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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NO. 1-7657
AMERICAN EXPRESS COMPANY
(Exact name of registrant as specified in its charter)
NEW YORK 13-4922250
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
WORLD FINANCIAL CENTER
200 VESEY STREET
NEW YORK, NEW YORK 10285
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 640-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- --------------------------------------------- ----------------------------
Common Shares (par value $0.20 per Share) New York Stock Exchange
Boston Stock Exchange
Chicago Stock Exchange
Pacific Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value, as of June 30, 2004, of voting shares held by
non-affiliates of the registrant was approximately $64.0 billion. Common shares
of the registrant outstanding at February 28, 2005 were 1,248,000,259.
DOCUMENTS INCORPORATED BY REFERENCE
Parts I, II and IV: Portions of Registrant's 2004 Annual Report to Shareholders.
Part III: Portions of Registrant's Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the Annual Meeting of
Shareholders to be held on April 27, 2005.
TABLE OF CONTENTS
FORM 10-K
ITEM NUMBER
PART I PAGE
1. Business.................................................................................. 1
Introduction.......................................................................... 1
Travel Related Services............................................................... 3
American Express Financial Advisors................................................... 33
American Express Bank................................................................. 61
Corporate and Other................................................................... 73
Foreign Operations.................................................................... 76
Important Factors Regarding Forward-Looking Statements................................ 76
Segment Information and Classes of Similar Services................................... 82
Executive Officers of the Company..................................................... 82
Employees............................................................................. 84
2. Properties................................................................................ 84
3. Legal Proceedings......................................................................... 85
4. Submission of Matters to a Vote of Security Holders....................................... 91
PART II
5. Market for Company's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities........................................................ 91
6. Selected Financial Data................................................................... 93
7. Management's Discussion and Analysis of Financial Condition and Results of Operation...... 93
7A. Quantitative and Qualitative Disclosures About Market Risk................................ 93
8. Financial Statements and Supplementary Data............................................... 93
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...... 93
9A. Controls and Procedures................................................................... 93
9B. Other Information......................................................................... 94
PART III
10. Directors and Executive Officers of the Company........................................... 94
11. Executive Compensation.................................................................... 94
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters................................................................... 94
13. Certain Relationships and Related Transactions............................................ 94
14. Principal Accounting Fees and Services.................................................... 95
PART IV
15. Exhibits and Financial Statement Schedules............................................... 95
Signatures................................................................................ 96
Index to Financial Statements............................................................. F-1
Consent of Independent Auditors........................................................... F-2
Exhibit Index............................................................................. E-1
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PART I*
ITEM 1. BUSINESS
INTRODUCTION
Overview
American Express Company, together with its consolidated subsidiaries
("American Express", the "Company", "we", "us" or "our"), is a leading provider
of travel related services, payment services, financial advisory services and
international banking services throughout the world. We were founded in 1850 as
a joint stock association. We were incorporated in 1965 as a New York
corporation.
Our headquarters are located in New York, New York in lower Manhattan. We
also have offices in other locations in North America, as well as throughout the
world. We have three operating segments: Travel Related Services ("TRS"),
American Express Financial Advisors ("AEFA") and American Express Bank ("AEB"),
each of whose businesses we will describe below.
Securities Exchange Act Reports And Additional Information
We maintain an Investor Relations Web site on the Internet at
http://ir.americanexpress.com. We make available free of charge, on or through
this Web site, our annual, quarterly and current reports and any amendments to
those reports as soon as reasonably practicable following the time they are
electronically filed with or furnished to the Securities and Exchange
Commission. To access these, just click on the "SEC Filings" link found on our
Investor Relations homepage.
You can also access our Investor Relations Web site through our main Web
site at www.americanexpress.com by clicking on the "About American Express"
link, which is located at the bottom of our homepage. Information contained on
our Web site is not incorporated by reference into this report or any other
report filed with the SEC.
2004 Highlights
We achieved record revenues and earnings in 2004, driven by growth in our
credit and charge card businesses, gains in our financial services business and
a rebound in travel activity. We began the year with good momentum built during
the latter half of 2003, and as the year progressed, our performance
strengthened.
* Some of the statements in this report constitute forward-looking statements.
