American Express 2003 Annual Report Download - page 84

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Liabilities for equity indexed deferred annuities issued in 1999 or later are equal to the accumulation of host contract values
covering guaranteed benefits and the market value of embedded equity options. Liabilities for equity indexed deferred annu-
ities issued before 1999 are equal to the present value of guaranteed benefits and the intrinsic value of index-based benefits.
Liabilities for fixed annuities in a benefit status are based on established industry mortality tables and interest rates, rang-
ing from 4.6% to 9.5%, depending on year of issue, with an average rate of approximately 6.3%.
Liabilities for future benefits on term and whole life insurance are based on the net level premium method, using antici-
pated mortality, policy persistency and interest earning rates. Anticipated mortality rates are based on established industry
mortality tables, with modifications based on Company experience. Anticipated policy persistency rates vary by policy form,
issue age and policy duration with persistency on level term and cash value plans generally anticipated to be better than
persistency on yearly renewable term insurance plans. Anticipated interest rates range from 4% to 10%, depending on pol-
icy form, issue year and policy duration.
Liabilities for future disability income and long-term care policy benefits include both policy reserves and claim reserves.
Policy reserves are based on the net level premium method, using anticipated morbidity, mortality, policy persistency and
interest earning rates. Anticipated morbidity and mortality rates are based on established industry morbidity and mortal-
ity tables. Anticipated policy persistency rates vary by policy form, issue age, policy duration and, for disability income poli-
cies, occupation class. Anticipated interest rates for disability income policy reserves are 7.5% at policy issue and grade
to 5% over 5 years. Anticipated interest rates for long-term care policy reserves are currently 5.9% grading up to 8.9%
over 30 years.
Claim reserves are calculated based on claim continuance tables and anticipated interest earnings. Anticipated claim con-
tinuance rates are based on established industry tables. Anticipated interest rates for claim reserves for both disability
income and long-term care range from 5% to 8%, with an average rate of approximately 5.7%. The Company issues only
non-participating life insurance contracts and does not issue short duration life insurance liabilities.
Guaranteed Minimum Death Benefits
The majority of the variable annuity contracts offered by American Express Financial Advisors (AEFA) contain guaranteed
minimum death benefit (GMDB) provisions. At time of issue, these contracts typically guarantee that the death benefit
payable will not be less than the amount invested, regardless of the performance of the customer’s account. Most contracts
also provide for some type of periodic adjustment of the guaranteed amount based on the change in value of the contract.
A large portion of AEFA’s contracts containing a GMDB provision adjust once every six years. The periodic adjustment of
these contracts can either increase or decrease the guaranteed amount though not below the amount invested adjusted for
withdrawals. When market values of the customer’s accounts decline, the death benefit payable on a contract with a GMDB
may exceed the accumulated contract value. Through December 31, 2003, the amount paid in excess of contract value was
expensed when payable. Amounts expensed in 2003, 2002 and 2001 were $32 million, $37 million and $16 million, respec-
tively. See Recently Issued Accounting Standards section below for a description of Statement of Position 03-1.
Stock-Based Compensation
At December 31, 2003, the Company has two stock-based employee compensation plans, which are described more fully
in Note 14. Effective January 1, 2003, the Company adopted the fair value recognition provisions of SFAS No. 123, “Account-
ing for Stock-Based Compensation,” prospectively for all stock options granted after December 31, 2002. The fair value of
each option is estimated on the date of grant using a Black-Scholes option-pricing model. Prior to 2003, the Company
accounted for those plans under the recognition and measurement provisions of Accounting Principles Board (APB) Opin-
ion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. Prior to the adoption of the fair value
recognition provisions of SFAS No. 123 in 2003, no employee compensation cost was recorded in net income for stock
options granted, since all options granted under these plans had an exercise price equal to the market value of the under-
(p.82_axp_ notes to consolidated financial statements)