EXHIBIT 99.3
[LOGO OF AMERICAN EXPRESS COMPANY]
2004
Fourth Quarter/Full Year
Earnings Supplement
The enclosed summary should be read in conjunction with the text and
statistical tables included in American Express Company's (the "Company"
or "AXP") Fourth Quarter/Full Year 2004 Earnings Release.
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This summary contains certain forward-looking statements that are subject
to risks and uncertainties and speak only as of the date on which they
are made. Important factors that could cause actual results to differ
materially from these forward-looking statements, including the Company's
financial and other goals, are set forth on page 27 herein and in the
Company's 2003 10-K Annual Report, and other reports, on file with the
Securities and Exchange Commission.
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AMERICAN EXPRESS COMPANY
FOURTH QUARTER 2004
HIGHLIGHTS
o Fourth quarter diluted EPS on a net income basis of $0.71 increased 20%
versus $0.59 last year. Fourth quarter diluted EPS of $0.71 increased 18%
over last year's diluted EPS of $0.60 before the accounting change. Total
revenues rose 10%. For the trailing 12 months, ROE was 22%.
- - 4Q '04 included:
-- A $117MM ($76MM after-tax) net gain in connection with the sale
of the equipment leasing product line managed within TRS' small
business financing unit (see discussion below); and,
-- $102MM ($66MM after-tax) in aggregate restructuring charges (see
discussion below).
- - 4Q '03 included:
-- The adoption of FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities", as revised ("FIN 46"), resulting in
a below-the-line, non-cash charge of $13MM net of tax, or $0.01
per share.
o Compared with the fourth quarter of 2003:
- - Worldwide billed business increased 17% on continued strong consumer,
small business and Corporate Services spending growth and over 40%
growth in global network partner volumes. A comparatively weaker U.S.
dollar benefited the reported growth rate by 2%.
-- Worldwide average spending per proprietary basic card in
force increased 12% versus last year (up 10% adjusted for foreign
exchange translation);
- - TRS' worldwide lending balances of $26.9B on an owned basis increased
4%; on a managed basis, worldwide lending balances of $47.2B were
also up 4%. Excluding the sale of TRS' equipment leasing product
line, managed loans increased 8% (see discussion of "managed basis"
on page 7);
- - Card credit quality continued to be well-controlled and reserve
coverage ratios remained strong;
- - Worldwide cards in force of 65.4MM increased 8%, up 4.9MM from last
year and 2.1MM during 4Q '04, on continued solid proprietary card
growth and particularly strong network card growth; and,
- - AEFA assets owned, managed and administered of $413B were up 13%
versus last year reflecting market appreciation, favorable foreign
currency translation impacts and asset inflows.
o Additional items of note included:
- - Marketing, promotion, rewards and cardmember services costs increased
26% versus 4Q '03. Rewards costs increased, reflecting a higher
redemption rate, strong volume growth and the continued increase in
cardmember loyalty program participation. Marketing costs rose
primarily due to costs related to the Company's new global "My Life,
My Card(SM)" advertising campaign. Improved metric performance during
the quarter reflected the ongoing benefits of the increased spending
over the last two years.
- - The Company's reengineering initiatives delivered in excess of the
$1B of benefits targeted for this year, including significant
carry-over benefits from certain initiatives begun in prior periods.
During the fourth quarter, reengineering initiatives continued to
provide substantial year-over-year expense comparison benefits. In
addition, revenue-related reengineering activities are driving a
significant portion of the total benefits, representing more than 25%
of the benefits delivered in 4Q `04.
- - As previously disclosed, the Company decided to expense stock options
beginning in 1Q '03 and use restricted stock awards in place of stock
options for middle management. As a result, the 4Q '04 impacts of
incremental annual option grant expense, increased levels of
restricted stock awards and other related compensation changes
contributed to the 17% increase in human resources expense.
-- Compared with last year, the total employee count of 77,500
decreased 1%; compared with last quarter, the total employee count
was down 600 employees or approximately 1%.
- - On December 1, 2004, the Company completed the sale of American
Express Business Finance Corporation, the equipment leasing product
line within TRS' small business financing unit. The sale of this
portfolio, of approximately $1.5B of loans as of 9/30/04, generated a
net gain during the quarter of $117MM ($76MM after-tax).
-1-
AMERICAN EXPRESS COMPANY
FOURTH QUARTER 2004
HIGHLIGHTS (Cont'd)
- - 4Q '04 also included aggregate charges of $102MM ($66MM after-tax)
recorded in connection with various restructuring activities
undertaken within certain of AXP's business units and staff groups.
The charge reflects expenses incurred in connection with several
initiatives relating principally to the restructuring of TRS'
Business Travel operations, the decision to sell certain of the
operations of AEB in Bangladesh, Egypt, Luxembourg and Pakistan, and
the relocation of certain functions within the company's finance
operations. Once completed, these initiatives are expected to result
in the elimination of approximately 2,000 positions company-wide and
to provide annual pre-tax benefits to the Company in excess of $75MM.
The charge is reflected in the Company's segments as follows: $64MM
in TRS, $3MM in AEFA and $35MM in AEB.
o On November 5, pursuant to an agreement announced in January, MBNA
became the first U.S. bank to issue credit cards accepted on the
American Express network. This followed a Supreme Court decision in
October to uphold lower court rulings that Visa and Mastercard
association bylaws that prevented banks from issuing cards on rival
networks, were illegal and must be abolished.
o On November 15, American Express filed a lawsuit against Visa,
Mastercard and eight major banks that are members of the two card
associations seeking monetary damages for the business lost as a result
of the illegal, anticompetitive practices of the card associations,
which had effectively locked the Company out of the bank-issued card
business in the United States.
o As previously announced, at a meeting held on November 22, 2004,
the Audit Committee of the Board of Directors approved the future
engagement of PricewaterhouseCoopers LLP as the Company's independent
registered public accountants ("auditors") for the fiscal year ending
December 31, 2005 and dismissed the firm of Ernst & Young LLP ("E&Y")
as auditors for the 2005 fiscal year. This action was the result of
the Audit Committee's request for proposals from auditing firms for
the Company's 2005 audit. As disclosed in the 2004 proxy, this request
for proposals was made in accordance with the Audit Committee's
charter, which requires a detailed review of the Company's outside
audit firm at least every ten years. The Audit Committee's decision to
dismiss E&Y was made after a robust proposal process that included
three of the four major international accounting firms, including E&Y.
All of the proposals received by the Company were of high quality. E&Y
continues as the Company's auditors for the year ended December 31,
2004.
o On December 16, the Company entered into an agreement to sell and lease
back seven real properties located in the U.S. to designated affiliates
of The Inland Real Estate Group, Inc., enabling the Company to monetize
the value of the properties and use the proceeds for reinvestment in
its business.
o During the quarter, American Express continued to invest in growth
opportunities through expanded products and services.
- - At TRS we:
- -- Announced a network agreement with Citibank to issue American
Express branded credit cards in the U.S. beginning in late 2005;
- -- Launched the first American Express branded credit card in China,
denominated in both local Chinese currency and U.S. dollars,
through our network relationship with the Industrial and
Commercial Bank of China;
- -- Supported the entry of Credomatic, a leader in Central America's
financial services industry, into the Mexican marketplace with
the launch of American Express branded credit cards in
Guadalajara, Mexico, which included a co-branded card with
Farmacias Guadalajara, one of Mexico's largest drug and
supermarket retailers;
- -- Announced plans to roll-out, in all 5,300 of CVS' U.S. retail
locations, point of sale terminals enabled for ExpressPay, a
contact-less payment device which operates by radio-frequency
transmission to make everyday purchases quick and easy;
- -- Partnered with Rite-Aid to offer American Express gift cards at
their 3,400 stores nationwide;
- -- Launched a redesigned Business Travel website, further
enhancing AXP's focus on delivering savings, service and control
across 100 percent of a customers' travel expenditures globally;
-2-
AMERICAN EXPRESS COMPANY
FOURTH QUARTER 2004
HIGHLIGHTS (Cont'd)
- -- Announced a strategic agreement with Travelocity to use a private
label version of Travelocity's online booking engine for flights,
hotels, car rentals, and last minute travel products for American
Express' U.S. online consumer travel site;
- -- Launched a new global brand advertising campaign, introducing the
theme "My Life, My Card(SM)";
- -- Introduced a new groundbreaking online shopping experience with
the "My Wishlist" promotion in which American Express cardmembers
vied for the opportunity to purchase premium gift items at
significantly discounted prices (e.g. a BMW Roadster for $5,000)
via an online, auction-style website; and,
- -- Welcomed JetBlue Airways into our Membership Rewards(R) Program.
- - At AEFA we:
- -- Announced the introduction of the American Express Individual
(k)(R), a 401(k)-based plan designed to provide self-employed
professionals with added flexibility, investment choices, and
higher contribution limits to help them save more effectively for
retirement; and,
- -- Introduced the Charitable Giving Benefit, a new feature of the
American Express(R) Estate Series variable universal and
universal life product lines, allowing policyholders, upon death
of the insured, to give the equivalent of 1% of the policy's
death benefit, up to a maximum of $100,000, to an accredited
charitable organization of their choice at no added cost and
without decreasing the amount of the insurance death benefit paid
out to beneficiaries.
-3-
AMERICAN EXPRESS COMPANY
FOURTH QUARTER 2004 OVERVIEW
CONSOLIDATED
(Preliminary)
Condensed Statements of Income
(Unaudited, GAAP basis)
Quarters Ended Percentage
(millions) December 31, Inc/(Dec)
------------------------------- -------------
2004 2003
---- ----
Revenues:
Discount revenue $2,817 $2,432 16%
Net investment income 826 786 5
Management and distribution fees 788 728 8
Cardmember lending net finance charge revenue 560 531 6
Net card fees 491 467 5
Travel commissions and fees 484 445 9
Other commissions and fees 616 531 16
Insurance and annuity revenues 394 366 7
Securitization income, net 325 293 11
Other 470 459 3
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Total revenues 7,771 7,038 10
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Expenses:
Human resources 1,971 1,678 17
Marketing, promotion, rewards and cardmember services 1,472 1,166 26
Provision for losses and benefits 1,162 1,164 -
Interest 238 205 16
Other 1,745 1,735 -
------ ------
Total expenses 6,588 5,948 11
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Pre-tax income before accounting change 1,183 1,090 9
Income tax provision 287 314 (9)
------ ------
Income before accounting change 896 776 16
Cumulative effect of accounting change, net of tax - (13) #
------ ------
Net income $896 $763 17
====== ======
EPS:
Income before accounting change - Basic $0.72 $0.61 18
====== =====
Net Income - Basic $0.72 $0.60 20
====== =====
Income before accounting change - Diluted $0.71 $0.60 18
====== =====
Net Income - Diluted $0.71 $0.59 20
====== =====
Note: Certain prior period amounts have been reclassified to conform to the
current year presentation.
# Denotes variance greater than 100%.
o Net Income: Increased 17% to a record quarterly level of $896MM. Income
before last year's accounting change increased 16%.
- - 4Q '04 included:
- -- A $117MM ($76MM after-tax) net gain at TRS in connection with
the sale of American Express Business Finance Corporation, the
equipment leasing product line managed within TRS' small
business financing unit; and,
- -- $102MM ($66MM after-tax) in aggregate restructuring charges
(see discussion on page 2).
- - 4Q '03 included:
- -- The adoption of FIN 46, resulting in a below-the-line, non-cash
charge of $13MM net of tax, or $0.01 per share.
o Consolidated Revenues: Revenues increased 10% due to higher discount
revenues, greater other commissions and fees, greater management and
distribution fees, higher net investment income, greater travel
commissions and fees, higher net securitization income, higher cardmember
lending net finance charge revenue, larger insurance and annuity revenues
and greater net card fees. Consolidated revenue growth versus last year
reflected 11% growth at TRS, 9% growth at AEFA, and 1% growth at AEB.