In some cases, you can identify forward-looking statements by words such as
"believe," "expect," "anticipate," "optimistic," "intend," "plan," "aim,"
"will," "may," "should," "could," "would," "likely", "estimate," "predict,"
"potential," or "continue" or the negative of these terms or other similar
expressions. We discuss certain factors that may cause our actual results to
differ materially from these forward-looking statements under "Important
Factors Regarding Forward Looking Statements" below.
1
We were able to achieve record revenues and net income while at the same
time continuing to invest in our future by significantly increasing our spending
on business-building activities, which resulted in growth in spending on our
card products and cards-in-force, higher sales and asset levels at AEFA and
higher private banking holdings at AEB.
Compared with 2003, we delivered:
- Revenues of $29.1 billion, up 13% from $25.8 billion
- Net income of $3.4 billion, up 15% from $3.0 billion
- Diluted earnings per share of $2.68, up 17% from $2.30
- Return on equity of 22.0%, compared with 20.6%
These results exceeded our long-term targets of 12% to 15% earnings per
share growth, 8% revenue growth and 18% to 20% return on equity, on average and
over time.
For a complete discussion of our financial results, including financial
information regarding each of our three operating segments, see pages 26-123
of the Company's 2004 Annual Report to Shareholders, which are incorporated
herein by reference. For a summary of the Company and our operating segments,
and a discussion of our principal sources of revenue, see pages 26-29 and
pages 82-84 of the 2004 Annual Report to Shareholders.
Spin-off of AEFA
On February 1, 2005, we announced our intention to pursue a spin-off of
our AEFA operating unit to our shareholders. In the transaction, American
Express shareholders would receive 100% of the common shares of American Express
Financial Corporation ("AEFC"), 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 in the third quarter of 2005, subject to certain conditions.
Upon completion of the spin-off, our shareholders would have a separate
interest in two distinct corporate groups - the American Express group and the
AEFC group. The American Express group would consist primarily of the network,
charge and credit card, Travelers Cheque and prepaid services and travel
businesses of the TRS operating segment. It would also include the consumer
financial services, private banking and financial institutions businesses of the
AEB operating segment. The AEFC group would be comprised primarily of the asset
accumulation and investments and insurance businesses, whose products are
offered principally through AEFA's network of over 12,300 financial advisors.
The two groups would be independent, have separate public ownership, boards of
directors and management. To facilitate AEFC's separation from American Express,
the companies presently intend to continue certain existing arrangements for a
transitional period following completion of the transaction.
At the time of the spin-off, we intend to provide additional capital to
AEFC that will enable it to achieve a senior debt rating that permits it
efficient access to the capital markets. Additionally, American Express intends
to capitalize the AEFC group's insurance business in a manner that would confirm
its current financial strength ratings.
2
Following the spin-off, we plan to raise our return on equity target from
18-20 percent to 28-30 percent, on average and over time, and maintain our
current dividend.
We anticipate that we will incur spin-off related expenses associated with
establishing an independent company. Cumulatively, these expenses could be
significant. We expect to disclose these transitional operating expenses in our
future filings with the SEC, as well as in the announcements of our quarterly
results.
The spin-off is subject to conditions, including the necessary regulatory
approvals, the receipt of a favorable tax ruling from the Internal Revenue
Service and/or a favorable tax opinion from outside counsel and final approval
by our Board of Directors. We have not yet determined the final terms of the
transaction and plan to disclose these in our future filings with the SEC.
This report describes American Express as presently structured and
operated. Where appropriate, we make reference to the proposed spin-off
transaction.
TRAVEL RELATED SERVICES
The TRS operating segment includes our card, merchant, network, Travelers
Cheque and travel businesses. It provides a variety of products and services
worldwide, including, among others:
- - global card network services;
- - charge card and credit cards for consumers and businesses worldwide;
- - consumer and small business lending products;
- - American Express(R) Travelers Cheques and prepaid card products;
- - business expense management products and services;
- - business travel and travel management services;
- - consumer travel services;
- - merchant acquiring and transaction processing;
- - point-of-sale and back-office products and services for merchants;
- - tax, accounting and business consulting services; and
- - magazine publishing.
In certain countries we have granted licenses to partially-owned affiliates and
unaffiliated entities to offer some of these products and services.
