EXHIBIT 99.3
[Logo of AMERICAN EXPRESS COMPANY]
2005
Second Quarter
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") Second Quarter 2005 Earnings Release.
THIS PRESENTATION 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 PAGES 71-73 IN THE COMPANY'S 2004 ANNUAL REPORT
TO SHAREHOLDERS AND IN ITS 2004 ANNUAL REPORT ON FORM 10-K, AND OTHER REPORTS,
ON FILE WITH THE SECURITIES AND EXCHANGE COMMISSION.
AMERICAN EXPRESS COMPANY
SECOND QUARTER 2005
HIGHLIGHTS
o Second quarter diluted EPS of $0.81 increased 19% versus $0.68 last year.
Total revenues rose 11%. For the trailing 12 months, ROE was 23%.
- 2Q '05 included:
-- A $90MM tax benefit resulting from an IRS audit of previous years' tax
returns.
- $49MM of this benefit was recognized within the Corporate and Other
segment, $33MM in AEB, $5MM in TRS and $3MM in AEFA;
-- A $115MM ($75MM after-tax) benefit from the recovery of 9/11-related
insurance claims.
- $90MM of this benefit was recognized in TRS, $21MM in the Corporate
and Other segment, and $2MM each in AEFA and AEB;
-- $57MM ($37MM after-tax) of net investment gains at AEFA resulting
principally from the sale of all of AEFA's interest in a CDO
securitization trust;
-- $102MM ($66MM after-tax) of reengineering costs, principally
related to restructuring costs within the International Payments
business, the Corporate Travel business and the Finance and
Technologies functions.
- $100MM of this cost was recognized within TRS and $2MM in AEB;
-- $59MM ($38MM after-tax) of expenses related to AEFA spin-off activities
(see discussion on page 2); and
-- $35MM ($23MM after-tax) of expenses related to securities industry
legal and regulatory matters at AEFA.
- 2Q '04 included:
-- Net pre-tax investment gains of $30MM at AEFA; and
-- $32MM of expenses related to securities industry regulatory and legal
matters at AEFA.
o Compared with the second quarter of 2004:
- Worldwide billed business increased 18% on continued strong consumer,
small business and Corporate Services spending growth and over 35%
growth in global network partner volumes. A comparatively weaker U.S.
dollar benefited the reported worldwide growth rate by 1%.
-- Worldwide average spending per proprietary basic card in force
increased 13% versus last year (up 12% adjusted for foreign
exchange translation);
- TRS' worldwide lending balances of $28.1B on an owned basis increased
6%; on a managed basis, worldwide lending balances of $48.8B were up
8%. Excluding the 4Q '04 sale of TRS' equipment leasing product line,
managed loans increased 12% (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 67.3MM increased 8%, up 4.8MM from last
year and 1.2MM during 2Q '05, on continued proprietary and network
card growth; and
- AEFA assets owned, managed and administered of $415.5B were up 9%
versus last year reflecting market appreciation, favorable foreign
currency translation and net asset inflows.
o Additional items of note included:
- Marketing, promotion, rewards and cardmember services costs increased
18% versus 2Q '04 reflecting higher marketing and promotion expenses
and greater rewards costs. Marketing expenses rose due to costs
related to the Company's ongoing global "My Life, My Card(SM)"
advertising campaign and various business building initiatives.
Rewards costs increased, reflecting volume growth, a higher
redemption rate, and strong cardmember loyalty program participation.
The strong metric performance during the quarter reflected the
ongoing benefits of the increased spending over the last two years.
- The Company's reengineering initiatives are on track to deliver $1B
of additional benefits this year, including significant carry-over
benefits from certain initiatives begun in prior periods.
Revenue-related reengineering activities are driving a significant
portion of the total benefits, representing more than 25% of the
benefits delivered in 2Q '05.
- 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 2Q '05 impacts of
incremental annual option grant expense, increased levels of
restricted stock awards and other related compensation changes
contributed to the 15% increase in human resources expense.
-- Compared with last year, the total employee count of 76,800
decreased by 2,000 employees or 3%; compared with last quarter,
the employee count was flat.
-1-
AMERICAN EXPRESS COMPANY
SECOND QUARTER 2005
HIGHLIGHTS (Cont'd)
o On February 1, 2005, the Company announced its intention to pursue a
spin-off of its AEFA operating unit to shareholders. In the
transaction, American Express shareholders would receive 100 percent of
the common shares of American Express Financial Corporation, the wholly
owned subsidiary that directly and through its subsidiaries and
affiliates conducts our AEFA business. The transaction is intended to
be tax-free to shareholders and is expected to be completed late in the
third quarter of 2005, subject to certain conditions.
On May 25th, AEFA announced their new dual branding strategy.
Specifically, Ameriprise Financial ("Ameriprise") will be the holding
company brand, as well as the name of Ameriprise's branded advisors,
who will operate as the Personal Advisors of Ameriprise Financial. The
Ameriprise brand will also be associated with products marketed
directly to clients, including personal auto and home protection
products, 401(k), deposit and credit products and services, wrap
accounts, face-amount certificates and retail brokerage services.
RiverSourceSM will be the brand associated with mutual funds, annuities
and life insurance products for individuals, as well as the asset
management business and hedge fund products for institutions. It is
expected that AEFA will begin to operate under the Ameriprise name, and
also begin to employ the RiverSourceSM brand name as of August 1, 2005.
The transition to the new, dual brand architecture will be
substantially complete by year-end 2005, but the formal legal entity
name changes will not be completed until year-end 2006.
American Express made a commitment to appropriately capitalize
Ameriprise in order to provide them with sufficient liquidity and
access to capital markets, while supporting their existing insurance
financial strength ratings. As a result, American Express plans to
provide a $1B capital infusion to Ameriprise Financial, prior to the
spin-off. The Company believes that the total capital contribution will
fully fund the expected one-time transition expenses and provide
adequate capital for Ameriprise as of the spin-off date.
A portion of the capital contribution from American Express will
pre-fund an estimated $875 million in pre-tax separation costs to be
borne by Ameriprise. In addition, the American Express Parent expects
to incur approximately $70MM of pre-tax separation costs, $50MM of
which will be incurred in 2005. To date, the Company on a consolidated
basis has incurred total spin-off related costs of $59MM ($38MM
after-tax) in 2Q '05 and $22MM ($14MM after-tax) in 1Q '05.