Translation of foreign currency revenues contributed approximately 2% of
the 10% revenue growth rate.
-4-
AMERICAN EXPRESS COMPANY
FOURTH QUARTER 2004 OVERVIEW
CONSOLIDATED (Cont'd)
o Consolidated Expenses: Expenses were up 11%, reflecting higher marketing,
promotion, rewards and cardmember services expenses, greater human
resources costs and increased interest expense. Provision for losses and
benefits and other operating expenses were virtually flat. Consolidated
expenses reflected increases versus last year of 10% at TRS, 10% at AEFA,
and 23% at AEB. Translation of foreign currency expenses contributed
approximately 2% of the 11% expense growth rate.
o Pre-Tax Margin: Was 15.2% in 4Q '04 compared with 17.4% in 3Q '04 and
15.5% in 4Q '03.
o Effective Tax Rate: Was 24% in 4Q '04 versus 30% in 3Q '04 and 29% in 4Q
'03. The decrease in the consolidated tax rate for the quarter was
primarily due to the impact of continuing benefits from the changes in
international funding strategy at TRS in 2004, favorable tax audit
experience at both TRS and AEB, and a favorable adjustment to the current
taxes payable account at AEFA. At TRS, the changes in international
funding strategy will continue to positively affect our effective tax rate
going forward, and be offset in part by higher related funding costs.
o Share Repurchases: During 4Q '04, 15.0MM shares were repurchased. Since
the inception of repurchase programs in September 1994, 495.5MM shares
have been acquired under cumulative Board authorizations to repurchase up
to 570MM shares, including purchases made under agreements with third
parties.
Millions of Shares
------------------------------------------------
- AVERAGE SHARES: 4Q `04 3Q `04 4Q `03
------ ------ ------
Basic 1,242 1,251 1,277
====== ====== ======
Diluted 1,270 1,275 1,299
====== ====== ======
- ACTUAL SHARE ACTIVITY:
Shares outstanding - beginning of period 1,255 1,267 1,285
Repurchase of common shares (15) (15) (3)
Employee benefit plans, compensation and other 9* 3 2
------ ------ ------
Shares outstanding - end of period 1,249 1,255 1,284
====== ====== ======
* Includes 9MM net shares issued through employee stock option exercises and
related activity.
CORPORATE AND OTHER
o The net expense was $57MM in 4Q '04 compared with $65MM in 3Q '04 and
$54MM in 4Q '03. 4Q '04 continues to reflect corporate investment
spending on compliance and technology projects.
-5-
AMERICAN EXPRESS COMPANY
FOURTH QUARTER 2004 OVERVIEW
TRAVEL RELATED SERVICES
(Preliminary)
STATEMENTS OF INCOME
(Unaudited, GAAP basis)
Quarters Ended Percentage
(millions) December 31, Inc/(Dec)
--------------------------------- -------------
2004 2003
---- ----
Net revenues:
Discount revenue $2,817 $2,432 16%
Lending:
Finance charge revenue 716 654 9
Interest expense 156 123 26
------ ------
Net finance charge revenue 560 531 6
Net card fees 491 467 5
Travel commissions and fees 484 445 9
Other commissions and fees 606 515 18
TC investment income 94 93 1
Securitization income, net 325 293 11
Other revenues 411 435 (6)
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Total net revenues 5,788 5,211 11
------ ------
Expenses:
Marketing, promotion, rewards and cardmember services 1,416 1,141 24
Provision for losses and claims:
Charge card 240 227 5
Lending 296 330 (10)
Other 30 28 6
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Total 566 585 (3)
Charge card interest expense 196 187 5
Human resources 1,169 1,003 17
Other operating expenses:
Professional services 619 567 9
Occupancy and equipment 366 371 (1)
Communications 118 116 2
Other 320 357 (10)
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Total 1,423 1,411 1
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Total expenses 4,770 4,327 10
------ ------
Pre-tax income 1,018 884 15
Income tax provision 289 278 4
------ ------
Net income $ 729 $ 606 20
====== ======
Note: Certain prior period amounts have been reclassified to conform to the
current year presentation.
o Net Income: Increased 20%.
- - 4Q '04 included:
- -- A $117MM ($76MM after-tax) net gain in connection with the sale
of the equipment leasing product line within the small business
financing unit; and,
- -- $64MM ($42MM after-tax) in aggregate charges relating
principally to restructuring activities within Business Travel
operations.
o Pre-tax Margin: Was 17.6% in 4Q '04 versus 19.5% in 3Q '04 and 17.0% in
4Q '03.
o Effective Tax Rate: Was 28% in 4Q '04 compared with 31% in 3Q '04 and 4Q
'03. The lower rate was driven primarily by continuing benefits arising
from the changes in international funding strategy in 2004, as well as
the favorable impact of certain federal audit adjustments.
o GAAP Basis Income Statement Items:
- - Securitization Income, Net: Increased 11%. Securitization income, net
represents the non-credit provision components of the net gains and
charges from securitization activities, the amortization and related
impairment charges, if any, of the related interest-only strip,
excess spread related to securitized loans, net finance charge
revenue on retained interests in securitized loans, and servicing
income, net of related discounts or fees.
-- During 4Q '04, there was no incremental securitization activity.
The average balance of cardmember lending securitizations was
$20.3B in 4Q '04 versus $19.4B in 4Q '03 resulting in an overall
increase in net securitization income.
- - Net Finance Charge Revenue: Increased 6%, reflecting 10% growth in
the average balance of the owned lending portfolio for the period and
a lower yield.
- - The Lending Provision: Decreased 10% reflecting strong credit quality
in the owned lending portfolio.
- - The above GAAP basis items relating to net finance charge revenue and
lending provision reflect the owned portfolio only. "Owned basis"
credit quality statistics are available in the Fourth Quarter/Full
Year 2004 Earnings Release on the TRS Selected Statistical Information
pages.
-6-
AMERICAN EXPRESS COMPANY
FOURTH QUARTER 2004 OVERVIEW
TRAVEL RELATED SERVICES (Cont'd)
Supplemental Information - Managed Basis: The following supplemental table
includes information on both a GAAP basis and a "managed" basis. The managed
basis presentation assumes there have been no securitization transactions,
i.e., all securitized Cardmember loans and related income effects are
reflected in the Company's balance sheet and income statement, respectively.
The Company presents TRS information on a managed basis because that is the
way the Company's management views and manages the business. Management
believes that a full picture of trends in the Company's Cardmember lending
business can only be derived by evaluating the performance of both securitized
and non-securitized Cardmember loans. Asset securitization is just one of
several ways for the Company to fund Cardmember loans.
Use of a managed basis presentation, including non-securitized and securitized
Cardmember loans, presents a more accurate picture of the key dynamics of the
Cardmember lending business, avoiding distortions due to the mix of funding
sources at any particular point in time. For example, irrespective of the mix,
it is important for management and investors to see metrics, such as changes
in delinquencies and write-off rates, for the entire Cardmember lending
portfolio because it is more representative of the economics of the aggregate
Cardmember relationships and ongoing business performance and trends over
time. It is also important for investors to see the overall growth of
Cardmember loans and related revenue and changes in market share, which are
all significant metrics in evaluating the Company's performance and which can
only be properly assessed when all non-securitized and securitized Cardmember
loans are viewed together on a managed basis.
Management views any net gains from securitizations as discretionary benefits
to be used for card acquisition expenses, which are reflected in both
marketing, promotion, rewards and cardmember services and other operating
expenses. Consequently, the managed basis presentation assumes that gains from
new issuances and charges from the amortization and maturities of outstanding
transactions are offset by impacts to marketing, promotion, rewards and
cardmember services expenses. Accordingly, the incremental benefits, as well
as the impact of the net lending securitization activity, are eliminated. As
there was no 4Q '04 or 4Q '03 securitization activity, no such adjustments are
reflected.
The following table compares and reconciles the GAAP basis TRS income
statements to the managed basis information, where different.
Effect of Securitizations (unaudited)
--------------------------------------------------------
(preliminary, millions) GAAP Basis (unaudited) Securitization Effect Managed Basis
- ------------------------------------------------------------------------ ---------------------- ---------------------------------
Percentage Percentage
Quarters Ended December 31, 2004 2003 Inc/(Dec) 2004 2003 2004 2003 Inc/(Dec)
---------------------------------- ---------------------- ---------------------------------
Net revenues:
Discount revenue $2,817 $2,432 16%
Lending:
Finance charge revenue 716 654 9 $621 $532 $1,337 $1,186 13%
Interest expense 156 123 26 132 84 288 207 38
---------------------------------- ---------------------- ---------------------------------
Net finance charge revenue 560 531 6 489 448 1,049 979 7
Net card fees 491 467 5
Travel commissions and fees 484 445 9
Other commissions and fees 606 515 18 54 53 660 568 16
TC investment income 94 93 1
Securitization income, net 325 293 11 (325) (293) - - -
Other revenues 411 435 (6)
---------------------------------- ---------------------- ---------------------------------
Total net revenues 5,788 5,211 11 218 208 6,006 5,419 11
---------------------------------- ---------------------- ---------------------------------
Expenses:
Marketing, promotion, rewards
and cardmember services 1,416 1,141 24
Provision for losses and claims:
Charge card 240 227 5
Lending 296 330 (10) 218 208 514 538 (4)
Other 30 28 6
---------------------------------- ---------------------- ---------------------------------
Total 566 585 (3) 218 208 784 793 (1)
Charge card interest expense 196 187 5
Human resources 1,169 1,003 17
Other operating expenses:
Professional Services 619 567 9
Occupancy and equipment 366 371 (1)
Communications 118 116 2
Other 320 357 (10)
- ------------------------------------------------------------------------
Total 1,423 1,411 1
- ------------------------------------------------------------------------ ---------------------- ---------------------------------
Total expenses 4,770 4,327 10 $218 $208 $4,988 $4,535 10
- ------------------------------------------------------------------------
Pre-tax income 1,018 884 15
Income tax provision 289 278 4
- ------------------------------------------------------------------------
Net income $729 $606 20
Note: Certain prior period amounts have been reclassified to conform to the
current year presentation.
-7-
AMERICAN EXPRESS COMPANY
FOURTH QUARTER 2004 OVERVIEW
TRAVEL RELATED SERVICES (Cont'd)
The following discussion addresses results on a managed basis.
o Managed basis net revenue rose 11% from higher discount revenue, greater
travel and other commissions and fees, higher net finance charge revenue,
and greater card fees.
o The 10% higher managed basis expenses reflect substantially higher
marketing, promotion, rewards and cardmember services costs, greater
human resources expenses, increased professional services expenses and
higher interest expenses, partially offset by lower other operating
expenses and reduced provisions for losses.
o Discount Revenue: A 17% increase in billed business, partially offset by
a lower discount rate, yielded a 16% increase in discount revenue.
- The average discount rate was 2.54% in 4Q '04 versus 2.57% in 3Q '04 and
2.56% in 4Q `03. The decrease versus last quarter and last year
primarily reflects changes in the mix of spending between various
merchant segments due to the cumulative impact of stronger than average
growth in the lower rate retail and other "everyday spend" merchant
categories (e.g., supermarkets, discounters, etc).
-- We believe the AXP value proposition is strong. However, as
indicated in prior quarters, continued changes in the mix of
business, volume-related pricing discounts and selective repricing
initiatives will probably continue to result in some erosion of the
average rate over time.
