American Express 2003 Annual Report Download - page 91

The gain or loss recorded when loans are securitized is the difference between the proceeds of sale and the book basis of
the assets sold. That book basis is determined by allocating the carrying amount of the assets, net of applicable reserve for
losses, between the assets sold and the retained interests based on their relative fair values. Fair values are based on market
prices at date of transfer for assets sold and on the estimated present value of future cash flows for retained interests.
During 2003, 2002 and 2001 the Company sold $3.5 billion, $4.6 billion and $4.3 billion, respectively, of U.S. cardmember
loans, or $3.1 billion, $4.2 billion and $3.9 billion, respectively, net of investments in subordinated interests. The pretax
gains on these securitizations were $124 million, $136 million and $155 million, respectively. During 2003, 2002 and 2001,
$1.0 billion, $2.0 billion and $1.0 billion, respectively, of investor certificates that were previously issued by the securitiza-
tion trust matured. When investor certificates mature, principal collections received from the Trust assets are used to redeem
the certificates. As of December 31, 2003, $17.6 billion of U.S. cardmember loans had been sold, net of investments in sub-
ordinated interests of $1.8 billion, for a total amount securitized of $19.4 billion.
The value of retained interests is primarily subject to changes in credit risk, average loan life and interest rates on the trans-
ferred financial assets. The Company generally continues to experience shorter average loan lives. Key economic assump-
tions used in measuring the retained interests resulting from securitizations during 2003 and 2002 were as follows (rates
are per annum):
2003 2002
Average loan life (months) 55 – 6
Expected credit losses 4.60% – 5.52% 5.05% – 6.03%
Cash flows from subordinated security interests
and I/O strips discounted at 8.3% – 12.0% 8.3% – 12.0%
Returns to investors
Variable Contractual spread over Contractual spread over
LIBOR ranging from .04% to 1.15% LIBOR ranging from .04% to 1.05%
Fixed 1.7% – 7.4% 5.5% – 7.4%
The following table presents quantitative information about delinquencies, net credit losses and components of securitized
cardmember loans at December 31:
Total Principal Principal Amount of Loans Net Credit Losses
(Billions) Amount of Loans 30 Days or More Past Due During the Year
2003 2002 2003 2002 2003 2002
Cardmember loans managed $43.6 $ 38.0 $1.3 $1.3 $2.2 $2.2
Less: Securitized cardmember loans sold 19.5 17.2 0.6 0.6 1.0 1.0
Cardmember loans on balance sheet $24.1 $ 20.8 $0.7 $0.7 $1.2 $1.2
At December 31, 2003, I/O strips were $225 million and were reported as other receivables on the Consolidated Balance
Sheets. The key economic assumptions and the sensitivity of the current year’s fair value of the I/O strip to immediate
10 percent and 20 percent adverse changes in assumed economics are as follows:
Cash Flows from
Average Loan Life Expected Credit Interest-only Strips
(Millions, except rates per annum) (months) Losses Discounted at Interest Rates
Assumption 5.1 5.1% 12.0% 2.0%
Impact on fair value of 10% adverse change $14.8 $ 23.6 $ 0.5 $ 0.1
Impact on fair value of 20% adverse change $28.6 $ 47.2 $ 1.1 $ 0.2
These sensitivities are hypothetical and will be different from what actually occurs in the future. Any change in fair value
based on a 10 percent variation in assumptions cannot be extrapolated in part because the relationship of the change in
assumption on the fair value of the retained interest is calculated independent from any change in another assumption; in
reality, changes in one factor may result in changes in another, which magnify or counteract the sensitivities.
(p.89_axp_ notes to consolidated financial statements)