Additional information related to the transaction and the business
segments of Ameriprise is available in the Ameriprise Financial Inc.
Form 10 registration statement on file with the SEC. The financial
presentation of the Company's AEFA segment in this Supplement differs
in certain significant respects from the financial presentation of
Ameriprise in the Form 10. The financial statements in
the Form 10 were prepared as if Ameriprise were a stand-alone company,
and reflect differences in the businesses comprising the Company's
AEFA segment and Ameriprise.
o During the quarter, American Express continued to invest in growth
opportunities through expanded products and services as we:
- Introduced new proprietary card products, including:
- A JetBlue Airways co-branded credit card, which allows
Cardmembers to earn Award Dollars convertible to points in
JetBlue's Flight Gratitude program, TrueBlue(R);
- The SkyPoints(TM) card, co-branded with Delta Air Lines, which
provides travelers with additional flexibility and savings on
Delta airfares;
- A consumer and small-business credit card in the U.K., cobranded
with Loyalty Management UK, the owners and operators of
Nectar, the largest loyalty program in that country; and
- The Platinum Business Premium Cash Rebate Card, a fee-free credit
card for high-spending small business owners;
- Expanded the U.S. GNS business through a new agreement with USAA
Federal Savings Bank to issue American Express and USAA branded
charge and credit cards in the U.S., which will be accepted
globally on the American Express merchant network;
- Expanded the non-U.S. GNS business through:
- A new partnership with Lloyds TSB to issue credit cards in
the United Kingdom on the American Express Network. Lloyds
TSB is one of the U.K.'s largest banks with 16 million
customers, 2,000 branches and over 6 million credit card
customers;
- An agreement with Barclaycard to exclusively acquire and
process American Express Card transactions in nine African
countries;
-2-
AMERICAN EXPRESS COMPANY
SECOND QUARTER 2005
HIGHLIGHTS (Cont'd)
- A partnership with OTP Bank, the largest bank card issuer in
the Hungarian banking market, with approximately 3.4MM cards
issued, to exclusively issue American Express Cards in
Hungary;
- A partnership with Postbank to launch and exclusively issue
the first American Express Cards in Bulgaria, as well as
exclusively acquire new merchants for the card network in
this country; and
- A partnership with Parex Banka to launch and exclusively
issue the first American Express Cards in Latvia, as well as
exclusively acquire new merchants for the card network in
this country.
- Began issuing Blue from American Express(R) with the ExpressPay
feature, a new contactless technology providing customers with
easy, secure, and convenient payment;
- Announced an agreement with the Duane Reade drugstore chain to offer
the American Express(R) Gift Card in all of its 249 stores in the
Metropolitan New York area;
- Promoted a new installment of the "My WishList" program, with a
specific focus on home improvement and decorating. My WishList
is part of the American Express Selects program, serving
cardmembers with valuable merchant retail, dining, and travel
offers and merchants with business building programs through our
cardmember base; and
- Relaunched the Consumer Travel website with additional features
and benefits including low fares, secured booking, promotions,
and faster accumulation of Membership Rewards points.
-3-
AMERICAN EXPRESS COMPANY
SECOND QUARTER 2005 OVERVIEW
CONSOLIDATED
(Preliminary)
CONDENSED STATEMENTS OF INCOME
(GAAP basis)
Quarters Ended Percentage
(millions) June 30, Inc/(Dec)
---------------------------------- ----------------
2005 2004
---- ----
Revenues:
Discount revenue $2,941 $2,529 16%
Net investment income 822 785 5
Management and distribution fees 814 724 12
Cardmember lending net finance charge revenue 637 561 14
Net card fees 506 472 7
Travel commissions and fees 502 468 7
Other commissions and fees 611 565 8
Insurance and annuity revenues 403 378 7
Securitization income, net 296 282 5
Other 470 468 1
------- -------
Total revenues 8,002 7,232 11
------- -------
Expenses:
Human resources 2,092 1,813 15
Marketing, promotion, rewards and cardmember services 1,471 1,250 18
Provision for losses and benefits 1,177 1,080 9
Interest 251 210 20
Other operating expenses 1,692 1,613 5
------- -------
Total expenses 6,683 5,966 12
------- -------
Pretax income 1,319 1,266 4
Income tax provision 306 390 (22)
------- -------
Net income $1,013 $876 16
======= =======
EPS:
Net Income - Basic $0.82 $0.69 19
======= =======
Net Income - Diluted $0.81 $0.68 19
======= =======
o NET INCOME: Increased 16% to a record quarterly level of $1,013MM.
- 2Q '05 included:
-- A $90MM tax benefit resulting from an IRS audit of previous years' tax
returns.
- $49MM of this benefit was recognized within the Corporate and Other
segment, $33MM in AEB, $5MM in TRS and $3MM in AEFA;
-- A $115MM ($75MM after-tax) benefit from the recovery of 9/11-related
insurance claims.
- $90MM of this benefit was recognized in TRS, $21MM in the Corporate
and Other segment, and $2MM each in AEFA and AEB;
-- $57MM ($37MM after-tax) of net investment gains at AEFA resulting
principally from the sale of all of AEFA's interest in a CDO
securitization trust;
-- $102MM ($66MM after-tax) of reengineering costs, principally
related to restructuring costs within the International Payments
business, the Corporate Travel business and the Finance and
Technologies functions.
- $100MM of this cost was recognized within TRS and $2MM in AEB;
-- $59MM ($38MM after-tax) of expenses related to AEFA spin-off
activities (see discussion on page 2); and
-- $35MM ($23MM after-tax) of expenses related to securities industry
legal and regulatory matters at AEFA.
- 2Q '04 included:
-- Net pre-tax investment gains of $30MM at AEFA; and
-- $32MM of expenses related to securities industry regulatory and
legal matters at AEFA.