Our general purpose card network and card issuing businesses are global in
scope. We are a world leader in providing charge and credit cards to consumers,
small businesses and corporations. American Express(R)-branded Cards ("Cards")
are currently issued in over 45 currencies. This includes Cards issued by
third-party banks and other institutions. In 2004, TRS' worldwide billed
business (spending on American Express cards, including our branded cards issued
by third parties) was $416 billion, with approximately $111 billion coming from
Cardmembers domiciled outside the United States. Our Cards permit Cardmembers to
charge purchases of goods and services in most countries around the world at the
millions of merchants that accept cards bearing our logo. TRS added a net total
of 4.9 million cards in 2004, bringing
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total worldwide cards-in-force to 65.4 million (including our branded Cards
issued by third parties).
We believe that our "spend-centric" business model (in which we focus
primarily on generating revenues by driving spending on our Cards and
secondarily by finance charges and fees) has significant competitive advantages.
Card issuers generate the majority of their income through some combination of
customer spending (which generates payments from merchants for card
transactions), lending (which generates finance charges on revolving credit
balances) and customer fees. We have strength in all three revenue streams, and
we have a competitive edge in spending. On average, U.S. Cardmembers spend about
four times as much on their American Express Cards as they do on other cards.
For merchants, our Cardmembers' higher spending represents greater value to them
in the form of higher sales and loyal customers, which gives us the ability to
earn a premium discount rate. As a result, we can generate higher revenues from
spending and have the flexibility to offer more attractive rewards and other
incentives to keep customers spending more on their Cards. This, in turn, drives
more business to merchants that accept our Card products. This business model
gives us a competitive advantage that we seek to leverage to provide more value
to Cardmembers, merchants and Card-issuing partners.
TRS' business as a whole has not experienced significant seasonal
fluctuations, although travel sales tend to be highest in the second quarter;
Travelers Cheque sales and Travelers Cheques outstanding tend to be greatest
each year in the summer months, peaking in the third quarter; and Card-billed
business tends to be moderately higher in the fourth quarter than in other
quarters.
TRS places significant importance on its trademarks and servicemarks and
diligently protects its intellectual property rights around the world.
GLOBAL NETWORK SERVICES
TRS operates a global general purpose charge and credit card network
through its Global Network Services ("GNS") business. Network functions include
operations, service delivery, systems, authorization, clearing, settlement and
brand advertising and marketing; the development of new and innovative products
for the network; and establishing and enhancing relationships with merchants
globally, both online and offline.
Since May 1996, we have been pursuing a strategy of inviting U.S. banks
and other institutions to issue American Express-branded cards on the American
Express merchant network, building on a business strategy we have implemented
successfully in a number of countries outside the United States, where we have
many banks and other financial institutions issuing Cards on the American
Express network. By leveraging our global infrastructure and the appeal of the
American Express brand, we aim to broaden our Cardmember and merchant base for
our network worldwide. Our GNS business has established 87 card-issuing or
merchant acquiring partnership arrangements with banks and other institutions in
over 95 countries.
A key asset of our merchant network is the American Express brand, which
is one of the world's most highly recognized and respected brands. Cards bearing
our logo are issued by TRS
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and by qualified licensed institutions, and are accepted at all merchant
locations worldwide that accept American Express-branded Cards. In addition,
depending on the product, Cards bearing our logo may also be accepted at all ATM
locations worldwide that accept American Express-branded cards. TRS issues the
vast majority of Cards on our network.
GNS focuses on partnering with qualified third-party financial
institutions to issue American Express-branded Cards accepted on our global
merchant network. While TRS' network arrangements are customized to the
particular market and partner requirements, as well as to our strategic plans in
that marketplace, all GNS partnerships are designed to help our partners develop
products for their highest-spending and most affluent customers and to support
the value of American Express Card acceptance to merchants. We choose GNS
partners who share a core set of attributes such as commitment to high quality
standards, strong marketing expertise and compatibility with the American
Express brand, and we require our GNS partners to adhere to our product, brand
and service standards.
Our GNS arrangements fall into three main categories. The first and most
common type of GNS partnership arrangement is known as a network card license
("NCL") (which we formerly referred to as a non-proprietary license). At the end
of 2004, we had 45 of these arrangements in place. In an NCL arrangement, we
grant the partner a license to issue American Express-branded cards. We
generally pursue these arrangements in markets where we already have a strong,
well-established local business. In an NCL arrangement, American Express
maintains the responsibility to acquire and service the merchants in the local
market that accept Cards. Our NCL partner owns the customer relationships for
all Cards it issues, provides service, billing and credit management, and
designs the Card product features, subject to meeting certain standards. We
operate the merchant network and route and process Card transactions from the
merchant's point of sale through submission to the issuing partner, and settle
with issuing partners. The NCL is the model that we are discussing with banks in
the United States. Examples of NCL arrangements include our partnerships with
MBNA America Bank, N.A. ("MBNA") and Banco Popular in Puerto Rico.