Quarters Ended Percentage
December 31, Inc/(Dec)
----------------------------------- --------------
2004 2003
------ ------
Card billed business (billions):
United States $83.4 $72.3 15%
Outside the United States 32.1 26.2 23
------ ------
Total $115.5 $98.5 17
====== =====
Cards in force (millions):
United States 39.9 36.4 9
Outside the United States 25.5 24.1 6
------ ------
Total 65.4 60.5 8
====== ======
Basic cards in force (millions):
United States 30.6 27.7 10
Outside the United States 21.0 19.9 5
------ ------
Total 51.6 47.6 8
====== ======
Spending per basic card in force (dollars): (a)
United States $2,860 $2,633 9
Outside the United States $2,003 $1,668 20
Total $2,589 $2,314 12
(a) Proprietary card activity only.
- - Billed Business: The 17% increase in worldwide billed business reflected
a 12% increase in spending per proprietary basic card and 8% growth in
cards in force.
- -- U.S. billed business was up 15% reflecting growth of 15% within our
consumer card business, a 20% increase in small business spending and 10%
improvement in Corporate Services volumes.
- Spending per proprietary basic card in force increased 9%.
- -- U.S. non-T&E-related volume categories (which represented approximately 70%
of 4Q `04 U.S. billed business) grew 18%, while T&E volumes rose 9%.
- -- U.S. airline-related volume, which represented approximately 9% of total
U.S. volumes during the quarter, rose 3% as transaction volume growth was
suppressed by a lower average airline charge.
- -- Excluding the impact of foreign exchange translation:
- Worldwide billed business and spending per proprietary basic card in
force increased 15% and 10%, respectively.
- Total billed business outside the U.S. was up 15% reflecting
double-digit growth across all regions.
- Within our proprietary business, billed business outside the U.S.
reflected 12% growth in consumer and small business spending and a
15% increase in Corporate Services volumes.
- Spending per proprietary basic card in force outside the U.S.
rose 12%.
- -- Global Network Services volumes rose in excess of 40% on
continued strong growth in non-U.S. partner volume and the
addition of MBNA-related volumes in the U.S.
- -- Worldwide airline volumes, which represented approximately 11%
of total volumes during the quarter, increased 11% on 14% growth
in transaction volume, partially offset by a decrease in the
average airline charge of 3%.
-8-
AMERICAN EXPRESS COMPANY
FOURTH QUARTER 2004 OVERVIEW
TRAVEL RELATED SERVICES (Cont'd)
o Discount Revenue (cont'd):
- Cards in force: Rose 8% worldwide versus last year on continued
strong card acquisitions, an improved average customer retention
level within our proprietary issuing business, and strong growth in
network cards, particularly in the U.S.
-- U.S. cards in force rose 1.9MM during the quarter, including the
new MBNA portfolio.
-- Outside the United States, 200K cards in force
were added during the quarter.
o Net Card Fees: Rose 5% due to higher cards in force. The average annual
fee per proprietary card in force was $35 in 4Q '04 and 4Q '03 versus $34
in 3Q `04.
o Net Finance Charge Revenue: Increased 7% as 7% growth in average
worldwide lending balances was partially offset by a decline in the
portfolio yield.
- The yield on the worldwide portfolio was 8.5% in 4Q '04 versus 8.6%
in 3Q '04 and 8.7% in 4Q '03. The decrease versus last year and last
quarter reflects higher funding costs and lower revolve rates.
o Travel Commissions and Fees: Increased 9% on a 14% increase in travel
sales, which was partially offset by lower transaction fees as a greater
proportion of bookings were made on-line.
o Other Commissions and Fees: Increased 16% on greater volume-related
foreign exchange conversion fees, higher card-related fees and
assessments, and larger network partner-related fees.
o TC Investment Income: Increased 1% on higher average investments and a
lower investment yield. TC sales increased 5% versus last year.
o Other Revenues: Decreased 6% as higher publishing revenues, larger
insurance premiums and greater merchant-related revenues were more than
offset by lower interest income on investment and liquidity pools held
within card funding vehicles, as well as lower ATM revenues resulting
from the 3Q `04 sale of the remaining portion of the ATM business.
o Marketing, Promotion, Rewards and Cardmember Services Expenses: Increased
24%, reflecting both greater rewards costs and higher marketing and
promotion expenses. The growth in rewards costs is attributable to a
higher redemption rate, strong volume growth and the continued increase
in cardmember loyalty program participation. The increase in marketing
and promotion expenses is primarily due to the Company's new global brand
advertising campaign and our continued focus on business-building
initiatives.
o Charge Card Interest Expense: Rose 5% due to greater average receivable
balances and a higher effective cost of funds.
o Human Resources Expense: Increased 17% due to $46MM of severance-related
restructuring costs, merit increases, greater management incentive
expenses and larger employee benefit costs.
- The employee count at 12/04 of 65,200 was down 600 versus 12/03
and down 500 versus 9/04.
o Professional Services Expenses: Rose 9% primarily due to increased
technology costs related to higher business and service-related volumes.
o Other Operating Expenses: Decreased 10% as the $117MM net gain on the
sale of the equipment leasing product line within the small business
financing unit was partially offset by higher taxes other than income
taxes and $18MM in restructuring costs.
-9-
AMERICAN EXPRESS COMPANY
FOURTH QUARTER 2004 OVERVIEW
TRAVEL RELATED SERVICES (Cont'd)
o Credit Quality:
- Overall credit quality continued to perform exceptionally well.
- The provision for losses on charge card products increased 5%, as
higher volumes were partially offset by a lower provision rate.
- The lending provision for losses was down 4% versus last year, despite
growth in loans outstanding, due to well-controlled credit.
- Reserve coverage ratios, which are well in excess of 100% of past
due balances, remained strong.
- Worldwide Charge Card: *
-- The net loss ratio declined versus last year and last quarter,
and remained near historically low levels; the past due rate
improved versus last year and was flat versus last quarter.
12/04 9/04 12/03
------------ ------------ -------------
Net loss ratio as a % of charge volume 0.25% 0.26% 0.27%
90 days past due as a % of receivables 1.8% 1.8% 1.9%
-- Reserve coverage of past due accounts remained strong, despite a
decline in the reserve balance due to the sustained improvement
in credit quality.
12/04 9/04 12/03
------------ ------------ -------------
Total Receivables (B) $31.1 $28.6 $28.4
Reserves (MM) $806 $847 $916
% of receivables 2.6% 3.0% 3.2%
% of 90 day past due accounts 146% 160% 171%
- Worldwide Lending: **
-- The write-off rate improved versus last year and held steady
versus last quarter. Past due rates declined versus both last
quarter and last year.
12/04 9/04 12/03
------------ ------------ -------------
Net write-off rate 4.1% 4.1% 4.8%
30 days past due as a % of loans 2.4% 2.5% 2.7%
-- Coverage of past due accounts was maintained at a high level
despite a decline in the reserve balance.
12/04 9/04 12/03
------------ ------------ -------------
Total Loans (B) $47.2 $45.6 $45.3
Reserves (MM) $1,475 $1,537 $1,541
% of total loans 3.1% 3.4% 3.4%
% of 30 day past due accounts 129% 132% 127%
* There are no off-balance sheet Charge Card securitizations. Therefore,
"Owned basis" and "Managed basis" credit quality statistics for the
Charge Card portfolio are the same.
** As previously described, this information is presented on a "Managed
basis". "Owned basis" credit quality statistics are available in the
Fourth Quarter/Full Year 2004 Earnings Release on the TRS Selected
Statistical Information pages. Credit trends are generally consistent
under both reporting methods.
-10-
AMERICAN EXPRESS COMPANY
FOURTH QUARTER 2004 OVERVIEW
AMERICAN EXPRESS FINANCIAL ADVISORS
(Preliminary)
Statements of Income
(Unaudited, GAAP basis)
(millions)
Quarters Ended Percentage
December 31, Inc/(Dec)
----------------------------- -------------
2004 2003
----- -----
Revenues:
Net investment income $635 $599 6%
Investment management and service fees 463 415 11
Distribution fees 327 314 4
Variable life insurance and variable annuity charges* 113 107 7
Life and health insurance premiums 91 94 (3)
Property-casualty insurance premiums 114 100 15
Other 113 81 36
----- -----
Total revenues 1,856 1,710 9
----- -----
Expenses:
Provision for losses and benefits:
Interest credited on annuities and universal life-type
contracts 286 306 (7)
Benefits on insurance and annuities 124 113 10
Interest credited on investment certificates 86 55 54
Losses and expenses on property-casualty insurance 89 81 11
----- -----
Total 585 555 6
Human resources - Field 339 295 15
Human resources - Non-Field 253 206 22
Amortization of deferred acquisition costs 116 102 14
Other operating expenses 315 304 4
----- -----
Total expenses 1,608 1,462 10
----- -----
Pre-tax income before accounting change 248 248 -
Income tax provision 30 53 (43)
----- -----
Income before accounting change 218 195 12
Cumulative effect of accounting change, net of tax - (13) -
----- -----
Net income $218 $182 20
===== =====
Note: Certain prior period amounts have been reclassified to conform to
the current year presentation.
* Includes variable universal life and universal life insurance charges.
# Denotes variance greater than 100%.
o Net Income: Increased 20%; 12% before last year's accounting change. Pre-tax
income was flat.
- 4Q '04 included:
-- $8MM of net investment gains versus $5MM of net gains last year; and
-- A substantially lower tax rate versus last year.
o Revenues: Increased 9% due to:
- - Increased net investment income;
- - Higher investment management and services fees;
- - Increased distribution fees;
- - Greater property-casualty insurance premiums;
- - Greater variable life insurance and variable annuity charges; and,
- - Growth in other revenues, primarily driven by higher planning and
advice services fees.
o Pre-tax Margin: Was 13.4% in 4Q '04 compared with 15.0% in 3Q '04 and
14.5% in 4Q '03.
o Effective Tax Rate: Was 12% in 4Q '04 versus 28% in 3Q '04 and 21%
in 4Q '03.
- - The 4Q '04 effective tax rate was driven by a $33MM favorable
adjustment to the current taxes payable account.
- - In 4Q '03, the effective tax rate reflected a $12MM reduction in tax
expense resulting from adjustments related to the finalization of the
2002 tax return filed during 3Q '03 and the publication of favorable
technical guidance in 3Q '03 related to the taxation of dividend
income.
-11-
AMERICAN EXPRESS COMPANY
FOURTH QUARTER 2004 OVERVIEW
AMERICAN EXPRESS FINANCIAL ADVISORS (Cont'd)
o Supplemental Information - Net Revenues: In the following table, the
Company presents AEFA's aggregate revenues on a basis that is net of
provisions for losses and benefits because the Company manages the AEFA
business and evaluates its financial performance, where appropriate, in
terms of the "spread" on its products. An important part of AEFA's
business is margin-related, particularly the insurance, annuity and
certificate businesses.
One of the drivers for the AEFA business is the return on invested cash,
primarily generated by sales of insurance, annuities and investment
certificates, less provisions for losses and benefits on these products.
These investments tend to be interest rate sensitive. Thus, GAAP revenues
tend to be higher in periods of rising interest rates and lower in times
of decreasing interest rates. The same relationship is true of provisions
for losses and benefits, only it is more accentuated period-to-period
because rates credited to customers' accounts generally reset at shorter
intervals than the yield on underlying investments. The Company presents
this portion of the AEFA business on a net basis to eliminate potentially
less informative comparisons of period-to-period changes in revenue and
provisions for losses and benefits in light of the impact of these
changes in interest rates.