-4-
AMERICAN EXPRESS COMPANY
SECOND QUARTER 2005 OVERVIEW
CONSOLIDATED (Cont'd)
o CONSOLIDATED REVENUES: Revenues increased 11% due to higher discount
revenues, higher management and distribution fees, increased Cardmember
lending net finance charge revenue, increased other commissions and fees,
higher net investment income, higher travel commissions and fees, larger
net card fees, greater insurance and annuity revenues, increased net
securitization income, and greater other revenues. Consolidated revenue
growth versus last year reflected 11% growth at TRS, 10% growth at AEFA,
and a 2% increase at AEB. Translation of foreign currency revenues
contributed approximately 1% of the 11% revenue growth rate.
o CONSOLIDATED EXPENSES: Expenses were up 12%, reflecting greater human
resources costs, higher marketing, promotion, rewards and cardmember
services expenses, greater provision for losses and benefits, higher
other operating expenses, and increased interest expense. Consolidated
expenses reflected increases versus last year of 12% at TRS, 17% at AEFA,
and 1% at AEB. Translation of foreign currency expenses contributed
approximately 2% of the 12% expense growth rate.
o PRE-TAX MARGIN: Was 16.5% in 2Q '05 compared with 18.2% in 1Q '05 and
17.5% in 2Q '04.
o EFFECTIVE TAX RATE: Was 23% in 2Q '05, as compared to 31% in 1Q '05 and
in 2Q '04. The lower rate in 2Q '05 reflects the $90MM tax benefit
previously discussed.
o SHARE REPURCHASES: During 2Q '05, 10MM shares were repurchased versus
12MM shares in 1Q '05 and 19MM shares in 2Q '04. Repurchases during 1Q
'05 and 2Q '05 reflect a more measured strategy towards repurchase
activity in light of the capital implications of the anticipated spin-off
of AEFA. Since the inception of repurchase programs in September 1994,
518MM 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: 2Q '05 1Q '05 2Q '04
------ ------ ------
Basic 1,231 1,239 1,263
===== ===== =====
Diluted 1,254 1,264 1,288
===== ====== =====
- ACTUAL SHARE ACTIVITY:
Shares outstanding - beginning of period 1,245 1,249 1,281
Repurchase of common shares (10) (12) (19)
Employee benefit plans, compensation and other 5 8 5
----- ------- -----
Shares outstanding - end of period 1,240 1,245 1,267
===== ======= =====
CORPORATE AND OTHER
o Net income was $4MM in 2Q '05, compared with a net expense of $51MM in 1Q
'05 and $58MM in 2Q '04. 2Q '05 includes the $49MM tax audit benefit
previously discussed, the $21MM ($14MM after-tax) benefit due to the
recovery of 9/11-related insurance claims, and $5MM ($3MM after-tax) of
spin-off related expenses. 2Q '04 included an $18MM tax benefit resulting
from an IRS audit of previous years' tax returns (1989-1992 fiscal
periods), offset by higher interest expense versus the prior year related
to corporate debt issuances over the prior 12 months, and higher
corporate investment spending on compliance and technology projects.
-5-
AMERICAN EXPRESS COMPANY
SECOND QUARTER 2005 OVERVIEW
TRAVEL RELATED SERVICES
(Preliminary)
STATEMENTS OF INCOME
(GAAP basis)
Quarters Ended Percentage
(millions) June 30, Inc/(Dec)
-------------------------- -----------
2005 2004
---- ----
Net revenues:
Discount revenue $2,941 $2,529 16%
Lending:
Finance charge revenue 839 697 21
Interest expense 202 136 49
------ ------
Net finance charge revenue 637 561 14
Net card fees 506 472 7
Travel commissions and fees 502 468 7
Other commissions and fees 602 551 9
TC investment income 94 95 (1)
Securitization income, net 296 282 5
Other 396 420 (5)
------ ------
Total net revenues 5,974 5,378 11
------ ------
Expenses:
Marketing, promotion, rewards and
cardmember services 1,440 1,225 18
Provision for losses and claims:
Charge card 234 189 23
Lending 275 314 (12)
Other 72 33 #
------ ------
Total 581 536 8
Charge card interest expense 211 175 20
Human resources 1,224 1,081 13
Other operating expenses:
Professional services 538 488 10
Occupancy and equipment 342 313 9
Communications 110 114 (3)
Other
360 367 (2)
------ ------
Total other operating expenses 1,350 1,282 5
------ ------
Total expenses 4,806 4,299 12
------ ------
Pretax income 1,168 1,079 8
Income tax provision 360 347 4
------ ------
Net income $808 $732 10
====== ======
# Denotes variance of more than 100%.
o NET INCOME: Increased 10%. 2Q '05 included:
- A $90MM ($58MM after-tax) benefit from the recovery of 9/11-related
insurance claims;
- $100MM ($65MM after-tax) of the previously discussed reengineering-related
costs; and
- A $5MM tax benefit resulting from the IRS audit of previous years' tax
returns.
o PRE-TAX MARGIN: Was 19.6% in 2Q '05, versus 21.0% in 1Q '05 and 20.1% in
2Q '04.
o EFFECTIVE TAX RATE: Was 31% in 2Q '05, compared with 32% in 1Q '05 and
2Q '04.
o GAAP BASIS INCOME STATEMENT ITEMS:
- SECURITIZATION INCOME, NET: Increased 5% on a greater average balance
of securitized loans, a higher portfolio yield and a decrease in
portfolio write-offs, partially offset by greater interest expense
due to a higher coupon rate paid to certificate holders and an
increase in the payment speed of the trust assets. 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 2Q '05 and 2Q '04, TRS' results reflected net
securitization gains, including the credit components, of $1MM
($1MM after-tax) and $9MM ($6MM after-tax), respectively. The
average balance of Cardmember lending securitizations was $20.0B
in 2Q '05, compared with $18.9B in 2Q '04.
- NET FINANCE CHARGE REVENUE: Increased 14%, reflecting 6% growth in
the average balance of the owned lending portfolio and a higher portfolio
yield.
- LENDING PROVISION: Decreased 12% as the higher average balance was
offset by improved credit metrics due in part to the alignment of
initial reserves with demonstrated credit performance for certain new
products.
- 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 Second Quarter 2005
Earnings Release on the TRS Selected Statistical Information pages.
