For life insurance, no claim adjustment expense reserve
is held. The claim adjustment expense reserves for disability income and long-term care are based on the claim reserves.
Liabilities for fixed and variable universal life insurance and fixed and variable deferred annuities are equal to accumu-
lation values.
(p.81_axp_ notes to consolidated financial statements)