GNS' revenues in NCL arrangements are derived from the level of Cardmember
spending, royalties and fees charged to the Card issuer based on charge volume,
and our provision of value-added services for the issuer's cards such as
Cardmember insurance products and other Card features and benefits. As indicated
above, the NCL partner bears the credit risk for the issued Cards, as well as
the Card marketing and acquisition costs, fraud costs and costs of rewards and
other loyalty initiatives. We bear the risk arising from the GNS partner's
potential failure to meet its settlement obligations to us. We mitigate this
risk by selecting GNS partners whom we believe are financially sound and will
meet their obligations, and by monitoring our GNS partners' financial health,
their compliance with the terms of their relationship with us and the political
and economic environment in which they operate. In addition, we generally
require GNS partners to post a letter of credit, bank guarantee or other
collateral to reduce this risk.
The second type of GNS partnership is known as an independent operator
("IO") arrangement. As of the end of 2004, we had over 30 of these arrangements
around the world. Under this type of arrangement, our bank partner issues local
currency Cards in the particular market(s) in which it is located and also
serves as the local merchant acquirer and processor.
5
Our local IO partner owns the customer relationships and credit risk for the
issued Cards, and makes the decisions about which customers will be issued
Cards. GNS' sources of revenues in IO arrangements include fees paid by the IO
partner that are largely driven by the number of Cards issued by our IO
partners, by the subsequent spending on those Cards and by total charge volume
on all Cards at merchants with whom the GNS partner has an agreement to accept
our branded Cards. Our IO partner is responsible for transaction authorizations,
billing, pricing, Cardmember servicing and funding Card receivables. In
addition, all issuers on the American Express network benefit from the expanded
merchant coverage driven by our IO partner, which accommodates inbound spending
by Cardmembers from other parts of the world. That, in turn, generates
additional revenue for the issuer in the Cardmember's home market.
We typically establish IO arrangements in markets where we have not built
a significant local currency Card business of our own. The IO partner's local
presence and relationships help the American Express network reach merchant
coverage goals more quickly, and operate at economic scales and cost levels that
would be difficult for us to achieve on our own. Examples of countries where we
have entered into IO arrangements include Denmark, Ecuador, Pakistan, Croatia,
Peru and Vietnam.
The third type of GNS partnership is a joint venture. We have utilized
this type of arrangement in Switzerland, Belgium and several other countries. In
these markets, TRS joins with a third party to establish a separate business in
which TRS has a significant ownership stake. The joint venture typically signs
new merchants to the American Express network and issues local currency Cards
locally that carry our logo. In a joint venture arrangement, the joint venture
assumes the Cardmember credit risk, and bears the operating and marketing costs.
The economics of the joint venture are similar to our proprietary card issuing
business, which we discuss below under "Consumer Card, Small Business and
Consumer Travel Services," and we receive a portion of the joint venture's
income depending on the level of our ownership interest.
Gross revenues we receive per dollar spent on a Card issued by a GNS
partner are lower than those from our proprietary card issuing business.
However, because the GNS partner is responsible for most of the operating costs
and risk of its card issuing business, our expenses are lower than those in our
proprietary card issuing business. The GNS business model generates an
attractive earnings stream and risk profile that requires a lower level of
capital support. The return on equity in our GNS business can thus be
significantly higher than that of our proprietary card issuing business. Because
the majority of GNS costs are fixed, the GNS business is highly scalable. GNS
partners benefit from their association with the American Express brand and
their ability to gain attractive revenue streams and expand and differentiate
their product offerings with innovative marketing programs.
In 2004, we signed new GNS relationships with 14 financial institutions.
GNS partners launched a total of 67 new products during 2004, bringing the total
number of American Express-branded GNS partner products to over 400. During the
year, we also implemented two arrangements outside the United States in which
the GNS partner acts as the local merchant acquirer in a particular market, but
does not issue Cards.