-6-
AMERICAN EXPRESS COMPANY
SECOND QUARTER 2005 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., as if 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 the trends in the Company's cardmember lending business are more
accurately portrayed by evaluating the performance of both securitized and
non-securitized cardmember loans. Asset securitization is just one of several
ways the Company funds 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
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 the impact of
this net activity was offset by higher marketing, promotion, rewards and
cardmember services expenses of $1MM in 2Q '05 and $6MM in 2Q '04, and other
operating expenses of $3MM in 2Q '04. Accordingly, the incremental expenses,
as well as the impact of the net lending securitization activity, are
eliminated.
The following table compares and reconciles the GAAP basis TRS income
statements to the managed basis information, where different.
Effect of Securitizations
-------------------------------------------------------
(preliminary, millions) GAAP Basis Securitization Effect Managed Basis
- ------------------------------------------------------------------------- --------------------- --------------------------------
Percentage Percentage
Quarters Ended June 30, 2005 2004 Inc/(Dec) 2005 2004 2005 2004 Inc/(Dec)
----------------------------------- ------------------- --------------------------------
Net revenues:
Discount revenue $2,941 $2,529 16%
Lending:
Finance charge revenue 839 697 21 $618 $489 $1,457 $1,186 23%
Interest expense 202 136 49 164 61 366 197 87
- ------------------------------------------------------------------------- --------------------- --------------------------------
Net finance charge revenue 637 561 14 454 428 1,091 989 10
Net card fees 506 472 7
Travel commissions and fees 502 468 7
Other commissions and fees 602 551 9 51 50 653 601 9
TC investment income 94 95 (1)
Securitization income, net 296 282 5 (296) (282) - - -
Other 396 420 (5)
- ------------------------------------------------------------------------- --------------------- --------------------------------
Total net revenues 5,974 5,378 11 209 196 6,183 5,574 11
- ------------------------------------------------------------------------- --------------------- --------------------------------
Expenses:
Marketing, promotion, rewards
and cardmember services 1,440 1,225 18 (1) (6) 1,439 1,219 18
Provision for losses and claims:
Charge card 234 189 23
Lending 275 314 (12) 210 205 485 519 (6)
Other 72 33 #
- ------------------------------------------------------------------------- --------------------- --------------------------------
Total 581 536 8 210 205 791 741 7
Charge card interest expense 211 175 20
Human resources 1,224 1,081 13
Other operating expenses:
Professional services 538 488 10
Occupancy and equipment 342 313 9
Communications 110 114 (3)
Other 360 367 (2) - (3) 360 364 (1)
- ------------------------------------------------------------------------- --------------------- --------------------------------
Total other operating expenses 1,350 1,282 5 - (3) 1,350 1,279 6
- ------------------------------------------------------------------------- --------------------- --------------------------------
Total expenses 4,806 4,299 12 $209 $196 $5,015 $4,495 12
- ------------------------------------------------------------------------- --------------------- --------------------------------
Pretax income 1,168 1,079 8
Income tax provision 360 347 4
- -------------------------------------------------------------------------
Net income $808 $732 10
- -------------------------------------------------------------------------
-7-
AMERICAN EXPRESS COMPANY
SECOND QUARTER 2005 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, higher
net finance charge revenue, greater commissions and fees, and higher card
fees.
o The 12% higher managed basis expenses reflect higher marketing,
promotion, rewards and cardmember services costs, greater human resources
expenses, higher interest expense, increased provision for losses, larger
occupancy and equipment costs, and increased professional services
expenses.
o DISCOUNT REVENUE: An 18% increase in billed business, partially offset by
a lower average discount rate, yielded a 16% increase in discount
revenue.
- The average discount rate was 2.54% in 2Q '05 versus 2.56% in
1Q '05 and 2Q '04. The decrease versus last year and last
quarter reflects, in part, changes in the mix of spending between
various merchant segments.
-- 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 discount rate over time.
Quarters Ended Percentage
June 30, Inc/(Dec)
----------------------------------- --------------
2005 2004
---- ----
Card billed business (billions):
United States $ 88.5 $ 75.7 17%
Outside the United States 32.3 26.7 21
------- -------
Total $120.8 $102.4 18
======= =======
Cards in force (millions):
United States 41.0 37.5 9
Outside the United States 26.3 25.0 5
------- -------
Total 67.3 62.5 8
======= =======
Basic cards in force (millions):
United States 31.1 28.5 9
Outside the United States 21.8 20.8 5
------- -------
Total 52.9 49.3 7
======= =======
Spending per basic card in force (dollars): (a)
United States $2,947 $2,676 10
Outside the United States $1,974 $1,643 20
Total $2,640 $2,339 13
(a) Proprietary card activity only.
- - BILLED BUSINESS: The 18% increase in worldwide billed business
reflected a 13% increase in spending per proprietary basic card and
8% growth in cards in force.
-- U.S. billed business was up 17% reflecting growth of 16% within our
consumer card business, a 19% increase in small business spending and an
11% improvement in Corporate Services volumes.
- Spending per proprietary basic card in force increased 10%.
-- U.S. non-T&E-related volume categories (which represented approximately
67% of 2Q '05 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 quarter, rose 8% as 15% transaction volume
growth was suppressed by a 6% lower average airline charge.
-- Excluding the impact of foreign exchange translation:
- Worldwide billed business and spending per proprietary basic card
in force increased 17% and 12%, respectively.
- Total billed business outside the U.S. reflected double-digit
proprietary growth in all regions, with the largest increases in
Canada and Latin America.
- Within our proprietary business, billed business outside the U.S.
reflected 13% growth in consumer and small business spending, as
well as a 17% increase in Corporate Services volumes.
- Spending per proprietary basic card in force outside the U.S. rose
15%.
-- Global Network Services volumes rose by more than 35%.
-- Worldwide airline volumes, which represented approximately 13% of total
volumes during the quarter, increased 16% on 17% growth in transaction
volume, partially offset by a decrease in the average airline charge
of 1%.
-8-
AMERICAN EXPRESS COMPANY
SECOND QUARTER 2005 OVERVIEW
TRAVEL RELATED SERVICES (Cont'd)
o BILLED BUSINESS (cont'd):
- CARDS IN FORCE: Rose 8% worldwide versus last year on continued
strong card acquisitions and improved average customer retention
levels within our proprietary issuing business, as well as strong
growth in network cards.
