American Express 2011 Annual Report Download - page 19

AMERICAN EXPRESS COMPANY
2011 FINANCIAL REVIEW
Investment Securities
The Company’s investment securities are mostly composed of
fixed-income securities issued by states and municipalities as
well as the U.S. Government and Agencies.
The fair market values for the Company’s investment
securities, including investments comprising defined benefit
pension plan assets, are obtained primarily from pricing services
engaged by the Company. For each security, the Company
receives one price from a pricing service. The fair values
provided by the pricing services are estimated using pricing
models where the inputs to those models are based on observable
market inputs. The Company did not apply any adjustments to
prices received from the pricing services. The Company reaffirms
its understanding of the valuation techniques used by its pricing
services at least annually. In addition, the Company corroborates
the prices provided by its pricing services to test for
reasonableness by comparing the prices to valuations from
different pricing sources as well as comparing prices to the sale
prices received from sold securities.
InthemeasurementoffairvaluefortheCompany’s
investment securities, even though the underlying inputs used in
the pricing models are directly observable from active markets or
recent trades of similar securities in inactive markets, the pricing
models do entail a certain amount of subjectivity and therefore
differing judgments in how the underlying inputs are modeled
could result in different estimates of fair value.
Other-Than-Temporary Impairment of Investment Securities
Realized losses are recognized when management determines
that a decline in the fair value of investment securities is other-
than-temporary. Such determination requires judgment
regarding the amount and timing of recovery. The Company
reviews and evaluates its investment securities at least quarterly,
and more often as market conditions may require, to identify
investment securities that have indications of other-than-
temporary impairments. The Company considers several factors
when evaluating debt securities for other-than-temporary
impairment, including the determination of the extent to which
a decline in the fair value of a security is due to increased default
risk for the specific issuer or market interest rate risk. With
respect to market interest rate risk, the Company assesses
whether it has the intent to sell the investment securities and
whether it is more likely than not that the Company will be
required to sell the investment securities before recovery of any
unrealized losses.
In determining whether any of the Company’s investment
securities are other-than-temporarily impaired, a change in facts
and circumstances could lead to a change in management
judgment around the Company’s view on collectibility and credit
quality of the issuer, or the impact of market interest rates on the
investment securities. Any such changes could result in the
Company recognizing an other-than-temporary impairment loss
through earnings.
Derivative Instruments
The Company’s primary derivative instruments are interest rate
swaps, foreign currency forward agreements, cross-currency
swaps and a total return swap relating to a foreign equity
investment.
The fair value of the Company’s derivative instruments is
estimated by using either a third-party valuation service that uses
proprietary pricing models, or by internal pricing models, where
the inputs to those models are readily observable from actively
quoted markets. The Company reaffirms its understanding of the
valuation techniques used by its pricing services at least annually.
To mitigate derivative instrument credit risk, counterparties
are required to be pre-approved and rated as investment grade.
In addition, the Company manages certain counterparty credit
risks by exchanging collateral under executed credit support
agreements. Based on the assessment of credit risk of the
Company’s derivative counterparties, the Company does not
have derivative positions that warrant credit valuation
adjustments.
In the measurement of fair value for the Company’s derivative
instruments, although the underlying inputs used in the pricing
models are readily observable from actively quoted markets, the
pricing models do entail a certain amount of subjectivity and,
therefore, differing judgments in how the underlying inputs are
modeled could result in different estimates of fair value.
GOODWILL RECOVERABILITY
Goodwill represents the excess of acquisition cost of an acquired
company over the fair value of assets acquired and liabilities
assumed. In accordance with GAAP, goodwill is not amortized
but is tested for impairment at the reporting unit level annually
or when events or circumstances arise, such as adverse changes in
the business climate, that would more likely than not reduce the
fair value of the reporting unit below its carrying value.
The Company assigns goodwill to its reporting units for the
purpose of impairment testing. A reporting unit is defined as
either an operating segment or a business that is one level below
an operating segment for which discrete financial information is
regularly reviewed by the operating segment manager.
The goodwill impairment test utilizes a two-step approach.
The first step identifies whether there is potential impairment by
comparing the fair value of a reporting unit to its carrying
amount, including goodwill. If the fair value of a reporting unit
is less than its carrying amount, the second step of the
impairment test is required to measure any impairment loss.
The Company uses a combination of discounted cash flow
methods and market multiples valuation methods in estimating
the fair value of its reporting units.
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