Quarters ended Percentage
(millions) December 31, Inc/(Dec)
----------------------------- ---------------
2004 2003
------ ------
Total GAAP Revenues $1,856 $1,710 9%
Less: Total provision for losses and benefits 585 555 6
------ ------
Total Net Revenues $1,271 $1,155 10
====== ======
Note: Certain prior period amounts have been reclassified to conform to
the current year presentation.
- - Spreads within the annuity products were up versus last year and last
quarter. Insurance spreads were down versus last year, but up versus
last quarter. Certificates spreads were down versus last year and
last quarter.
- - On a net revenue basis, the pre-tax margin was 19.6% in 4Q '04
versus 21.5% in 3Q '04 and 21.4% in 4Q '03.
o ASSETS OWNED, MANAGED AND ADMINISTERED:
Percentage
(billions) December 31, Inc/(Dec)
----------------------------- ---------------
2004 2003
------ ------
Assets owned (excluding separate accounts) $61.2 $53.8 14%
Separate account assets 35.9 30.8 17
Assets managed 256.8 226.6 13
Assets administered 58.8 54.1 9
------ ------
Total $412.7 $365.3 13
====== ======
o Asset Quality:
- Overall, credit quality continued to improve as default rates have
stabilized below long-term averages.
- Non-performing assets relative to invested assets (excluding
short-term cash positions and including the impact of FIN 46) were
0.02% and were more than 7x covered by reserves, including those
related to the impairment of securities.
- High-yield investments (excluding unrealized
appreciation/depreciation and the impact of FIN 46) totaled $2.9B,
or 7% of the total investment portfolio at 12/04, 9/04 and 12/03.
-- Excluding unrealized appreciation/depreciation, but including the
impact of FIN 46, high-yield investments totaled $3.1B, or 7% of
the total investment portfolio at 12/04 and 9/04 versus 8% at
12/03.
- The SFAS No. 115 related mark-to-market adjustment (including the
impact of FIN 46 and reported in assets pre-tax) was appreciation of
$0.8B at 12/04 versus $0.9B at 9/04 and 12/03.
- As part of AEFA's decision to continue to improve its investment
portfolio risk profile AEFA began to liquidate the last two remaining
Structured Loan Trusts, which were consolidated upon adopting FIN 46.
This resulted in a 4Q '04 charge of $4MM included in gross investment
losses within net investment income.
o Product Sales:
- Total gross cash sales from all products were up 12% versus 4Q '03.
Branded advisor-generated sales increased 8% on both a cash basis and
on the internally used "gross dealer concession" (GDC) basis, a
commonly used financial services industry measure of the sales
production of the advisor channel.
- Total mutual fund cash sales decreased 5% as proprietary sales
declined, while non-proprietary sales rose versus last year. A
significant portion of non-proprietary sales continued to occur in
"wrap" accounts (which are included in assets managed).
- Total annuity cash sales increased 9% as an increase in variable
product sales was partially offset by a decrease in fixed product
sales.
-12-
AMERICAN EXPRESS COMPANY
FOURTH QUARTER 2004 OVERVIEW
AMERICAN EXPRESS FINANCIAL ADVISORS (Cont'd)
- - Total certificate cash sales increased 70% due to higher sales of
certificates sold to clients outside the U.S. through the joint
venture between AEFA and AEB, and stronger advisor-sales levels, in
part as a result of a marketing promotion for certificates.
- - Total cash sales of insurance products rose 8%, primarily reflecting
higher property-casualty insurance sales, in part due to sales
through Costco, and higher life insurance sales through the advisor
channel.
- - Total institutional cash sales increased 88%, reflecting strong
growth at Threadneedle, as well as relatively lower pension
contributions during 4Q `03.
- - Total other cash sales increased 10% reflecting relatively lower
401(k) activity in 4Q '03, the effect of which was partially offset
by lower limited partnership product sales in 4Q '04.
- - Advisor product sales (GDC basis) generated through financial planning
and advice services were 76% of total sales in 4Q '04 versus 75% in
both 3Q '04 and 4Q `03.
o Net Investment Income: Increased 6% versus last year reflecting higher
levels of invested assets. 4Q '04 included $8MM of net investment gains
($19MM of gross gains partially offset by $11MM of gross losses) versus
$5MM of net gains in 4Q `03.
- - Average invested assets of $46.6B (including unrealized
appreciation/depreciation and the impacts of FIN 46) rose 5% versus
$44.5B in 4Q '03, reflecting the cumulative benefit of sales of the
underlying fixed rate products over the past two years, partially
offset by lower unrealized appreciation versus last year.
- - The average yield on invested assets (excluding realized and
unrealized appreciation/depreciation and including the impacts of FIN
46) was 5.2% in 4Q '04 versus 5.3% in 4Q `03.
o Investment Management and Service Fees: Increased 11% due to higher
average assets under management, reflecting improved equity market
valuations and net inflows.
- - ASSETS MANAGED:
Percentage
(billions) December 31, Inc/(Dec)
------------------------------- ---------------
2004 2003
------ ------
Assets managed for individuals $117.5 $110.2 7%
Assets managed for institutions 139.3 116.4 20
Separate account assets 35.9 30.8 17
------ ------
Total $292.7 $257.4 14
====== ======
-- The increase in managed assets since 12/03 resulted from market
appreciation and foreign currency translation of $26.6B and net
inflows of $8.7B.
-- The $24.3B increase in managed assets during 4Q `04 reflects net
inflows of $3.4B and market appreciation and foreign currency
translation of $20.9B.
o Distribution Fees: Increased 4% on greater mutual fund fees, in
particular wrap account fees, partially offset by lower limited
partnership and brokerage-related fees.
o Variable Life Insurance and Variable Annuity Charges: Increased 7% due to
higher insurance in force.
o Life and Health Insurance Premiums: Declined 3% due to decreases in
long-term care policies in force resulting from our de-emphasizing this
business, partially offset by increases in life and disability insurance
policies in force.
o Property-Casualty Insurance Premiums: Increased 15% due to higher
policies in force.
o Other Revenues: Were up 36% primarily due to growth in financial planning
and advice services fees of $18MM. During 4Q '03, financial planning and
advice services fees reflected the negative impact of a change in timing
of fee recognition, which deferred revenues and a comparable amount of
human resources expenses. The number of financial plans sold rose 15%
compared to 4Q `03.
-13-
AMERICAN EXPRESS COMPANY
FOURTH QUARTER 2004 OVERVIEW
AMERICAN EXPRESS FINANCIAL ADVISORS (Cont'd)
o Provisions for Losses and Benefits:
- - Interest Credited on Annuities and Universal Life-type Contracts:
Decreased 7% due to lower interest crediting rates, partially offset
by higher life insurance in force levels and annuity accumulation
values.
- - Benefits on Insurance and Annuities: Increased 10% due to higher life
and disability insurance in force levels and higher annuity levels,
partially offset by lower long-term care in force levels.
- - Interest Credited on Investment Certificates: Rose 54% on higher
average reserves and higher interest crediting rates.
- - Losses and Expenses on Property-Casualty Insurance: Grew 11% as a
result of higher average policies in force.
o Human Resources Expense - Field: Increased 15% reflecting increased
production, higher assets per advisor and growth in the advisor force.
- - Total Advisor Force: Grew to 12,344 at 12/04, up 223 advisors or 2%
versus 12/03 and up 273 advisors versus 9/04.
-- Veteran advisor retention rates remain strong.
-- Total production and advisor productivity were up versus last year.
- - The total number of clients was flat versus last year as we
successfully focused on high value client acquisition activities and
purged inactive accounts during 3Q `04. Client acquisitions rose 9%
in the quarter and accounts per client were up 2%. Client retention
was 94%.
o Human Resources Expense - Non-field: Increased 22% reflecting higher
management incentive costs and merit increases. The average number of
non-field employees was relatively unchanged versus 4Q `03.
o Amortization of Deferred Acquisition Costs: Increased 14% due to higher
deferred costs and less favorable impacts arising from near term mean
reversion rate changes.
o Other Operating Expenses: Increased 4% from 4Q '03 as well-controlled
operating costs were partially offset by a substantial increase in
advertising and promotion costs and higher costs related to industry
regulatory and legal matters.
-14-
AMERICAN EXPRESS COMPANY
FOURTH QUARTER 2004 OVERVIEW
AMERICAN EXPRESS BANK
(Preliminary)
Statements of Income
(Unaudited)
(millions) Quarters Ended Percentage
December 31, Inc/(Dec)
---------------------------------- ---------------
2004 2003
---- ----
Net revenues:
Interest income $145 $139 5%
Interest expense 67 57 16
---- ----
Net interest income 78 82 (3)
Commissions and fees 74 68 7
Foreign exchange income and other revenues 55 55 -
---- ----
Total net revenues 207 205 1
---- ----
Expenses:
Human resources 81 75 8
Other operating expenses 76 67 13
Provision for losses 8 21 (60)
Restructuring charges 35 - #
---- ----
Total expenses 200 163 23
---- ----
Pre-tax income 7 42 (84)
Income tax provision 1 13 (93)
---- ----
Net income $6 $29 (79)
==== ====
# Denotes variance greater than 100%.
o Net Income: Decreased 79% due to the $35MM ($22MM after-tax)
restructuring charge in the quarter.
o Net Revenues: Rose 1%.
- Net interest income decreased 3% primarily due to lower spreads in
the investment portfolio and lower levels of Consumer Financial
Services ("CFS", formerly referred to as Personal Financial Services)
loans, reflecting AEB's prior decision to temporarily curtail loan
origination in Hong Kong; and,
- Commissions and fees increased 7% due to higher volumes in the
Financial Institutions Group ("FIG") and Private Banking.
o Human Resources Expense: Was up 8% reflecting merit increases and
continued investment in core businesses, partially offset by the benefits
of reengineering initiatives.
o Other Operating Expenses: Increased 13% reflecting higher technology and
business volume-related expenses partially offset by the benefits of
reengineering initiatives.
o Provision for Losses: Decreased 60% due to lower CFS loan volumes and
reduced bankruptcy related write-offs in the consumer lending portfolio
in Hong Kong.
o Restructuring Charges: Totaling $35MM ($22MM after-tax) were recorded in
the quarter, reflecting:
- $31MM of expense related to employee severance obligations and other
costs related to the early termination of certain real estate property
leases pursuant to management's decision to exit businesses in
Bangladesh, Egypt and Pakistan; and,
- $4MM of expense pursuant to the sale of the Private Banking business
in Luxembourg.
o Pre-Tax Margin: Was 20.3% before restructuring charges (3.4% after
charges) in 4Q '04 versus 23.9% in 3Q '04 and 20.5% in 4Q '03.
o Effective Tax Rate: Was 14% in 4Q '04 versus 35% in 3Q '04 and 31% in 4Q
'03. The reduced tax rate for the quarter was driven by the impact of
recurring non-taxable items on the Bank's lower level of pre-tax income,
plus a favorable state tax adjustment arising from the conclusion of an
outstanding tax audit.
-15-
AMERICAN EXPRESS COMPANY
FOURTH QUARTER 2004 OVERVIEW
AMERICAN EXPRESS BANK (Cont'd)
o AEB remained "well-capitalized".
12/04 9/04 12/03 Well-Capitalized
---------- ---------- ---------- --------------------
Tier 1 11.0% 10.8% 11.4% 6.0%
Total 10.1% 10.6% 11.3% 10.0%
Leverage Ratio 5.8% 5.7% 5.5% 5.0%
o Assets Managed and Administered:
- For the twelve months ended 12/04 and during 4Q `04, growth in
managed and administered assets of $3.0B and $1.6B, respectively,
reflected net asset inflows, market appreciation and a positive
foreign currency translation impact.
o Loans:
- AEB's loans outstanding were $6.9B at 12/04 versus $6.4B at 9/04 and
$6.5B at 12/03.
