American Express 2014 Annual Report Download - page 56

AMERICAN EXPRESS COMPANY
2014 FINANCIAL REVIEW
Changes in the Membership Rewards URR and WAC per point have the effect of either increasing or decreasing the liability through the
current period marketing, promotion, rewards and Card Member services expense by an amount estimated to cover the cost of all points
previously earned but not yet redeemed by current enrollees as of the end of the reporting period. As of December 31, 2014, an increase in
the estimated URR of current enrollees of 100 basis points would increase the Membership Rewards liability and corresponding rewards
expense by approximately $319 million. Similarly, an increase in the WAC per point of 1 basis point would increase the Membership
Rewards liability and corresponding rewards expense by approximately $82 million.
FAIR VALUE MEASUREMENT
We hold investment securities and derivative instruments that are carried at fair value on the Consolidated Balance Sheets. Management
makes assumptions and judgments when estimating the fair values of these financial instruments.
In accordance with fair value measurement and disclosure guidance, the objective of a fair value measurement is to determine the price
that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date based on the principal or, in the absence of a principal, most advantageous market for the specific asset or liability. The disclosure
guidance establishes a three-level hierarchy of inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the
highest priority to the measurement of fair value based on unadjusted quoted prices in active markets for identical assets or liabilities (Level
1), followed by the measurement of fair value based on pricing models with significant observable inputs (Level 2), with the lowest priority
given to the measurement of fair value based on pricing models with significant unobservable inputs (Level 3). We did not have any Level 3
assets measured on a recurring basis during the year ended December 31, 2014. Refer to Note 15 to the Consolidated Financial Statements.
Investment Securities
Our 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 our investment securities, including investments comprising defined benefit pension plan assets, are obtained
primarily from pricing services we engage. For each security, we receive one price from a pricing service we engage. 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 or recent
trades of similar securities. The pricing services did not apply any adjustments to the pricing models used as of December 31, 2013 and 2014.
In addition, we did not apply any adjustments to prices received from the pricing services. We reaffirm our understanding of the valuation
techniques used by our pricing services at least annually. In addition, we corroborate the prices provided by our pricing services for
reasonableness by comparing the prices from the respective pricing services to valuations obtained from different pricing sources as well as
comparing prices to the sale prices received from sold securities at least quarterly.
In the measurement of fair value for our 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. We review and evaluate our 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. We consider 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, we assess whether we have the intent to sell the investment securities and whether
we are more likely than not that we will be required to sell the investment securities before recovery of any unrealized losses.
In determining whether any of our investment securities are other-than-temporarily impaired, a change in facts and circumstances could
lead to a change in management judgment about our view on collectability and credit quality of the issuer, or the impact of market interest
rates on the investment securities. Any such changes could result in us recognizing an other-than-temporary impairment loss through
earnings.
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