American Express 2008 Annual Report Download - page 85

Download and view the complete annual report

Please find page 85 of the 2008 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 125

  • 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
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125

notes to consolidated financial statements
american express company
83
The following table summarizes the unrealized losses of temporary impairments by ratio of fair value to amortized cost as of
December 31, 2008:
(Millions) Less than 12 months 12 months or more Total
Ratio of Fair Value to
Amortized Cost
Estimated
Fair
Value
Gross
Unrealized
Losses
Estimated
Fair
Value
Gross
Unrealized
Losses
Estimated
Fair
Value
Gross
Unrealized
Losses
90%–100% $1,289 $ (73) $ 111 $ (7) $1,400 $ (80)
Less than 90% 2,032 (842) 2,025 (713) 4,057 (1,555)
Total $3,321 $(915) $2,136 $(720) $5,457 $(1,635)
The securities with a fair value to amortized cost ratio of less
than 100 percent consist primarily of state and municipal
securities and the retained subordinated securities from the
Company’s securitization programs. The retained subordinated
securities represent investments in the Lending Trust, as
discussed in more detail in Note 6. The state and municipal
securities do not contain a concentration of any one security.
At December 31, 2008, the Company had approximately 995
securities with a fair value of $5.5 billion in an unrealized loss
position, which represented approximately 63 percent of the
total number of outstanding investment securities.
Key factors considered when assessing other-than-
temporary impairment include the determination of the extent
to which the difference is due to increased default risk for the
specific issuer, or market interest rate risk. With respect to
increased default risk, the Company assesses the collectibility
of principal and interest payments by monitoring issuer’s credit
ratings, related changes to those ratings, specific credit events
associated with the individual issuers as well as the credit
ratings of financial guarantor, where applicable. With respect
to market interest rate risk, including benchmark interest rates
and credit spreads, the Company’s intent and ability to hold the
securities for a time sufficient to recover the unrealized losses
is a significant consideration in the other-than-temporary
evaluation process.
The gross unrealized losses on state and municipal securities
are attributable to a number of reasons such as increases in
issuer specific credit spreads, changes in the interest rates as
well as pricing pressures resulting from the excess supply of
securities in the market that were caused by unusually high
redemptions of municipal money market funds that occurred
since September 2008. However, there were no specific credit
concerns identified for any of the issuers and therefore the
Company expects to collect all of the contractual cash flows due
on these securities. These securities support specific businesses
within the Company and the Company has both the intent and
ability to hold these securities for a time sufficient to recover
the unrealized losses.
The gross unrealized losses on the retained subordinated
securities from the Company’s securitization programs are
primarily attributable to the increase in issuer specific credit
spreads. The credit spreads on these securities have increased
substantially during fourth quarter of 2008 due to limited
market liquidity. However, upon analysis of the projected
cash flows of the American Express Credit Account Master
Trust (the Lending Trust), the Company expects to collect all
of the contractual cash flows due on these securities. Also, the
Company has the ability and intent to hold these securities
as there are no current funding needs that would require the
Company to sell these securities.
The gross unrealized losses on all other securities are
attributable to changes in market interest rates, particularly the
widening of credit spreads. The Company has the ability and
the intent to hold these securities for a time sufficient to recover
the unrealized losses and expects that contractual principal and
interest will be received on these securities.
supplemental information
Gross realized gains and losses on sales of investment securities,
included in other revenue, follows:
(Millions) 2008 2007 2006
Gains $20 $14 $89(a)
Losses (8)(5)(1)
Total $12 $ 9 $88
(a) Includes $68 million of gains related to a rebalancing program in the fourth
quarter of 2006 to better align the maturity profile of the Travelers Cheque
and Gift Card investment portfolio with its business liquidity needs.
Contractual maturities of investment securities classified
as available-for-sale, excluding equity securities and other
securities, primarily mutual funds with no stated maturity,
follows:
(Millions) Cost
Estimated
Fair Value
Due in:
2009 $ 2,318 $ 2,355
2010–2013 4,227 3,943
2014–2018 726 472
2019 and beyond 6,195 5,194
Total $13,466 $11,964
The expected payments on state and municipal obligations
and mortgage-backed securities may not coincide with their
contractual maturities because borrowers have the right to call or
prepay certain obligations.