-- CFS loans were $1.4B at 12/04 versus $1.3B at 9/04
and $1.4B at 12/03.
-- Non-CFS loans were $5.5B at 12/04 versus $5.1B at 9/04 and 12/03.
-- % of Total loans:
12/04 9/04 12/03
------- ------ ---------
Private Banking loans 48% 45% 45%
Consumer loans 22% 23% 23%
Financial Institution loans 29% 31% 29%
Corporate Banking loans 1% 1% 3%
- In addition to the loan portfolio, there are other banking
activities, such as forward contracts, various credit-related
commitments and market placements, which added approximately $7.2B to
the credit exposures at 12/04 versus $7.5B at 9/04 and $7.6B at
12/03. Of the $7.2B of additional exposures at 12/04, $4.7B were cash
and securities related balances.
o Asset Quality:
- - Non-CFS loans*:
-- Total non-performing loans were $37MM at 12/04, compared to
$32MM at 9/04 and $78MM at 12/03. The decrease from 12/03
reflects loan payments and write-offs, partially offset by net
downgrades.
-- The loss reserve for non-CFS loans was $58MM at 12/04, compared
with $57MM at 9/04 and $59MM at 12/03, or 156%, 180% and 75% of
non-performing loans, respectively.
- - CFS loans*:
-- The write-off and past due rates improved versus last quarter
and last year.
12/04 9/04 12/03
----------- ----------- ------------
Net write-off rate 3.0% 3.6% 6.6%
30+ days past due as a % of loans 4.5% 5.1% 6.6%
-- Coverage of past due accounts was maintained despite a
decline in the reserve balance versus last year.
12/04 9/04 12/03
------------ ------------ -------------
Reserves (MM) $37 $39 $54
% of total CFS loans 2.7% 2.9% 4.0%
% of 30+ day past due accounts 61% 57% 60%
- - Other non-performing assets were $1MM at 12/04 and 9/04 versus $15MM at
12/03.
* For non-performing loan definitions and write-off policies, please
refer to AEB's Selected Statistical Information pages within the
Fourth Quarter/Full Year 2004 Earnings Release.
-16-
AMERICAN EXPRESS COMPANY
FULL YEAR 2004 OVERVIEW
CONSOLIDATED
(Preliminary)
Condensed Statements of Income
(Unaudited, GAAP basis)
Years Ended Percentage
(millions) December 31, Inc/(Dec)
-------------------------------- ------------
2004 2003
-------- -------
Revenues:
Discount revenue $10,249 $8,781 17%
Net investment income 3,118 3,063 2
Management and distribution fees 3,023 2,420 25
Cardmember lending net finance charge revenue 2,224 2,042 9
Net card fees 1,909 1,835 4
Travel commissions and fees 1,795 1,507 19
Other commissions and fees 2,284 1,960 17
Insurance and annuity revenues 1,525 1,366 12
Securitization income, net 1,132 1,105 2
Other 1,856 1,757 6
-------- -------
Total revenues 29,115 25,836 13
-------- -------
Expenses:
Human resources 7,359 6,303 17
Marketing, promotion, rewards and cardmember services 5,083 3,901 30
Provision for losses and benefits 4,318 4,429 (2)
Interest 867 905 (4)
Other 6,537 6,051 8
-------- -------
Total expenses 24,164 21,589 12
-------- -------
Pre-tax income before accounting change 4,951 4,247 17
Income tax provision 1,435 1,247 15
-------- -------
Income before accounting change 3,516 3,000 17
Cumulative effect of accounting change, net of tax (71) (13) #
-------- -------
Net income $3,445 $2,987 15
======== =======
EPS:
Income before accounting change - Basic $2.79 $2.34 19
======== =======
Net Income - Basic $2.74 $2.33 18
======== =======
Income before accounting change - Diluted $2.74 $2.31 19
======== =======
Net Income - Diluted $2.68 $2.30 17
======== =======
Note: Certain prior period amounts have been reclassified to conform to the
current year presentation.
# Denotes variance greater than 100%.
o Income before the accounting changes increased 17% and net income increased
15% versus last year.
- 2004 results include:
-- The $117MM ($76MM after-tax) net gain during 4Q '04 in connection with
the sale of TRS's equipment leasing product line within its small
business financing unit;
-- $102MM ($66MM after-tax) in aggregate restructuring charges recorded
during 4Q '04;
-- A charge within TRS during 3Q `04 of $115MM as a result of the
reconciliation of prior year's securitization-related lending
receivables;
-- A benefit within TRS during 3Q '04 of $60MM reflecting a reduction in
merchant-related reserves;
-- A net benefit of $24MM ($15MM after-tax) resulting from Deferred
Acquisition Costs ("DAC") adjustments arising from AEFA's annual third
quarter review of underlying DAC assumptions and dynamics;
-- $11MM of net investment gains at AEFA versus $20MM of net investment
losses in 2003;
-- Higher expenses related to securities industry regulatory and legal
matters at AEFA;
-- The adoption of the American Institute of Certified Public Accountants
Statement of Position 03-1 ("SOP 03-1") resulting in a below-the-line,
non-cash charge at AEFA of $109MM ($71MM after-tax) or $0.06 per diluted
share; and,
-- A 1Q '04 DAC valuation benefit at AEFA of $66MM ($43MM after-tax)
reflecting the lengthening of amortization periods for certain
insurance and annuity products in connection with the adoption of
SOP 03-1.
- 2003 results reflect:
-- A net benefit of $2MM ($1MM after-tax) at AEFA resulting from
DAC-related adjustments arising from the annual third quarter
review of underlying DAC assumptions and dynamics;
-- A net benefit of $2MM ($1MM after-tax) at AEB representing adjustments
to the 2002 restructuring charge for severance and other costs; and,
-- The adoption of FIN 46, resulting in a below-the-line, non-cash charge
of $13MM net of tax, or $0.01 per share.
-17-
AMERICAN EXPRESS COMPANY
FULL YEAR 2004 OVERVIEW
CONSOLIDATED (Cont'd)
o Consolidated Revenues: Revenues increased 13% due to greater discount
revenues, higher management and distribution fees, increased travel and
other commissions and fees, higher lending net finance charge revenue,
larger insurance and annuity revenues, and greater other revenues. The
Threadneedle and Rosenbluth acquisitions added 2% to consolidated revenue
growth; the effect on net income was not material. Consolidated revenue
growth versus last year reflected 12% growth at TRS, 15% growth at AEFA,
and 3% growth at AEB. Translation of foreign currency revenues
contributed approximately 2% of the 13% revenue growth rate.
o Consolidated Expenses: Expenses were up 12%, reflecting higher marketing,
promotion, rewards and cardmember services expense, greater human
resources costs and increased other operating expenses. These increases
were partially offset by a lower provision for losses and lower funding
costs. Consolidated expenses reflected increases versus last year of 12%
at TRS, 13% at AEFA and 4% at AEB. Translation of foreign currency
expenses contributed approximately 2% of the 12% expense growth rate.
o The pre-tax margin was 17.0% in 2004 versus 16.4% in 2003.
o The effective tax rate was 29% in 2004 and in 2003.
o
o Average Shares:
Millions of Shares
-------------------------------
2004 2003
----- -----
Basic 1,259 1,284
===== =====
Diluted 1,285 1,298
===== =====
o Actual Share Activity:
Shares outstanding - beginning of period 1,284 1,305
Repurchase of common shares (69) (21)
Prepayments - 3rd party share purchase agreements - (15)
Employee benefit plans, compensation and other 34* 15
----- -----
Shares outstanding - end of period 1,249 1,284
===== =====
*Includes 30MM net shares issued in connection with employee stock
option exercises and related activity.
CORPORATE AND OTHER
o The net expense was $238MM in 2004 compared with $214MM in 2003. The
increase versus last year reflects higher corporate investment spending
on compliance and technology projects, partially offset by an $18MM
benefit from the final settlement of a Federal tax audit.
-18-
AMERICAN EXPRESS COMPANY
FULL YEAR 2004 OVERVIEW
TRAVEL RELATED SERVICES
(Preliminary)
Statements of Income
(Unaudited, GAAP basis)
Years Ended Percentage
(millions) December 31, Inc/(Dec)
--------------------------------- -------------
2004 2003
------- -------
Net revenues:
Discount revenue $10,249 $8,781 17%
Lending:
Finance charge revenue 2,795 2,525 11
Interest expense 571 483 18
------- -------
Net finance charge revenue 2,224 2,042 9
Net card fees 1,909 1,835 4
Travel commissions and fees 1,795 1,507 19
Other commissions and fees 2,230 1,901 17
TC investment income 378 367 3
Securitization income, net 1,132 1,105 2
Other revenues 1,661 1,651 1
------- -------
Total net revenues 21,578 19,189 12
------- -------
Expenses:
Marketing, promotion, rewards and cardmember services 4,944 3,814 30
Provision for losses and claims:
Charge card 833 853 (2)
Lending 1,130 1,218 (7)
Other 176 127 38
------- -------
Total 2,139 2,198 (3)
Charge card interest expense 713 786 (9)
Human resources 4,389 3,822 15
Other operating expenses:
Professional services 2,101 1,958 7
Occupancy and equipment 1,300 1,199 8
Communications 465 452 3
Other 1,410 1,389 1
------- -------
Total 5,276 4,998 6
------- -------
Total expenses 17,461 15,618 12
------- -------
Pre-tax income 4,117 3,571 15
Income tax provision 1,265 1,141 11
------- -------
Net income $2,852 $2,430 17
======= =======
Note: Certain prior period amounts have been reclassified to conform to the
current year presentation.
o Net Income: Increased 17%.
- - 2004 results include:
- -- The $117MM ($76MM after-tax) net gain during 4Q '04 from the
sale of the equipment leasing product line managed within the
small business financing unit;
- -- $64MM ($42MM after-tax) in aggregate charges in 4Q '04 relating
principally to restructuring activities within Business Travel
operations;
- -- A $115MM 3Q '04 charge resulting from the reconciliation of
prior year's securitization-related lending receivable accounts;
- -- A $60MM benefit during 3Q '04 reflecting a reduction in
merchant-related reserves; and,
- -- Cardmember lending securitization net gains of $26MM versus
net gains of $124MM in 2003.
o Pre-tax Margin: Was 19.1% in 2004 versus 18.6% in 2003.
o Effective Tax Rate: Was 31% in 2004 versus 32% in 2003. The effective
rate was lower than in 2003 primarily as a result of one time and ongoing
benefits related to the changes in international funding strategy in
2004, favorable variances between estimates of foreign tax expense and
returns actually filed, and favorable tax audit experience.
o GAAP Basis Income Statement Items:
- - Securitization income, Net: Increased 2% as the increase in the
average balance securitized was partially offset by lower
securitization net gains.
-- During 2004 and 2003, TRS' results included Cardmember lending
securitization net gains of $26MM ($17MM after-tax) and $124MM
($81MM after-tax), respectively. The average balance of
Cardmember lending securitizations was $19.4B in 2004, compared
with $18.8B in 2003.
- - Net Finance Charge Revenue: Increased 9%, reflecting 15% growth in
the average balance of the owned lending portfolio, partially offset
by a lower yield.
- - Lending Provision: Decreased 7% reflecting strong credit quality in
the owned lending portfolio.
- - The above GAAP basis items relating to net finance charge revenue and
lending provision reflect the owned portfolio only. "Owned basis"
credit quality statistics are available in the Fourth Quarter/Full
Year 2004 Earnings Release on the TRS Selected Statistical
Information pages.