6
Some of the highlights of our GNS business outside the United States in
2004 include:
- an agreement with the Industrial & Commercial Bank of China, the
largest bank in China (with 20,000 branch locations), to issue the
first American Express-branded credit cards in China, denominated in
both local Chinese currency and U.S. dollars, including the first
issuance of those Cards in December 2004;
- an agreement with CorpBanca in Chile to issue American
Express-branded Gold charge and credit cards denominated in Chilean
pesos and U.S. dollars;
- a partnership with Westpac Banking in Australia to issue the
cobranded Altitude American Express Credit Card, a companion card to
qualified Westpac Altitude cardmembers;
- the launch of two SN Brussels Airlines American Express Charge Cards
from SN Brussels Airlines and our joint venture partner, Fortis
Bank, which combines the features of the American Express Card with
the benefits of SN Brussels Airlines frequent flyer program.
In addition, we entered into an agreement with HSBC Bank International Limited
to market HSBC-branded American Express International Currency Gold and Platinum
charge cards in both Euros and U.S. dollars to HSBC's offshore banking
customers.
In contrast to the situation outside the United States, where banks and
other qualified institutions have issued Cards on our network for many years,
until 2004 no major U.S. banks had issued Cards in the United States on the
American Express global merchant network. This situation was the result of rules
and policies of Visa U.S.A. and Visa International Service Association
(together, "VISA") and MasterCard, Incorporated and MasterCard International,
Inc. (together, "MasterCard") in the United States, which mandated expulsion of
members who issued American Express-branded cards. No bank was willing to risk
forfeiting membership in VISA and/or MasterCard to issue cards on our network.
In a lawsuit filed in October 1998 against VISA and MasterCard, the U.S.
Department of Justice alleged that these rules and policies violated the
antitrust laws of the United States. The lawsuit went to trial in the summer of
2000, and in October 2001, the trial judge ruled in favor of the U.S. Department
of Justice, holding that these rules and policies violate the antitrust laws.
VISA and MasterCard appealed the decision and were able to obtain a stay of the
court's judgment throughout the appeals process.
After the U.S. Court of Appeals for the Second Circuit affirmed the trial
court's decision, we renewed our discussions with banks about establishing NCL
partnership arrangements in the United States. In January 2004, we announced an
agreement with MBNA under which MBNA would issue American Express-branded Cards
in the United States once the legal process was concluded and the restrictive
rules were finally struck down.
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In October 2004, the Supreme Court declined to hear VISA's and
MasterCard's appeal. This decision marked the end of the VISA and MasterCard
rules that prevented their member banks from issuing cards on competitive
networks and cleared the way for implementation of the trial court's order
requiring the repeal of the illegal rules. We view this decision as a major
victory for U.S. consumers as well as U.S. banks because it opens the door to
more vigorous network competition and more innovative card products and
services.
For American Express, the Supreme Court's decision means that we are now
able to open our network to other card issuers in the United States, just as we
have done internationally. Building a network business in the United States that
operates in addition to our proprietary card business provides us with new and
substantial opportunities for growth.
In early November 2004, MBNA launched its first American Express-branded
credit cards through more than 1,000 affinity groups affiliated with MBNA,
including alumni associations, professional groups and recreational and
philanthropic organizations. In December 2004, we announced an agreement with
Citibank (South Dakota) to issue cards that will be accepted on our global
merchant network. We expect that Citibank will begin to issue American
Express-branded cards in the fourth quarter of 2005.
In November 2004, we filed a lawsuit against VISA, MasterCard and certain
of their member banks seeking monetary damages resulting from the illegal rules
that were struck down in the U.S. Department of Justice lawsuit discussed above.
(You can read more about this lawsuit in the "Legal Proceedings" section of this
report below.)
With more than 400 different card products launched so far by our bank
partners, GNS is an increasingly important business that is strengthening our
market presence, driving more transaction volume onto our merchant network and
increasing the number of merchants accepting the American Express Card. Since
the creation of the GNS business unit, GNS partners have added over 8.6 million
new Cards to our network (net of attrition). Since 1999, Cards-in-force issued
by GNS partners have grown at a compound annual growth rate of 25%. Outside the
United States, one of every two cards acquired in 2004 was a card issued by one
of our GNS partners, and GNS partners brought nearly one of every three
merchants into our network. Spending on these Cards has grown at a compound
annual rate of 18% since 1999 and totaled more than $17.7 billion in 2004.