-- U.S. cards in force rose 700K during the quarter.
-- Outside the United States, 500K cards in force were added during
the quarter.
o NET FINANCE CHARGE REVENUE: Increased 10% on 6% growth in average
worldwide lending balances and a higher portfolio yield.
- The yield on the worldwide portfolio was 8.7% in 2Q '05 versus 8.8% in
1Q '05 and 8.6% in 2Q '04. The increase versus last year reflects a
lower proportion of the U.S. portfolio on introductory rates and
increased finance charge rates, partially offset by rising funding costs.
o NET CARD FEES: Rose 7% due to higher cards in force. In both 2Q '05 and
1Q '05, the average annual fee per proprietary card in force was $35
versus $34 in 2Q '04.
o TRAVEL COMMISSIONS AND FEES: Increased 7% as higher travel sales were
partially offset by lower transaction fees as a greater proportion of
bookings were made on-line.
o OTHER COMMISSIONS AND FEES: Increased 9% on greater volume-related
foreign exchange conversion fees, higher card-related fees and
assessments, and larger network partner-related fees.
o TC INVESTMENT INCOME: Decreased slightly on higher average investments
and a lower investment yield. TC sales increased 3% versus last year.
o OTHER REVENUES: Declined 5% as higher Tax and Business Services,
Publishing and merchant-related revenues were offset by 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
18%, reflecting higher marketing and promotion expenses and greater
rewards costs. The increase in marketing and promotion expenses is due to
the Company's ongoing global brand advertising campaign and our continued
focus on business-building initiatives. The growth in rewards costs is
attributable to volume growth, a higher redemption rate and strong
cardmember loyalty program participation.
o OTHER PROVISION: More than doubled reflecting higher insurance and
travel-related reserves.
o CHARGE CARD INTEREST EXPENSE: Rose 20% due to a greater average
cardmember receivable balance and a higher effective cost of funds.
o HUMAN RESOURCES EXPENSE: Increased 13% due to severance costs, higher
management incentives, including an additional year of incremental
stock-based compensation expenses, merit increases and increased employee
benefit costs.
- The employee count at 6/05 of 64,300 was down 200 versus 3/05 and down
2,000 versus 6/04.
o PROFESSIONAL SERVICES EXPENSES: Rose 10% primarily due to increased
technology costs related to higher business and service-related volumes.
o OCCUPANCY AND EQUIPMENT EXPENSES: Rose 9% primarily due to higher rent
expense and the amortization of software costs.
o OTHER OPERATING EXPENSES: Decreased 1% primarily reflecting the $90MM
insurance recovery discussed previously and lower expenses as a result of
our 3Q '04 sale of the ATM business, partially offset by increased costs
related to restructuring and reengineering activities and higher business
volumes.
-9-
AMERICAN EXPRESS COMPANY
SECOND QUARTER 2005 OVERVIEW
TRAVEL RELATED SERVICES (Cont'd)
o CREDIT QUALITY:
- Overall credit quality continued to perform exceptionally well. While
the recent changes in bankruptcy law legislation did drive increased
filings and related write-offs during the quarter, the impact waned
by quarter end.
- The provision for losses on charge card products increased 23%
reflecting higher volumes.
- The lending provision for losses was down 6% versus last year,
despite growth in loans outstanding, due to well-controlled credit,
and in part due to the alignment of initial reserves with
demonstrated credit performance for certain new products.
- Reserve coverage ratios, which are well in excess of 100% of past due
balances, remained strong.
- WORLDWIDE CHARGE CARD: *
-- The net loss ratio was flat versus last year, but rose versus
last quarter; the past due rate improved versus last year and
last quarter.
6/05 3/05 6/04
----- ----- -----
Net loss ratio as a % of charge volume 0.25% 0.23% 0.25%
90 days past due as a % of receivables 1.7% 1.9% 1.9%
-- Reserve coverage of past due accounts
remained strong.
6/05 3/05 6/04
----- ----- -----
Total Receivables (B) $31.5 $30.0 $28.4
Reserves (MM) $848 $831 $864
% of receivables 2.7% 2.8% 3.0%
% of 90 day past due accounts 160% 147% 163%
- WORLDWIDE LENDING: **
-- The write-off rate improved versus last year and was flat versus
last quarter. Past due rates declined versus last year and
last quarter.
6/05 3/05 6/04
----- ----- -----
Net write-off rate 4.1% 4.1% 4.5%
30 days past due as a % of loans 2.3% 2.6% 2.5%
-- Coverage of past due accounts was maintained
at a conservative level despite a decline in
the reserve balance.
6/05 3/05 6/04
----- ----- -----
Total Loans (B) $48.8 $46.3 $45.1
Reserves (MM) $1,367 $1,419 $1,535
% of total loans 2.8% 3.1% 3.4%
% of 30 day past due accounts 121% 120% 136%
* 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
Second Quarter 2005 Earnings Release on the TRS Selected Statistical
Information pages. Credit trends are generally consistent under both
reporting methods.
-10-
AMERICAN EXPRESS COMPANY
SECOND QUARTER 2005 OVERVIEW
AMERICAN EXPRESS FINANCIAL ADVISORS
(Preliminary)
STATEMENTS OF INCOME
(GAAP basis)
(millions)
Quarters Ended Percentage
June 30, Inc/(Dec)
------------------------------ --------------
2005 2004
---- ----
Revenues:
Net investment income $638 $603 6%
Investment management and service fees 454 411 10
Distribution fees 362 315 15
Variable life insurance and variable annuity charges* 113 111 3
Life and health insurance premiums 92 88 4
Property-casualty insurance premiums 121 103 18
Other 128 106 18
----- -----
Total revenues 1,908 1,737 10
----- -----
Expenses:
Provision for losses and benefits:
Interest credited on annuities and universal life-type contracts 281 280 -
Benefits on insurance and annuities 125 124 1
Interest credited on investment certificates 96 48 97
Losses and expenses on property-casualty insurance 92 80 17
----- -----
Total 594 532 12
Human resources - Field 393 333 18
Human resources - Non-Field 279 210 33
Amortization of deferred acquisition costs 125 125 -
Other operating expenses 340 273 24
----- -----
Total expenses 1,731 1,473 17
----- -----
Pretax income 177 264 (33)
Income tax provision 37 90 (59)
----- -----
Net income $140 $174 (19)
===== =====
* Includes variable universal life and universal life insurance charges.
o NET INCOME: Decreased 19%.