-19-
AMERICAN EXPRESS COMPANY
FULL YEAR 2004 OVERVIEW
TRAVEL RELATED SERVICES (Cont'd)
Supplemental Information - Managed Basis: The following supplemental table
includes information on both a GAAP basis and a "managed" basis. The managed
basis presentation assumes there have been no securitization transactions,
i.e., all securitized Cardmember loans and related income effects are
reflected in the Company's balance sheet and income statement, respectively.
The Company presents TRS information on a managed basis because that is the
way the Company's management views and manages the business. Management
believes that a full picture of trends in the Company's Cardmember lending
business can only be derived by evaluating the performance of both securitized
and non-securitized Cardmember loans. Asset securitization is just one of
several ways for the Company to fund Cardmember loans.
Use of a managed basis presentation, including non-securitized and securitized
Cardmember loans, presents a more accurate picture of the key dynamics of the
Cardmember lending business, avoiding distortions due to the mix of funding
sources at any particular point in time. For example, irrespective of the mix,
it is important for management and investors to see metrics, such as changes
in delinquencies and write-off rates, for the entire Cardmember lending
portfolio because it is more representative of the economics of the aggregate
Cardmember relationships and ongoing business performance and trends over
time. It is also important for investors to see the overall growth of
Cardmember loans and related revenue and changes in market share, which are
all significant metrics in evaluating the Company's performance and which can
only be properly assessed when all non-securitized and securitized Cardmember
loans are viewed together on a managed basis.
Management views any net gains from securitizations as discretionary benefits
to be used for card acquisition expenses, which are reflected in both
marketing, promotion, rewards and cardmember services and other operating
expenses. Consequently, the managed basis presentation for the years ended
December 31, 2004 and 2003 assumes that gains from new issuances and charges
from the amortization and maturities of outstanding transactions are offset by
higher marketing, promotion, rewards and cardmember services expenses of $16MM
and $74MM, respectively, and other operating expense of $10MM and $50MM,
respectively. Accordingly, the incremental expenses, as well as the gains,
have been eliminated.
The following table compares and reconciles the GAAP basis TRS income
statements to the managed basis information, where different.
Effect of Securitizations (unaudited)
----------------------------------------------------------
(preliminary, millions) GAAP Basis (unaudited) Securitization Effect Managed Basis
- --------------------------------------------------------------------- ----------------------------------------------------------
Percentage Percentage
Years Ended December 31, 2004 2003 Inc/(Dec) 2004 2003 2004 2003 Inc/(Dec)
- --------------------------------------------------------------------- ----------------------------------------------------------
Net revenues:
Discount revenue $10,249 $8,781 17%
Lending:
Finance charge revenue 2,795 2,525 11 $2,222 $2,172 $5,017 $4,697 7%
Interest expense 571 483 18 384 317 955 800 19
- --------------------------------------------------------------------- ----------------------------------------------------------
Net finance charge revenue 2,224 2,042 9 1,838 1,855 4,062 3,897 4
Net card fees 1,909 1,835 4
Travel commissions and fees 1,795 1,507 19
Other commissions and fees 2,230 1,901 17 210 193 2,440 2,094 16
TC investment income 378 367 3
Securitization income, net 1,132 1,105 2 (1,132) (1,105) - -
Other 1,661 1,651 1
- --------------------------------------------------------------------- ----------------------------------------------------------
Total net revenues 21,578 19,189 12 916 943 22,494 20,132 12
- --------------------------------------------------------------------- ----------------------------------------------------------
Expenses:
Marketing, promotion, rewards
and cardmember services 4,944 3,814 30 (16) (74) 4,928 3,740 32
Provision for losses and claims:
Charge card 833 853 (2)
Lending 1,130 1,218 (7) 942 1,067 2,072 2,285 (9)
Other 176 127 38
- --------------------------------------------------------------------- ----------------------------------------------------------
Total 2,139 2,198 (3) 942 1,067 3,081 3,265 (6)
Charge card interest expense 713 786 (9)
Human resources 4,389 3,822 15
Other operating expenses:
Professional services 2,101 1,958 7
Occupancy and equipment 1,300 1,199 8
Communications 465 452 3
Other 1,410 1,389 1 (10) (50) 1,400 1,339 4
- --------------------------------------------------------------------- ----------------------------------------------------------
Total 5,276 4,998 6 (10) (50) 5,266 4,948 6
- --------------------------------------------------------------------- ----------------------------------------------------------
Total Expenses 17,461 15,618 12 $916 $943 $18,377 $16,561 11
- --------------------------------------------------------------------- ----------------------------------------------------------
Pre-tax income 4,117 3,571 15
Income tax provision 1,265 1,141 11
- ---------------------------------------------------------------------
Net income $2,852 $2,430 17
- ---------------------------------------------------------------------
-20-
AMERICAN EXPRESS COMPANY
FULL YEAR 2004 OVERVIEW
TRAVEL RELATED SERVICES (Cont'd)
The following discussion addresses results on a managed basis.
o Managed basis net revenue rose 12% reflecting higher discount revenue,
greater other and travel commissions and fees, larger finance charge
revenue, and increased card fees.
o The 11% higher managed basis expenses reflect greater marketing,
promotion, rewards and cardmember services costs, higher human resources
expenses and increased operating expenses, partially offset by reduced
provisions for losses and lower interest costs.
o Discount Revenue: An 18% increase in billed business partially offset by
a lower discount rate yielded a 17% increase in discount revenue.
- - The average discount rate was 2.56% in 2004 versus 2.59% in 2003. The
decrease versus last year primarily reflects changes in the mix of
spending between various merchant segments due to the cumulative
impact of stronger than average growth in the lower rate retail and
other "everyday spend" merchant categories (e.g., supermarkets,
discounters, etc.)
Years Ended Percentage
December 31, Inc/(Dec)
-------------------------------- --------------
2004 2003
------ ------
Card billed business (billions):
United States $304.8 $262.1 16%
Outside the United States 111.3 90.1 24
------ ------
Total $416.1 $352.2 18
====== ======
Spending per basic card in force (dollars) (a):
United States $10,686 $9,608 11
Outside the United States $6,913 $5,827 19
Total $9,460 $8,367 13
(a) Proprietary card activity only.
- Billed Business: The 18% increase in worldwide billed business
resulted from a 13% increase in spending per proprietary basic card
and 8% growth in cards in force.
-- U.S. billed business was up 16% reflecting growth of 16% within
the consumer card business, a 20% increase in small business
activity and a 12% improvement in Corporate Services volume.
- Spending per proprietary basic card in force increased 11%.
-- U.S. non-T&E-related volume categories (which represented
approximately 67% of 2004 U.S. billed business) grew 19%, while
T&E volumes rose 11%.
-- U.S. airline-related volume, which represented approximately 11%
of total U.S. volumes during the year, rose 9% due to increased
transaction volume, partially offset by lower ticket prices.
-- Excluding the impact of foreign exchange translation:
- Worldwide billed business and spending per proprietary basic
card in force increased 16% and 11%, respectively.
- Total billed business outside the U.S. was up 15% reflecting
double-digit improvement across all regions.
- Within our proprietary business, billed business outside the
U.S. reflected growth in consumer and small business spending of
13%, while Corporate Services volumes improved 15%.
- Spending per proprietary basic card in force outside the U.S.
grew 10%.
-- Global Network Services volume rose in excess of 30%.
-- Worldwide airline volumes, which represented approximately 12%
of total volumes during the year, increased 14% on 15% growth in
transaction volume, partially offset by a 1% decrease in the
average airline charge.
o Net Card Fees: Rose 4% due to higher cards in force. The average annual
fee per proprietary card in force was $34 in 2004 versus $35 in 2003.
o Net Finance Charge Revenue: Rose 4% on 9% growth in average worldwide
lending balances, partially offset by a decline in the portfolio yield.
- The yield on the portfolio was 8.6% in 2004 compared with 9.1% in 2003.
The decrease versus last year reflects a higher proportion of the U.S.
portfolio on introductory rates, lower revolve rates, better credit
performance and rising funding costs.
-21-
AMERICAN EXPRESS COMPANY
FULL YEAR 2004 OVERVIEW
TRAVEL RELATED SERVICES (Cont'd)
o Travel Commissions and Fees: Increased 19% on a 25% increase in travel
sales, partially offset by lower transaction fees related to growing
on-line transaction activity. Excluding the Rosenbluth acquisition,
travel sales for the full year were up 15%.
o Other Commissions and Fees: Increased 16% on greater foreign exchange
conversion fees and higher card-related assessments and network
partner-related fees.
o TC Investment Income: Increased 3% due to higher average investments.
TC sales grew 3% versus last year.
o Other Revenues: Increased slightly as larger insurance premiums and
greater merchant-related and publishing revenues were offset by lower
interest income on investment and liquidity pools held within card
funding vehicles and lower ATM revenues due to our exit of this business.
o Marketing, Promotion, Rewards and Cardmember Services Expenses: Increased
32%, reflecting both higher rewards costs and greater marketing and
promotion expenses. Rewards costs grew on a higher redemption rate,
strong volume growth and greater cardmember loyalty program
participation. Marketing costs rose as we continued to focus on
business-building initiatives and launched a new global card advertising
campaign.
o Other Provisions for Losses and Claims: Increased 38% primarily due to
the reconciliation in the third quarter of securitization-related lending
receivable accounts, which resulted in a charge of $115MM (net of $32MM
of reserves previously provided) for balances accumulated over the prior
five year period as a result of a computational error. The amount of the
error was immaterial to any of the quarters in which it occurred. In
addition, in the third quarter the merchant-related reserves were reduced
by approximately $60MM to reflect modifications in certain merchant
agreements to mitigate loss exposure, as well as on-going favorable
credit experience with merchants.
o Charge Card Interest Expense: Was down 9% due to a lower effective cost
of funds, partially offset by higher average receivable balances.
o Human Resources Expense: Increased 15% on $46MM of severance-related
restructuring costs, merit increases, higher employee benefits, greater
management incentive costs and the impact of the Rosenbluth acquisition.
o Professional Services Expense: Increased 7% due to higher business
volume-related technology outsourcing costs.
o Occupancy and Equipment: Rose 8% on an increase in outsourced data
processing services and an increase in depreciation of data processing
equipment.
o Other Operating Expenses: Increased 4% as the $117MM net gain in
connection with the sale of the equipment leasing product line was more
than offset by higher taxes other than income taxes, $18MM of 4Q `04
restructuring costs, and the Rosenbluth acquisition.
o Credit Quality:
- Overall credit quality performed exceptionally well throughout 2004.
- The provision for losses on charge card products decreased 2% on
improved past due and loss levels. The net loss ratio decreased to
0.26% in 2004 from 0.28% in 2003. *
- The lending provision for losses was down 9% versus last year,
despite growth in outstanding loans and increased reserve coverage
levels of past due accounts, due to exceptionally well-controlled
credit.
The net write-off rate for 2004 was 4.3% versus 5.2% for 2003. **
- -----------------
* There are no off-balance sheet Charge Card securitizations.
Therefore, "Owned basis" and "Managed basis" credit quality
statistics for the Charge Card portfolio are the same.
** As previously described, this information is presented on a "Managed
basis". "Owned basis" credit quality statistics are available in the
Fourth Quarter/Full Year Earnings Release on the TRS Selected
Statistical Information page. Credit trends are generally consistent
under both reporting methods.
