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[ 88 ]
notes to consolidated fi nancial statements
american express company
retained interests. Gains on sale from securitizations are
reported in securitization income, net on the Company’s
Consolidated Statements of Income. The income
component resulting from the release of credit reserves
upon sale is reported as a reduction of provision for losses
from cardmember lending.
The Company retains servicing responsibilities for
the transferred cardmember loans through its subsidiary,
American Express Travel Related Services Company,
Inc., and earns a related fee. No servicing asset or liability
is recognized at the time of a securitization because the
Company receives adequate compensation relative to
current market servicing fees.
Management utilizes certain estimates and
assumptions to determine the fair value of the retained
subordinated interests, including subordinated securities
and the interest-only strip. These estimates and
assumptions are 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 transferred 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 a significant impact in the
Company’s valuation. The key economic assumptions
used in measuring the retained subordinated interests at
the time of issuance and during 2006 and 2005 were as
follows (rates are per annum):
2006 2005
Weighted average
loan life (months) 44
Expected credit losses 2.60%–3.37% 3.30%–3.90%
Subordinated certificates
discounted at 4.9% - 5.3% 2.6%–4.8%
Residual cash flows
discounted at 12.0% 12.0%
Returns to investors:
Variable
Fixed
Contractual
spread
over LIBOR
ranging from
-0.01% to .90%
1.7%–5.8%
Contractual
spread
over LIBOR
ranging from
.00% to .90%
1.7%–5.8%
The following table presents quantitative information
about delinquencies, net credit losses, and components
of securitized cardmember loans on a trust basis at
December 31:
(Billions)
Tota l
Principal
Amount
of Loans
Principal
Amount of
Loans 30
Days or
More Past
Due
Net
Credit
Losses
During
the Year
2006
Cardmember loans managed $63.5 $1.7 $1.9
Less: Cardmember loans sold 20.2 0.5 0.6
Cardmember loans on-balance
sheet $43.3 $1.2 $1.3
2005
Cardmember loans managed $54.3 $1.3 $2.1
Less: Cardmember loans sold 21.2 0.6 1.0
Cardmember loans on-balance
sheet $33.1 $0.7 $1.1
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 %
Impact on fair value of
10% adverse change $ (17) $ (12) $ (0.5)
Impact on fair value of
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.