American Express 2007 Annual Report Download - page 33

Download and view the complete annual report

Please find page 33 of the 2007 American Express annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 118

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118

[ 31 ]
2007 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
RESERVES FOR MEMBERSHIP REWARDS COSTS
Description Assumptions/Approach Used Effect if Actual Results Differ
from Assumptions
The Membership Rewards program is the
largest card-based rewards program in the
industry. Eligible cardmembers can earn
points for purchases charged and many
of the Company’s card products offer the
ability to earn bonus points for certain
types of purchases. Membership Rewards
points are redeemable for a broad variety
of rewards, including travel, entertainment,
retail certificates and merchandise. Points
generally do not expire and there is no limit
on the number of points a cardmember
may earn. A large majority of spending by
eligible cardmembers earns points under
the program. While cardmember spend,
redemption rates, and the related expense
have been increasing, the Company benefits
through higher revenues, lower cardmember
attrition and credit losses and more timely
payments.
The Company establishes balance sheet
reserves that represent the estimated cost
of points earned to date that are ultimately
expected to be redeemed. Also, these reserves
reflect management’s judgment regarding
overall adequacy. The provision for the
cost of Membership Rewards is included
in marketing, promotion, rewards and
cardmember services expenses.
A weighted average cost per point redeemed
during the previous 12 months is used to
approximate future redemption costs and is
affected by the mix of rewards redeemed.
Management uses models to estimate
ultimate redemption rates based on historical
redemption statistics, card product type,
year of program enrollment, enrollment
tenure and card spend levels. During
2007, management enhanced the ultimate
redemption rate models by incorporating
more sophisticated statistical and actuarial
techniques to better estimate ultimate
redemption rates of points earned to date
by current cardmembers given redemption
trends and projected future redemption
behavior. The global ultimate redemption
rate for current participants increased to
approximately 90 percent.
The Company continually evaluates its
reserve methodology and assumptions based
on developments in redemption patterns, cost
per point redeemed, and other factors.
The balance sheet reserve for the estimated
cost of points expected to be redeemed is
impacted over time by enrollment levels, the
number of points earned and redeemed, and
the weighted-average cost per point, which
is influenced by redemption choices made by
cardmembers, reward offerings by partners
and other Membership Rewards program
changes. The reserve is most sensitive to
changes in the estimated ultimate redemption
rate. This rate is based on the expectation
that a large majority of all points earned will
eventually be redeemed.
As of December 31, 2007, if the ultimate
redemption rate of current enrollees changed
by 100 basis points, the balance sheet reserve
would change by approximately $200 million.
31