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[ 35 ]
2006 fi nancial review
american express company
ASSET SECURITIZATIONS
Description Assumptions/Approach Used
Effect if Actual Results Differ
from Assumptions
When the Company securitizes
cardmember loans, certain estimates and
assumptions are required to determine
the fair value of the Company’s
subordinated retained interests, including
an interest-only strip, and gains or losses
recorded at the time of sale.
Estimates and assumptions are generally
based on projections of finance charges
and fees paid related to the securitized
assets, expected credit losses, average
loan life (i.e., monthly payment rate), the
contractual fee to service the securitized
assets, and a discount rate applied to
the cash flows from the subordinated
retained interests which is commensurate
with the inherent risk.
Changes in the estimates and
assumptions used may have an impact on
the Company’s gain or loss calculation
and the valuation of its subordinated
retained interests. Management believes
that the fair value of the subordinated
interest is most sensitive to changes in
the monthly payment rate, expected
credit losses, and cash flow discount rate.
As of December 31, 2006, the total
fair value of all subordinated retained
interests was $266 million. The three
key economic assumptions and the
sensitivity of the current year’s fair value
of the interest-only strip to immediate 10
percent and 20 percent adverse changes
in these assumptions are as follows:
(Millions, except
rates per annum)
Monthly
Payment
Rate
Expected
Credit
Losses
Cash
Flows
from
Interest-
only Strips
Discounted
at
Assumption 25.6% 2.6% 12.0%
10% adverse
change $(17) $(12) $(0.5)
20% adverse
change $(33) $(24) $(1.0)
These sensitivities are hypothetical.
Management cannot extrapolate
changes in fair value based on a 10
percent or 20 percent change in all key
assumptions simultaneously in part
because the relationship of the change
in one assumption on the fair value
of the retained interest is calculated
independent from any change in another
assumption. Changes in one factor may
cause changes in another, which could
magnify or offset the sensitivities.