Local government regulations governing the issuance of charge and credit
cards have not been a significant factor impacting TRS' arrangements with banks
and qualifying financial institutions in any country in which such arrangements
exist, because such banks and institutions generally are already licensed to
issue general purpose cards. Accordingly, our GNS partners have generally not
had difficulty in obtaining appropriate government authorization in the markets
in which TRS has chosen to enter into GNS partnership arrangements.
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Competition
Our network competes with other card networks, including, among others,
VISA, MasterCard, Diners Club (which, in the United States, is being folded into
the network operated by MasterCard), Discover Business Services, a business unit
of Morgan Stanley (primarily in the United States), and JCB Co., Ltd. (primarily
in Asia). The principal competitive factors that affect the network business
include:
- the number of cards in force and amount of spending on these cards;
- the quantity and quality of the places where the cards can be used;
- the economic attractiveness to card issuers and merchant acquirers
of participating in the network;
- the success of marketing and promotional campaigns;
- reputation and brand recognition;
- innovation in systems, technology and product offerings; and
- the quality of customer service.
GLOBAL ESTABLISHMENT SERVICES
TRS operates a global merchant services business, which includes signing
merchants to accept our branded Cards (merchant acquisition) and accepting and
processing Card transactions and paying merchants (transaction processing) that
accept Cards for purchases made by Cardmembers with Cards ("Charges"). TRS also
provides point-of-sale and back office products and services to merchants.
Our objective is to achieve merchant coverage so that Cardmembers are able
to use the Card wherever and however they desire, as well as to increase
coverage in key geographic areas and in new industries that have not, to date,
accepted general purpose credit and charge cards as a means of payment. We add
new merchants to our network through a number of sales channels: a proprietary
sales force, third-party sales agents, strategic alliances with banks, the
Internet, telemarketing and inbound "Want to Honor" calls (i.e., merchants
desiring to accept the Card contacting us directly).
Since the early 1990's, we have significantly expanded the number of
merchants that accept our card products as well as the kinds of businesses that
accept the Card. In recent years, we have focused our efforts on increasing the
use of our Cards for everyday spending. In 1990, 65% of our U.S. billings came
from the travel and entertainment sectors and 35% came from retail and other
sectors. That proportion has now been more than reversed. In 2004, U.S.
non-travel and entertainment billings represented 67% of the U.S. billed
business on American Express Cards. This shift resulted from the growth, over
time, in the types of merchants who began to accept charge and credit cards in
response to consumers' increased desire to use these cards for more of their
purchases, and our focus on expanding Card acceptance to meet Cardmembers'
needs. In recent years, this shift was important because of a decrease in
spending in travel and entertainment resulting from the overall economic and
political environment.
During 2004, TRS continued its ongoing efforts to encourage consumers to
use the Card for everyday spending. TRS continued to increase the number and
types of merchants in retail
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and everyday spending categories that accept the Card, such as quick-serve
restaurants, retail stores, supermarkets and gas stations.
Key signings of merchants in 2004 brought Card acceptance to industries
where cash or checks are the predominant form of payment. For example, TRS
signed agreements this past year with Transport for London Underground, Metrogas
Utilities in Argentina, Sigma Pharmaceuticals in Australia and Safeway Inc. and
Allstate Group in the United States. In addition, Card acceptance at hotels and
conference centers for business meetings and events, business-to-business
purchases and apartment rentals are other examples of new industries in which
the Card is now accepted, and which have the potential to contribute to
increasing our average Cardmember spending.
As in prior years, during 2004, we continued to grow merchant acceptance
of our card products around the world and to refine our approach to calculating
merchant coverage in accordance with changes in the marketplace. Globally,
acceptance of general purpose charge and credit cards continues to increase,
including among merchants in industries that have not traditionally accepted
charge and credit cards. Additionally, as our GNS partners help grow merchant
acceptance in their local markets, and as American Express Card issuance expands
in emerging markets outside the United States, we have begun to include merchant
coverage information data from GNS merchant acquirers and from these emerging
markets. As a result of this refined approach, management estimates that, as of
the end of 2004, TRS' merchant network in the United States accommodated more
than 90% of Cardmembers' general purpose charge and credit card spending, and
our international merchant network accommodated over 80% of our Cardmembers'
general purpose charge and credit card spending.