-22-
AMERICAN EXPRESS COMPANY
FULL YEAR 2004 OVERVIEW
AMERICAN EXPRESS FINANCIAL ADVISORS
(Preliminary)
Statements of Income
(Unaudited, GAAP basis)
(millions)
Years Ended Percentage
December 31, Inc/(Dec)
----------------------------- -------------
2004 2003
------- -------
Revenues:
Net Investment income $2,375 $2,279 4%
Investment management and service fees 1,732 1,336 30
Distribution fees 1,298 1,092 19
Variable life insurance and variable annuity charges* 444 424 5
Life and health insurance premiums 356 351 1
Property-casualty insurance premiums 422 326 30
Other 408 334 22
------- -------
Total revenues 7,035 6,142 15
------- -------
Expenses:
Provision for losses and benefits:
Interest credited on annuities and universal life-type
contracts 1,128 1,224 (8)
Benefits on insurance and annuities 459 440 5
Interest credited on investment certificates 224 201 11
Losses and expenses on property-casualty insurance 327 257 27
------- -------
Total 2,138 2,122 1
Human resources - Field 1,332 1,067 25
Human resources - Non-Field 919 729 26
Amortization of deferred acquisition costs 405 476 (15)
Other operating expenses 1,155 889 30
------- -------
Total expenses 5,949 5,283 13
------- -------
Pre-tax income before accounting change 1,086 859 26
Income tax provision 280 177 59
------- -------
Income before accounting change 806 682 18
Cumulative effect of accounting change, net of tax (71) (13) #
------- -------
Net income $735 $669 10
======= =======
Note: Certain prior period amounts have been reclassified to conform to the
current year presentation.
* Includes variable universal life and universal life insurance charges.
# Denotes variance greater than 100%.
o Net Income: Increased 10%. Income before the accounting changes
increased 18%. Pre-tax income rose 26%.
- 2004 included:
-- A below-the-line, non-cash charge of $109MM ($71MM after-tax) in
1Q `04 resulting from the adoption of SOP 03-1;
-- A 1Q `04 DAC valuation benefit of $66MM ($43MM after-tax)
reflecting the lengthening of amortization periods for certain
insurance and annuity products in conjunction with the adoption
of SOP 03-1 and a 3Q '04 net benefit of $24MM ($15MM after-tax)
resulting from DAC-related adjustments arising from AEFA's
annual third-quarter review of underlying DAC assumptions and
dynamics;
-- $11MM of net investment gains versus $20MM of net investment
losses in 2003;
-- The impact of the 9/30/03 Threadneedle acquisition, which
contributed approximately 5% to revenue growth for the year and
a modest benefit to net income; and,
-- Higher expenses related to various securities industry regulatory
and legal matters.
- 2003 included:
-- A net benefit of $2MM ($1MM after-tax) resulting from
DAC-related adjustments arising from the annual third quarter
review of underlying DAC assumptions and dynamics; and,
-- The adoption of FIN 46, resulting in a below-the-line, non-cash
charge of $13MM net of tax.
o Total Revenues: Increased 15% due to larger investment management and
service fees, greater distribution fees, larger net investment income,
greater property-casualty insurance premiums and higher other revenues.
The full year impact of the 9/30/03 Threadneedle acquisition contributed
approximately 5% to revenue growth.
-23-
AMERICAN EXPRESS COMPANY
FULL YEAR 2004 OVERVIEW
AMERICAN EXPRESS FINANCIAL ADVISORS (Cont'd)
o Pre-tax Margin: Was 15.4% in 2004 versus 14.0% in 2003.
o Effective Tax Rate: Increased to 26% in 2004 versus 21% in 2003. The rate
rose due to the impact of higher pre-tax income compared to
tax-advantaged items, reduced low income housing credits and elimination
of significant one-time adjustments related to dividend received
deductions booked in 2003. These were partially offset by the favorable
impact of the adjustment to the current taxes payable account booked in
4Q '04.
o Supplemental Information - Net Revenues: In the following table, the
Company presents AEFA's aggregate revenues on a basis that is net of
provisions for losses and benefits because the Company manages the AEFA
business and evaluates its financial performance, where appropriate, in
terms of the "spread" on its products. An important part of AEFA's
business is margin-related, particularly the insurance, annuity and
certificate businesses.
One of the drivers for the AEFA business is the return on invested cash,
primarily generated by sales of insurance, annuities and investment
certificates, less provisions for losses and benefits on these products.
These investments tend to be interest rate sensitive. Thus, GAAP revenues
tend to be higher in periods of rising interest rates and lower in times
of decreasing interest rates. The same relationship is true of provisions
for losses and benefits, only it is more accentuated period-to-period
because rates credited to customers' accounts generally reset at shorter
intervals than the yield on underlying investments. The Company presents
this portion of the AEFA business on a net basis to eliminate potentially
less informative comparisons of period-to-period changes in revenue and
provisions for losses and benefits in light of the impact of these
changes in interest rates.
Years ended Percentage
(millions) December 31, Inc/(Dec)
--------------------------------- ---------------
2004 2003
------ ------
Total GAAP Revenues $7,035 $6,142 15%
Less: Total provision for losses and benefits 2,138 2,122 1
------ ------
Net Revenues $4,897 $4,020 22
====== ======
Note: Certain prior period amounts have been reclassified to conform to
the current year presentation.
- - Spreads within the insurance and annuity products were up versus last
year, while certificate spreads were down.
- - On a net revenue basis, the pre-tax margin was 22% in 2004 versus 21%
in 2003.
o Product Sales:
- - Total gross cash sales from all products were up 17% versus 2003.
Branded advisor-generated sales increased 11% on a cash basis and
increased 14% on a GDC basis.
- - Total mutual fund cash sales increased 15% on a rise in
non-proprietary sales and the benefits of the full year impact of the
9/30/03 Threadneedle acquisition. A significant portion of
non-proprietary sales continued to occur in "wrap" accounts (which
are included in assets managed).
- - Total annuity cash sales declined 6% as a decrease in fixed annuity
sales was partially offset by higher variable product sales.
- - Total cash sales of insurance products rose 19% reflecting higher
sales of life insurance products through the advisor channel and
strong property-casualty insurance sales, due in part to sales
through Costco.
- - Total certificate cash sales increased 25% reflecting greater sales
of certificates sold to clients outside the U.S., through the joint
venture between AEFA and AEB, and sold to clients in the U.S. through
the advisor channel.
- - Total institutional cash sales increased over 100%, benefiting from
the full year impact of the 9/30/03 Threadneedle acquisition.
- - Total other cash sales decreased 22% due to lower 401(k)
activity levels.
- - Advisor product sales (GDC basis) generated through financial planning
and advice services were 75% of total sales in 2004 and 2003.
-24-
AMERICAN EXPRESS COMPANY
FULL YEAR 2004 OVERVIEW
AMERICAN EXPRESS FINANCIAL ADVISORS (Cont'd)
o Net Investment Income: Increased 4% on generally higher invested assets
and $11MM of net investments gains this year versus $20MM of net
investment losses in 2003. In 2004, $100MM of gross investment gains were
largely offset by $89MM of gross investment losses.
- Average invested assets of $45.3B (including unrealized
appreciation/depreciation and the impacts of FIN 46) rose 3% versus
$44.0B in 2003.
- The average yield on invested assets (excluding realized and
unrealized appreciation/depreciation and including the impacts of FIN
46) remained flat at 5.2% in 2004.
o Investment Management and Service Fees: Increased 30% on a higher average
managed asset level and the full year benefit of the 9/30/03 Threadneedle
acquisition.
o Distribution Fees: Increased 19% on increased mutual fund fees, resulting
primarily from increased sales of wrap accounts and increased retail and
institutional brokerage fees.
o Variable Life Insurance and Variable Annuity Charges: Increased 5% due to
higher insurance in force.
o Life and Health Insurance Premiums: Grew 1% due to increases in the
average number of life and disability policies in force, partially offset
by decreases in average long-term care policies in force, resulting from
our de-emphasizing this business.
o Property-Casualty Insurance Premiums: Increased 30% due to an increase in
the average number of policies in force. Property-casualty insurance sold
through Costco accounted for a significant proportion of policies in
force at 12/31/04.
o Other Revenues: Were up 22% on higher fees earned on non-proprietary
funds and greater financial planning and advice services fees, which grew
15% versus 2003.
o Provisions for Losses and Benefits:
- - Interest Credited on Annuities and Universal Life-type Contracts:
Decreased 8% due to lower interest crediting rates, which were
partially offset by higher in-force levels.
- - Benefits on Insurance and Annuities: Grew 5%, due to growth in
annuity levels and growth in life and health insurance policies in
force, partially offset by declines in long-term care policies in
force.
- - Interest Credited on Investment Certificates: Increased 11% due to
higher average certificate reserves.
- - Losses and Expenses on Property-Casualty Insurance: Increased 27%
due to increased average property and casualty policies in force.
o Human Resources Expense - Field: Grew 25% versus 2003 due to increased
advisor production, lower deferrable costs resulting from the mix in
product sales, and the full year impact of the 9/30/03 Threadneedle
acquisition.
o Human Resources Expense - Non-Field: Grew 26%, reflecting the impact of
the Threadneedle acquisition, increased salaries and benefits, and higher
management incentive costs for employees. Within the home office, the
average number of employees was up 7% due to the Threadneedle
acquisition, although flat excluding the acquisition's impact.
o Amortization of Deferred Acquisition Costs: Decreased 15% primarily due
to the 1Q `04 valuation benefit of $66MM that occurred in conjunction
with the adoption of SOP 03-1.
o Other Operating Expenses: Increased 30% versus last year reflecting
higher costs related to various securities industry regulatory and legal
matters, higher advertising and promotion expenses, and the full-year
impact of the 9/30/03 Threadneedle acquisition.
-25-
AMERICAN EXPRESS COMPANY
FULL YEAR 2004 OVERVIEW
AMERICAN EXPRESS BANK
(Preliminary)
STATEMENTS OF INCOME
(Unaudited)
(millions) Years Ended Percentage
December 31, Inc/(Dec)
--------------------------------- ---------------
2004 2003
----- ------
Net revenues:
Interest income $542 $575 (6)%
Interest expense 227 226 -
----- ------
Net interest income 315 349 (10)
Commissions and fees 283 238 19
Foreign exchange income and other revenues 227 214 6
----- ------
Total net revenues 825 801 3
----- ------
Expenses:
Human resources 298 271 10
Other operating expenses 300 279 8
Provision for losses 37 102 (64)
Restructuring charges 44 (2) #
----- ------
Total expenses 679 50 4
----- ------
Pre-tax income 146 151 (3)
Income tax provision 50 49 3
----- ------
Net income $96 $102 (6)
===== ======
# Denotes variance greater than 100%.
o Net Income: Decreased 6%.
- - 2004 includes $44MM ($29MM after-tax) of restructuring charges
incurred in connection with the decision to sell certain AEB
operations in Bangladesh, Egypt, Luxembourg and Pakistan.
- - 2003 includes a net pre-tax benefit of $2MM ($1MM after-tax)
reflecting an adjustment to the 2002 restructuring charge for
severance and other costs.
o Net Revenues: Increased 3%.
- - Net interest income declined 10% primarily due to lower levels of CFS
loans, reflecting the Bank's decision to temporarily curtail loan
origination in Hong Kong, and lower spreads in the investment
portfolio. These negative effects were partially offset by strong
growth in Private Banking loans.
- - Commissions and fees were up 19% due to higher volumes in FIG and
Private Banking, partially offset by lower volumes in CFS.
- - Foreign exchange income and other revenues increased 6% due to higher
Private Banking client activity.
o Human Resource Expense: Increased 10% reflecting merit increases and
higher management incentive costs, partially offset by the benefits of
reengineering initiatives.
o Other Operating Expenses: Increased 8% due to higher technology and
business volume-related expenses, partially offset by a gain on the sale
of securities received from a settlement with a FIG client, and the
benefits of reengineering initiatives.
o Provision for Losses: Decreased 64% due to lower CFS loan volumes and an
improvement in bankruptcy-related write-offs in the consumer lending
portfolio in Hong Kong.
o Pre-Tax Margin: Before restructuring charges, was 23.0% (17.7% after
charges) in 2004 versus 18.6% (18.9% after charges) in 2003.
o Effective Tax Rate: Was 34% in 2004 versus 32% in 2003.