- 2Q '05 included:
-- $54MM ($35MM after-tax) of expenses related to spin-off related
activities (see discussion on page 2);
-- $57MM ($37MM after-tax) of net investment gains resulting principally
from the sale of all of AEFA's interest in a CDO securitization trust;
-- $35MM ($23MM after-tax) of expenses related to securities industry legal
and regulatory matters; and
-- A $4MM benefit related to the tax audit and 9/11 insurance recovery.
- 2Q '04 included:
-- Net pre-tax investment gains of $30MM;
-- A $16MM tax expense primarily as a result of required amendments to
prior-year tax returns; and
-- $32MM of expenses related to securities industry regulatory and legal
matters.
o REVENUES: Increased 10% due to:
- Increased distribution fees;
- Greater investment management and service fees;
- Increased net investment income;
- Higher insurance-related revenues; and
- Greater other revenues, driven by growth in financial planning and
advice services fees, and higher fees earned on non-proprietary funds.
o PRE-TAX MARGIN: Was 9.3% in 2Q '05 compared with 12.6% in 1Q '05 and 15.2%
in 2Q '04. Compressed margins in 2005 reflect the impact of spin-off
related costs.
o EFFECTIVE TAX RATE: Was 21% in 2Q '05 versus 29% in 1Q '05 and 34% in 2Q
'04. The lower rate in 2Q '05 reflects the tax audit benefit noted above
and lower levels of pre-tax income compared to tax advantaged items. 2Q
'04 included the $16MM of additional tax expense noted above.
-11-
AMERICAN EXPRESS COMPANY
SECOND QUARTER 2005 OVERVIEW
AMERICAN EXPRESS FINANCIAL ADVISORS (Cont'd)
o ASSETS OWNED, MANAGED AND ADMINISTERED:
Percentage
(billions) June 30, Inc/(Dec)
----------------------------- ---------------
2005 2004
------ ------
Assets owned (excluding separate accounts) $63.3 $57.9 9%
Separate account assets 37.4 32.9 14
Assets managed 255.2 234.3 9
Assets administered 59.6 55.3 8
------ ------
Total $415.5 $380.4 9
====== ======
o ASSET QUALITY:
- Overall, credit quality was stable as default rates have remained 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 6 times 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 $2.7B, or 6% of the total investment
portfolio at 6/05 and 3/05, versus 7% at 6/04.
-- Excluding unrealized appreciation/depreciation, but including
the impact of FIN 46, high-yield investments totaled $2.9B, or
7% of the total investment portfolio at 6/05 and 3/05, compared
with $3.2B, or 8% at 6/04.
- The SFAS No. 115 related mark-to-market adjustment (including the impact
of FIN 46 and reported in assets pre-tax) was appreciation of $0.7B at
6/05 versus $0.1B at 3/05 and $0.05B at 6/04.
o PRODUCT SALES:
- Total gross cash sales from all products were up 12% versus 2Q '04.
Branded advisor-generated sales increased 22% on a cash basis and 12%
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 increased 16% versus last year, driven
by higher sales of non-proprietary products which more than offset
lower proprietary product sales. A significant portion of
non-proprietary sales continued to occur in "wrap" accounts (which
are included in assets managed).
- Total annuity cash sales increased 28%, driven by a 46% increase in
proprietary variable annuity product sales through the advisor and
third party distribution channels.
- Total certificate cash sales increased 31% due to stronger
advisor-sales and to higher sales of certificates sold to clients
outside the U.S. through the joint venture between AEFA and AEB.
- Total cash sales of insurance products rose 9%, primarily reflecting
higher property-casualty insurance sales, largely due to sales
through direct mail channels, and higher life insurance sales through
the advisor channel.
- Total institutional cash sales decreased 11%. 2Q '04 included the
benefit of a $1.1B private placement offering of a structured
investment managed by AEFA. This was partially offset by a similar
$0.8B offering during 2Q '05.
- Total other cash sales decreased 3% reflecting a decline in 401(k)
activity levels, which was partially offset by higher limited
partnership product sales.
- Advisor product sales (GDC basis) generated through financial planning
and advice services were 75% of total sales in 2Q '05 versus 77% in 1Q
'05 and 75% in 2Q '04.
o NET INVESTMENT INCOME: Increased 6% versus last year reflecting higher
levels of invested assets and the impact of the higher net investment
gains versus last year. 2Q '05 included $57MM of net investment gains
($87MM of gross gains partially offset by $30MM of gross losses).
Included in the gross gains is $36MM related to the sale of all of AEFA's
interest in a CDO securitization trust, reflecting management's decision
to continue to improve the investment portfolio's risk profile through
the further liquidation of certain structured investments. 2Q '04
reflected $30MM of net investment gains ($36MM of gross investment gains
partially offset by $6MM of gross losses).
- Average invested assets of $47.3B (including unrealized
appreciation/depreciation and the impacts of FIN 46) rose 7% versus
$44.4B in 2Q '04, reflecting the cumulative benefit of sales of the
underlying fixed rate products over the past years and higher
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 5.1% in 2Q '05 and 2Q '04.
-12-
AMERICAN EXPRESS COMPANY
SECOND QUARTER 2005 OVERVIEW
AMERICAN EXPRESS FINANCIAL ADVISORS (Cont'd)
o INVESTMENT MANAGEMENT AND SERVICE FEES: Increased 10% due to higher average
assets under management.
- ASSETS MANAGED:
Percentage
(billions) June 30, Inc/(Dec)
--------------------- ---------------
2005 2004
---- ----
Assets managed for individuals $118.4 $108.8 9%
Assets managed for institutions 136.8 125.5 9
Separate account assets 37.4 32.9 14
------ ------
Total $292.6 $267.2 9
====== ======
-- The increase in managed assets since 6/04 resulted from market
appreciation and foreign currency translation of $20.6B and net
inflows of $4.9B.