We earn "discount" revenue from fees charged to merchants for accepting
Cards as payment for goods or services sold. The merchant discount is the fee
charged to the merchant for accepting Cards and is generally expressed as a
percentage of the amount charged on a Card. The merchant discount rate is
generally deducted from the amount of the payment that the "merchant acquirer"
(in most cases, TRS) pays to a merchant for charges submitted. A merchant
acquirer is the entity that contracts for Card acceptance with the merchant,
accepts transactions from the merchant, pays the service establishment for these
transactions and submits the transactions through the American Express network
to the appropriate Card issuer for billing to the cardmember. When a cardmember
presents the Card for payment, the merchant creates a record of charge for the
transaction and submits it to the merchant acquirer for payment. The merchant
discount is generally deducted from payment to the service establishment where
TRS is the merchant acquirer and is recorded by us as discount revenue at the
time the transaction is captured. Where we act as the merchant acquirer and the
Card presented at a merchant is issued by a third-party bank or financial
institution, such as in the case of some of our GNS partnership arrangements, we
will make financial settlement to the merchant and receive the discount revenue.
We will also receive financial settlement from the Card issuer, who receives an
issuer rate (i.e., the amount that card issuers receive for transactions charged
on our network with Cards that they issue, which is usually expressed as a
percentage of the charged amount). The difference between the discount revenue
and the issuer rate generates a return to the network. Where we are the Card
issuer and the merchant acquirer is a third-party bank or financial institution,
we receive an issuer rate in our settlement with the merchant acquirer.
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The level of the merchant discount rate that we charge is principally
determined by the value we deliver to the merchant and generally represents
a premium over other card networks. We deliver value to the merchant through
higher spending Cardmembers relative to cards issued on competing card networks,
the overall higher volume of spending by all Cardmembers, marketing programs and
the insistence of Cardmembers to use their Cards when enrolled in rewards or
other Card loyalty programs.
The merchant discount rate varies with the industry in which the merchant
does business, the charge volume, the timing and method of payment to the
merchant, the method of submission of charges and, in certain instances, the
scope of the Card acceptance agreement signed with us (local or global), and the
average charge amount. In 2004, as in prior years, we have experienced some
reduction in our global weighted average merchant discount rate, primarily
reflecting the impact of stronger than average growth in the lower rate
"everyday spend" merchant categories. Based on our business strategy, we expect
to see continued changes in the mix of business. This, along with volume-related
pricing discounts and selective repricing initiatives, will likely continue to
result in some erosion over time of the weighted average merchant discount rate.
Over the past few years, VISA and MasterCard have announced a number of
increases in their U.S. credit card interchange rates, which can increase the
cost to merchants of accepting VISA and MasterCard cards.
While most merchants understand our merchant discount rate pricing in
relation to the value provided, we do encounter a relatively small number of
merchants that accept our Cards, but tell their customers that they prefer to
accept another type of payment and, consequently, suppress use of the Card. We
devote significant resources to respond to this issue. We have made progress by:
concentrating on acquiring merchants where Cardmembers want to use the Card;
continuing to enhance the value we provide by programs such as "American Express
Selects", which enables merchants to gain valuable exposure and additional sales
by making online offers, such as discounts on purchases available to Cardmembers
on a Web site maintained by us; providing better and earlier communication of
our value proposition; and when necessary, by canceling merchants who suppress
the use of our Card products.
Merchant satisfaction is a key goal of our Global Establishment Services
business. We focus on understanding and addressing factors that influence
merchant satisfaction, executing programs that increase Card usage at merchants
and strengthening our relationships with merchants through an expanding roster
of services that help them meet their business goals. We offer a full range of
point-of-sale solutions, including terminals, integrated point-of-sale terminals
and direct links that allow our merchant partners to accept American Express
Cards, as well as bankcards, debit cards and checks. All proprietary
point-of-sale solutions support direct processing (i.e., direct connectivity) to
American Express, which lowers a merchant's cost of Card acceptance and avoids
any payment delays caused by a third party. During 2004, we also launched
Business Savings for all U.S. merchants that accept American Express Cards,
which provides them with ways to reduce expenses for office supplies, cellular
phone service, temporary staffing and shipping through pre-negotiated discounts
at select partners.
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We continue to support the fast-growing recurring billing industry through
the Automated Bill Payment platform, a product that allows merchants to bill
Cardmembers on a regular basis for recurring Charges such as insurance premiums,
newspaper subscriptions, health club memberships, commutation costs and cable TV
service. We have also made modifications to our host authorization system to
approve more transactions and reduce Cardmember inconvenience at the
point-of-sale without a corresponding increase in fraud or credit losses.