-26-
INFORMATION RELATING TO FORWARD LOOKING STATEMENTS
THIS RELEASE INCLUDES FORWARD-LOOKING STATEMENTS, WHICH ARE SUBJECT
TO RISKS AND UNCERTAINTIES. THE WORDS "BELIEVE," "EXPECT," "ANTICIPATE,"
"OPTIMISTIC," "INTEND," "PLAN," "AIM," "WILL," "MAY," "SHOULD," "COULD,"
"WOULD," "LIKELY," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE
ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE ON WHICH
THEY ARE MADE. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE OR REVISE ANY
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THESE FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED
TO: THE COMPANY'S ABILITY TO IMPROVE ITS OPERATING EXPENSE TO REVENUE RATIO
BOTH IN THE SHORT-TERM AND OVER TIME, WHICH WILL DEPEND IN PART ON THE
EFFECTIVENESS OF REENGINEERING AND OTHER COST-CONTROL INITIATIVES, AS WELL AS
FACTORS IMPACTING THE COMPANY'S REVENUES; THE COMPANY'S ABILITY TO COST
EFFECTIVELY MANAGE AND EXPAND CARDMEMBER BENEFITS, INCLUDING CONTAINING THE
GROWTH OF ITS MARKETING, PROMOTION, REWARDS AND CARDMEMBER SERVICES EXPENSES;
THE COMPANY'S ABILITY TO ACCURATELY ESTIMATE THE PROVISION FOR THE COST OF THE
MEMBERSHIP REWARDS PROGRAM; THE COMPANY'S ABILITY TO GROW ITS BUSINESS AND
MEET OR EXCEED ITS RETURN ON SHAREHOLDERS' EQUITY TARGET BY REINVESTING
APPROXIMATELY 35% OF ANNUALLY-GENERATED CAPITAL, AND RETURNING APPROXIMATELY
65% OF SUCH CAPITAL TO SHAREHOLDERS, OVER TIME, WHICH WILL DEPEND ON THE
COMPANY'S ABILITY TO MANAGE ITS CAPITAL NEEDS AND THE EFFECT OF BUSINESS MIX,
ACQUISITIONS AND RATING AGENCY REQUIREMENTS; THE ABILITY OF THE COMPANY TO
GENERATE SUFFICIENT REVENUES FOR EXPANDED INVESTMENT SPENDING AND TO ACTUALLY
SPEND SUCH FUNDS TO THE EXTENT AVAILABLE, AND THE ABILITY TO CAPITALIZE ON
SUCH INVESTMENTS TO IMPROVE BUSINESS METRICS; CREDIT RISK RELATED TO CONSUMER
DEBT, BUSINESS LOANS, MERCHANT BANKRUPTCIES AND OTHER CREDIT EXPOSURES BOTH IN
THE U.S. AND INTERNATIONALLY; VOLATILITY IN THE VALUATION ASSUMPTIONS FOR THE
INTEREST-ONLY (I/O) STRIP RELATING TO TRS' LENDING SECURITIZATIONS;
FLUCTUATION IN THE EQUITY AND FIXED INCOME MARKETS, WHICH CAN AFFECT THE
AMOUNT AND TYPES OF INVESTMENT PRODUCTS SOLD BY AEFA, THE MARKET VALUE OF ITS
MANAGED ASSETS, AND MANAGEMENT, DISTRIBUTION AND OTHER FEES RECEIVED BASED ON
THE VALUE OF THOSE ASSETS; AEFA'S ABILITY TO RECOVER DEFERRED ACQUISITION
COSTS (DAC), AS WELL AS THE TIMING OF SUCH DAC AMORTIZATION, IN CONNECTION
WITH THE SALE OF ANNUITY, INSURANCE AND CERTAIN MUTUAL FUND PRODUCTS; CHANGES
IN ASSUMPTIONS RELATING TO DAC, WHICH COULD IMPACT THE AMOUNT OF DAC
AMORTIZATION; THE ABILITY TO IMPROVE INVESTMENT PERFORMANCE IN AEFA'S
BUSINESSES, INCLUDING ATTRACTING AND RETAINING HIGH-QUALITY PERSONNEL; THE
SUCCESS, TIMELINESS AND FINANCIAL IMPACT, INCLUDING COSTS, COST SAVINGS AND
OTHER BENEFITS INCLUDING INCREASED REVENUES, OF REENGINEERING INITIATIVES
BEING IMPLEMENTED OR CONSIDERED BY THE COMPANY, INCLUDING COST MANAGEMENT,
STRUCTURAL AND STRATEGIC MEASURES SUCH AS VENDOR, PROCESS, FACILITIES AND
OPERATIONS CONSOLIDATION, OUTSOURCING (INCLUDING, AMONG OTHERS, TECHNOLOGIES
OPERATIONS), RELOCATING CERTAIN FUNCTIONS TO LOWER-COST OVERSEAS LOCATIONS,
MOVING INTERNAL AND EXTERNAL FUNCTIONS TO THE INTERNET TO SAVE COSTS, AND
PLANNED STAFF REDUCTIONS RELATING TO CERTAIN OF SUCH REENGINEERING ACTIONS;
THE ABILITY TO CONTROL AND MANAGE OPERATING, INFRASTRUCTURE, ADVERTISING AND
PROMOTION AND OTHER EXPENSES AS BUSINESS EXPANDS OR CHANGES, INCLUDING
BALANCING THE NEED FOR LONGER-TERM INVESTMENT SPENDING; THE POTENTIAL NEGATIVE
EFFECT ON THE COMPANY'S BUSINESSES AND INFRASTRUCTURE, INCLUDING INFORMATION
TECHNOLOGY, OF TERRORIST ATTACKS, DISASTERS OR OTHER CATASTROPHIC EVENTS IN
THE FUTURE; THE IMPACT ON THE COMPANY'S BUSINESSES RESULTING FROM CONTINUING
GEOPOLITICAL UNCERTAINTY; THE OVERALL LEVEL OF CONSUMER CONFIDENCE; CONSUMER
AND BUSINESS SPENDING ON THE COMPANY'S TRAVEL RELATED SERVICES PRODUCTS,
PARTICULARLY CREDIT AND CHARGE CARDS AND GROWTH IN CARD LENDING BALANCES,
WHICH DEPEND IN PART ON THE ABILITY TO ISSUE NEW AND ENHANCED CARD PRODUCTS
AND INCREASE REVENUES FROM SUCH PRODUCTS, ATTRACT NEW CARDHOLDERS, CAPTURE A
GREATER SHARE OF EXISTING CARDHOLDERS' SPENDING, SUSTAIN PREMIUM DISCOUNT
RATES ON ITS CARD PRODUCTS IN LIGHT OF MARKET PRESSURES, INCREASE MERCHANT
COVERAGE, RETAIN CARDMEMBERS AFTER LOW INTRODUCTORY LENDING RATES HAVE
EXPIRED, AND EXPAND THE GLOBAL NETWORK SERVICES BUSINESS; THE TRIGGERING OF
OBLIGATIONS TO MAKE PAYMENTS TO CERTAIN CO-BRAND PARTNERS, MERCHANTS, VENDORS
AND CUSTOMERS UNDER CONTRACTUAL ARRANGEMENTS WITH SUCH PARTIES UNDER CERTAIN
CIRCUMSTANCES; AEFA'S ABILITY TO DEVELOP AND ROLL OUT NEW AND ATTRACTIVE
PRODUCTS TO CLIENTS IN A TIMELY MANNER AND EFFECTIVELY MANAGE THE ECONOMICS IN
SELLING A GROWING VOLUME OF NON-PROPRIETARY MUTUAL FUNDS AND OTHER RETAIL
FINANCIAL PRODUCTS TO CLIENTS; SUCCESSFULLY CROSS-SELLING FINANCIAL, TRAVEL,
CARD AND OTHER PRODUCTS AND SERVICES TO THE COMPANY'S CUSTOMER BASE, BOTH IN
THE UNITED STATES AND INTERNATIONALLY; A DOWNTURN IN THE COMPANY'S BUSINESSES
AND/OR NEGATIVE CHANGES IN THE COMPANY'S AND ITS SUBSIDIARIES' CREDIT RATINGS,
WHICH COULD RESULT IN CONTINGENT PAYMENTS UNDER CONTRACTS, DECREASED LIQUIDITY
AND HIGHER BORROWING COSTS; FLUCTUATIONS IN INTEREST RATES, WHICH IMPACT THE
COMPANY'S BORROWING COSTS, RETURN ON LENDING PRODUCTS AND SPREADS IN THE
INSURANCE, ANNUITY AND INVESTMENT CERTIFICATE BUSINESSES; CREDIT TRENDS AND
THE RATE OF BANKRUPTCIES, WHICH CAN AFFECT SPENDING ON CARD PRODUCTS, DEBT
PAYMENTS BY INDIVIDUAL AND CORPORATE CUSTOMERS AND BUSINESSES THAT ACCEPT THE
COMPANY'S CARD PRODUCTS AND RETURNS ON THE COMPANY'S INVESTMENT PORTFOLIOS;
BANKRUPTCIES, RESTRUCTURINGS OR SIMILAR EVENTS AFFECTING THE AIRLINE OR ANY
OTHER INDUSTRY REPRESENTING A SIGNIFICANT PORTION OF TRS' BILLED BUSINESS,
INCLUDING ANY POTENTIAL NEGATIVE EFFECT ON PARTICULAR CARD PRODUCTS AND
SERVICES AND BILLED BUSINESS GENERALLY THAT COULD RESULT FROM THE ACTUAL OR
PERCEIVED WEAKNESS OF KEY BUSINESS PARTNERS IN SUCH INDUSTRIES; RISKS
ASSOCIATED WITH THE COMPANY'S AGREEMENTS WITH DELTA AIR LINES TO PREPAY $500
MILLION FOR THE FUTURE PURCHASES OF DELTA SKYMILES REWARDS POINTS AND TO LOAN
UP TO $100 MILLION TO DELTA; FLUCTUATIONS IN FOREIGN CURRENCY EXCHANGE RATES;
POLITICAL OR ECONOMIC INSTABILITY IN CERTAIN REGIONS OR COUNTRIES, WHICH COULD
AFFECT LENDING AND OTHER COMMERCIAL ACTIVITIES, AMONG OTHER BUSINESSES, OR
RESTRICTIONS ON CONVERTIBILITY OF CERTAIN CURRENCIES; DEFICIENCIES AND
INADEQUACIES IN THE COMPANY'S INTERNAL CONTROL OVER FINANCIAL REPORTING, WHICH
COULD RESULT IN INACCURATE OR INCOMPLETE FINANCIAL STATEMENTS AND PUBLIC
DISCLOSURES; CHANGES IN LAWS OR GOVERNMENT REGULATIONS, INCLUDING CHANGES IN
TAX LAWS OR REGULATIONS THAT COULD RESULT IN THE ELIMINATION OF CERTAIN TAX
BENEFITS; THE COSTS AND INTEGRATION OF ACQUISITIONS; AND OUTCOMES AND COSTS
ASSOCIATED WITH LITIGATION AND COMPLIANCE AND REGULATORY MATTERS. A FURTHER
DESCRIPTION OF THESE AND OTHER RISKS AND UNCERTAINTIES CAN BE FOUND IN THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2003, AND
ITS OTHER REPORTS FILED WITH THE SEC.
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