American Express 2014 Annual Report Download - page 55

AMERICAN EXPRESS COMPANY
2014 FINANCIAL REVIEW
Liquidity risk is managed both at an aggregate corporate level and at the major legal entities in order to ensure that sufficient funding and
liquidity resources are available in the amount and in the location needed in a stress event. The Funding and Liquidity Committee reviews
the forecasts of our aggregate and subsidiary cash positions and financing requirements, approves the funding plans designed to satisfy those
requirements under normal conditions, establishes guidelines to identify the amount of liquidity resources required and monitors positions
and determines any actions to be taken.
CRITICAL ACCOUNTING ESTIMATES
Refer to Note 1 to the Consolidated Financial Statements for a summary of our significant accounting policies referenced, as applicable, to
other financial statement footnotes. Certain of our accounting policies that require significant management assumptions and judgments are
set forth below.
RESERVES FOR CARD MEMBER LOSSES
Reserves for Card Member losses represent management’s best estimate of the probable losses inherent in our outstanding portfolio of Card
Member loans and receivables, as of the balance sheet date.
In estimating these losses, management uses statistical and analytical models that analyze portfolio performance and reflect management’s
judgment regarding the quantitative components of the reserve. The models take into account several factors, including delinquency-based
loss migration rates, loss emergence periods and average losses over an appropriate historical period, as well as expected future recoveries.
Management considers whether to adjust the quantitative reserve for certain external and internal qualitative factors that may increase or
decrease the reserves for losses on Card Member loans and receivables.
The process of estimating these reserves requires a high degree of judgment. To the extent historical credit experience updated for
external environmental trends is not indicative of future performance, actual losses could differ significantly from management’s judgments
and expectations, resulting in either higher or lower future provisions for Card Member losses in any quarter.
As of December 31, 2014, a 10 percent increase in management’s estimate of losses inherent in the outstanding portfolio of Card Member
loans and receivables evaluated collectively for impairment at such date would increase reserves for losses with a corresponding change to
provision for losses by approximately $167 million. This sensitivity analysis is provided as a hypothetical scenario to assess the sensitivity of
the provision for losses. It does not represent management’s expectations for losses in the future, nor does it include how other portfolio
factors such as delinquency-based loss migration rates or recoveries, or the amount of outstanding balances, may impact the level of reserves
for losses and the corresponding impact on the provision for losses.
LIABILITY FOR MEMBERSHIP REWARDS EXPENSE
The Membership Rewards program is our largest card-based rewards program. Card Members can earn points for purchases charged on their
enrolled card products. Certain types of purchases allow Card Members to also earn bonus points. Membership Rewards points are
redeemable for a broad variety of rewards including travel, entertainment, retail certificates and merchandise. Points typically do not expire,
and there is no limit on the number of points a Card Member may earn.
We record a Membership Rewards liability that represents the estimated cost of points earned that are expected to be redeemed by Card
Members in the future. The Membership Rewards liability is impacted over time by enrollment levels, attrition, the volume of points earned
and redeemed, and the associated redemption costs. We estimate the Membership Rewards liability by determining the URR and the WAC
per point, which are applied to the points of current enrollees.
The URR assumption is used to estimate the number of points earned by current enrollees that will ultimately be redeemed in future
periods. Management uses statistical and actuarial models to estimate the URR of points earned to date by current Card Members based on
redemption trends, card product type, enrollment tenure, card spend levels and credit attributes.
The WAC per point assumption is used to estimate future redemption costs and is primarily based on redemption choices made by Card
Members, reward offerings by partners, and Membership Rewards program changes. The WAC per point is derived from the previous 12
months of redemptions and is adjusted as appropriate for certain changes in redemption costs that are not representative of future cost
expectations.
The process of estimating the Membership Rewards liability includes a high degree of judgment. Actual redemptions and associated
redemption costs could differ significantly from management’s judgment, resulting in either higher or lower Membership Rewards expense.
Management periodically evaluates its liability estimation process and assumptions based on developments in redemption patterns, cost per
point redeemed, partner contract changes and other factors.
55