-- The $6.4B increase in managed assets during 2Q '05 reflects
market appreciation and foreign currency translation of $4.7B
and net inflows of $1.7B.
o DISTRIBUTION FEES: Increased 15% due to greater fees earned on wrap
accounts and brokered funds.
o VARIABLE LIFE INSURANCE AND VARIABLE ANNUITY CHARGES: Increased 3% due
to higher insurance in force.
o LIFE AND HEALTH INSURANCE PREMIUMS: Increased 4% primarily reflecting
higher life insurance and disability income policies in force.
o PROPERTY-CASUALTY INSURANCE PREMIUMS: Increased 18% due to higher
policies in force.
o OTHER REVENUES: Were up 18% on higher fees from financial planning and
advice services and non-proprietary funds. The number of financial plans
sold rose 5% compared to 2Q '04.
o PROVISIONS FOR LOSSES AND BENEFITS:
- INTEREST CREDITED ON ANNUITIES AND UNIVERSAL LIFE-TYPE CONTRACTS:
Remained flat as lower interest crediting rates on our annuity
products were partially offset by higher life insurance in force
levels and annuity accumulation values.
- BENEFITS ON INSURANCE AND ANNUITIES: Increased 1% due to higher
life and disability income insurance in force levels and
higher annuity levels.
- INTEREST CREDITED ON INVESTMENT CERTIFICATES: Rose 97% on higher
interest crediting rates and higher average reserve balances,
partially due to a marketing promotion program that ran in 1Q '05.
- LOSSES AND EXPENSES ON PROPERTY-CASUALTY INSURANCE: Grew 17% as a
result of higher average policies in force.
o HUMAN RESOURCES EXPENSE - FIELD: Increased 18% reflecting $23MM of
spin-off related expenses, improved advisor productivity and growth in
the advisor force.
- TOTAL ADVISOR FORCE: Grew to 12,162 at 6/05, up 219 advisors or 2%
versus 6/04, but was 194 advisors lower versus 3/05, primarily due to
fewer prospective advisors entering the training program in 4Q '04,
which resulted in lower employee advisor appointments in 2Q '05.
-- Veteran advisor retention rates remain strong; and
-- Total advisor productivity improved.
- The total number of retail clients increased by 1% versus last year
as we continued our focus on high value client acquisition
activities. When compared to the second quarter last year, client
acquisitions rose 3% and average assets per client were up 8%. Client
retention was 94%.
o HUMAN RESOURCES EXPENSE - NON-FIELD: Increased 33% reflecting higher
management incentives primarily at Threadneedle, $11MM of spin-off related
expenses, merit increases, severance costs, and greater benefit costs.
The average number of non-field employees was relatively unchanged
versus 2Q '04.
o AMORTIZATION OF DEFERRED ACQUISITION COSTS: Remained flat versus last
year.
o OTHER OPERATING EXPENSES: Increased 24%, reflecting $20MM of spin-off
related expenses, greater costs related to securities industry legal and
regulatory matters and higher insurance charges.
-13-
AMERICAN EXPRESS COMPANY
SECOND QUARTER 2005 OVERVIEW
AMERICAN EXPRESS BANK
(Preliminary)
STATEMENTS OF INCOME
(millions) Quarters Ended Percentage
June 30, Inc/(Dec)
------------------ --------------
2005 2004
---- ----
Net revenues:
Interest income $157 $131 21%
Interest expense 84 51 67
---- ----
Net interest income 73 80 (8)
Commissions and fees 78 70 10
Foreign exchange income and other revenues 57 53 7
---- ----
Total net revenues 208 203 2
---- ----
Expenses:
Human resources 81 71 14
Other operating expenses 80 78 1
Provision for losses 2 12 (83)
---- ----
Total expenses 163 161 1
---- ----
Pretax income 45 42 7
Income tax provision (benefit) (16) 14 #
---- ----
Net income $61 $28 #
==== ====
# Denotes variance greater than 100%.
o NET INCOME: Pre-tax income increased 7% as higher net revenues and lower
provision expense were partially offset by higher human resources
expenses.
- 2Q '05 included:
-- A $35MM ($34MM after-tax) benefit due to the tax audit and the recovery
of 9/11-related insurance claims; and
-- $2MM of reengineering-related expenses.
o NET REVENUES: Increased 2%.
- Net interest income decreased 8% due to lower spreads in the bank's
investment portfolio and decreased consumer loan volume in Hong Kong,
which were partially offset by higher Private Banking volumes.
- Commissions and fees increased 10% due to higher volumes in the Financial
Institutions Group ("FIG") and Private Banking.
- Foreign exchange income and other revenues rose 7% reflecting a gain on
the sale of AEB's Egypt branch, offset by higher funding costs associated
with the AEIDC joint venture.
o HUMAN RESOURCES EXPENSE: Increased 14% reflecting severance costs related
to reengineering activities, higher management incentive costs, merit
increases and a negative impact from foreign exchange.
o OTHER OPERATING EXPENSES: Increased 1% due to higher business
volume-related expenses partially offset by the insurance recovery.
o PROVISION FOR LOSSES: Decreased 83%, or $10MM, reflecting Corporate
Banking recoveries of accounts previously written off.
o PRE-TAX MARGIN: Was 21.6% in 2Q '05, 22.2% in 1Q '05 and 20.7% in 2Q '04.
o EFFECTIVE TAX RATE: Excluding the impact of the tax benefit discussed
above, the 2Q '05 effective tax rate was 38%. The effective tax rate in
1Q '05 was 35% and 33% in 2Q '04.
-14-
AMERICAN EXPRESS COMPANY
SECOND QUARTER 2005 OVERVIEW
AMERICAN EXPRESS BANK (Cont'd)
o AEB remained "well-capitalized".
6/05 3/05 6/04 Well-Capitalized
------------- --------- ---------- --------------------
Tier 1 11.7% 11.0% 12.0% 6.0%
Total 11.1% 10.7% 11.8% 10.0%
Leverage Ratio 6.0% 5.8% 5.9% 5.0%
o ASSETS MANAGED AND ADMINISTERED:
- For the 12 months ended 6/05, growth in managed and administered
assets of $2.8B reflected net asset inflows, market appreciation and a
positive foreign currency translation impact. During 2Q '05, growth in
managed and administered assets of $0.2B reflected net asset inflows,
market appreciation and a negative foreign currency translation
impact.
o LOANS:
- AEB's loans outstanding were $7.0B at 6/05 and 3/05 versus $6.5B at
6/04.
-- Non-CFS loans were $5.6B at 6/05 and 3/05 versus $5.2B at
6/04.
-- CFS loans were $1.4B at 6/05 and 3/05 versus $1.3B at 6/04.
-- % of Total loans:
6/05 3/05 6/04
---------- ---------- ----------
Private Banking loans 49% 48% 46%
Consumer loans 21% 23% 22%
Financial Institution loans 30% 28% 30%
Corporate Banking loans 0% 1% 2%
- 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 $7.6B to
the credit exposures at 6/05, $7.2B at 3/05, and $7.7B at 6/04. Of
the $7.6B of additional exposures at 6/05, $5.3B were cash and
securities related balances.
o ASSET QUALITY:
- Non-CFS loans*:
-- Total non-performing loans were $21MM at 6/05, compared to $28MM
at 3/05 and $50MM at 6/04. The decrease from 6/04 reflects loan
payments and write-offs, partially offset by net downgrades.
-- The loss reserve for non-CFS loans was $46MM at 6/05 compared to
$48MM at 3/05 and $62MM at 6/04, or 216%, 173% and 123% of
non-performing loans, respectively.
- CFS loans*:
-- Both write-off and past due rates improved versus last year.
While the write-off rate rose versus last quarter, the past-due
rate showed some improvement.
6/05 3/05 6/04
---------- ---------- ----------
Net write-off rate 3.2% 3.0% 4.0%
30+ days past due as a % of loans 4.2% 4.3% 5.5%
-- Coverage of past due accounts remained strong despite a decline
in the reserve balance versus last year and last quarter.
6/05 3/05 6/04
---------- ----------- ----------
Reserves (MM) $31 $35 $41
% of total CFS loans 2.3% 2.6% 3.1%
% of 30+ day past due accounts 54% 59% 57%
- Other non-performing assets were $1MM at 6/05 and 3/05 versus $2MM at 6/04.
* For non-performing loan definitions and write-off policies, please
refer to AEB's Selected Statistical Information pages within the
Second Quarter 2005 Earnings Release.
-15-
INFORMATION RELATING TO FORWARD LOOKING STATEMENTS
This supplement 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 following: the Company's ability to complete the planned spin-off of
its AEFA business unit, which is subject to final approval by the Company's
Board of Directors, the receipt of necessary regulatory approvals and a
favorable tax ruling and/or opinion from counsel, and in connection with the
proposed spin-off, the Company's ability to capitalize AEFA consistent with
rating agency requirements and to manage transition costs and implement
effective transition arrangements with AEFA on a post-completion basis; 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; consumer and business spending on the Company's travel
related services products, particularly credit and charge cards and Travelers
Cheques and other prepaid products and growth in card lending balances, which
depend in part on the ability to issue new and enhanced card and prepaid
products, services and rewards programs, and increase revenues from such
products, attract new cardmembers, reduce cardmember attrition, capture a
greater share of existing cardmembers' spending, sustain premium discount
rates on its card products in light of regulatory and market pressures,
increase merchant coverage, retain cardmembers after low introductory lending
rates have expired, and expand the global network services (GNS) business; the
Company's ability to introduce new products, reward program enhancements and
service enhancements on a timely basis during the latter half of 2005 and the
first half of 2006; the success of the GNS business in partnering with banks
in the United States, which will depend in part on the extent to which such
business further enhances the Company's brand, allows the Company to leverage
its significant processing scale, expands merchant coverage of the network,
provides U.S. GNS bank partners the benefits of greater cardmember loyalty and
higher spend per customer, and merchant benefits such as greater transaction
volume and additional higher spending customers; the continuation of favorable
trends, including increased travel and entertainment spending and the overall
level of consumer confidence; successfully cross-selling financial, travel,
card and other products and services to the Company's customer base, both in
the United States and abroad; the Company's ability to generate sufficient
revenues for expanded investment spending, and the ability to capitalize on
such investments to improve business metrics; the costs and integration of
acquisitions; the success, timeliness and financial impact (including costs,
cost savings and other benefits including increased revenues), and beneficial
effect on the Company's operating expense to revenue ratio, both in the
short-term and over time, 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 expenses as
business expands or changes, including the ability to accurately estimate the
provision for the cost of the Membership Rewards program; the Company's
ability to manage credit risk related to consumer debt, business loans,
-16-
merchant bankruptcies and other 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; 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; 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; 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 $75
million to Delta; AEFA's ability to improve investment performance, including
attracting and retaining high-quality personnel, and reduce outflows of
invested funds; AEFA's ability to develop and introduce 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; 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, and the level of guaranteed minimum death benefits paid
to clients; changes in assumptions relating to DAC, which could impact the
amount of DAC amortization; changes in federal securities laws affecting the
mutual fund industry, including possible enforcement proceedings and the
adoption of rules and regulations designed to prevent trading abuses, restrict
or eliminate certain types of fees, change mutual fund governance and mandate
additional disclosures, and the ability to make the required investment to
upgrade compliance systems and procedures in response to these changes; AEFA's
ability to avoid deterioration in its high-yield portfolio in order to
mitigate losses in its investment portfolio; fluctuations in foreign currency
exchange rates; fluctuations in interest rates, which impact the Company's
borrowing costs, return on lending products and spreads in the insurance,
annuity and investment certificate products; accuracy of estimates for the
fair value of the assets in the Company's investment portfolio and, in
particular, those investments that are not readily marketable, including the
valuation of the interest-only strip relating to TRS' lending securitizations;
the amount of recovery under the Company's insurance policies for losses
resulting from the September 11th terrorist attacks; 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; 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; changes
in laws or government regulations, including changes in tax laws or
regulations that could result in the elimination of certain tax benefits;
outcomes and costs associated with litigation and compliance and regulatory
matters; deficiencies and inadequacies in the Company's internal control over
financial reporting, which could result in inaccurate or incomplete financial
reporting; and competitive pressures in all of the Company's major businesses.
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,
2004, and its other reports filed with the SEC.
-17-