Wherever we manage both the acquiring relationship with merchants and the
Card-issuing side of the business, there is a "closed loop," which distinguishes
our network from the bankcard networks in that there is access to information at
both ends of the Card transaction. This enables us to provide targeted marketing
for merchants and special offers to Cardmembers through a variety of channels,
subject to applicable legal requirements. We work closely with our Card issuing
bank partners to maintain key elements of this closed loop, which permits them
to customize marketing efforts, deliver greater value to their Cardmembers and
help us to direct increased business to merchants who accept the Card.
As the merchant acquirer, we have certain contingent liabilities that
arise if a billing dispute between a Cardmember and a merchant is settled in
favor of the Cardmember. Drivers of this liability are returns in the normal
course of business, disputes over fraudulent charges, the quality or
non-delivery of goods and services and billing errors. Typically, we offset the
amount due to the Cardmember against the merchant's current or future
submissions for payment. We can realize losses when offsetting submissions
cease, such as when the merchant commences a bankruptcy proceeding or goes out
of business. We actively monitor our merchant base to assess the risk of this
exposure. When appropriate, we will take action to reduce the net exposure to a
given merchant by either holding cash reserves funded through cash holdbacks
from a merchant or lengthening the time between when the merchant submits a
charge for payment and when we pay the merchant. We also establish reserves on
our balance sheet for these contingencies.
In some markets outside the United States, particularly in the United
Kingdom, third party processors and some bankcard acquirers have begun to offer
merchants the capability of converting credit card transactions from the local
currency to the currency of the cardholder's residence (i.e., the cardholder's
billing currency) at the point-of-sale, and submitting the transaction in the
cardholder's billing currency, thus bypassing the traditional foreign currency
conversion process of the card network. This practice is known as "dynamic
currency conversion." If a merchant utilizes a dynamic currency conversion
process, the merchant and processor share any fee assessed or spread earned for
converting the transaction at the point of sale, thus reducing or eliminating
revenue for card issuers and card networks relating to the conversion of foreign
charges to the cardholder's billing currency. This practice is not widespread,
and it is uncertain to what extent consumers will prefer to have foreign
currency transactions converted by merchants in this way. Our policy generally
requires merchants to submit charges and be paid in the currency of the country
in which the transaction occurs, and we convert the transaction to the
Cardmember's billing currency. We are reviewing the potential impact of dynamic
currency conversion, including considering whether and to what extent we should
develop our own dynamic currency conversion process.
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Regulation
In recent years, regulators in several countries have focused on the fees
involved in the operation of card networks, including the fees merchants
are charged to accept cards. Regulators in the United Kingdom, European Union,
Australia, Mexico and Switzerland, among others, have conducted, and are
continuing to conduct, investigations into the way bankcard network members
collectively set the "interchange," which is the fee paid by the bankcard
merchant acquirer to the card-issuing bank. The interchange fee is generally the
largest component of the merchant discount rate charged to merchants by the
merchant acquirer for bankcard charges. Although the regulators' focus has
primarily been on VISA and MasterCard as the dominant card networks, government
regulation of the bankcard associations' pricing could ultimately affect all
card service providers by requiring reduction of the levels of interchange,
which will drive down merchant discount rates. Downward movement of interchange
and merchant discount fees may affect the relative economic attractiveness to
card issuers and merchant acquirers of participation in a particular network.
Loss of merchant discount revenue may lead card service providers to look for
other sources of revenue such as annual card fees, as well as to reduce costs by
scaling back or eliminating rewards programs. Reductions in bankcard interchange
mandated by the Reserve Bank of Australia in 2003 have resulted in lower
merchant discount rates for VISA and MasterCard. As a result of changes in the
marketplace, we have reduced our own merchant discount rates in Australia
although we continue to believe that we have strong economics in that market. In
addition, under legislation recently enacted in Argentina, a merchant acquirer
is required to charge the same merchant discount rate to all merchants in the
same industry category, and merchant discount rates cannot exceed 3%. In the
event governmental or regulatory activity to limit interchange continues or
increases, our revenues and profitability could be adversely affected.
Regulators have also considered the industry practice of prohibiting
merchants from passing the cost of merchant discount fees along to consumers
through surcharges on card purchases. Although some countries, such as the
United Kingdom, and more recently, Australia, permit merchants to levy a
surcharge on credit card purchases, there has been a relatively low incidence of
surcharging, as merchants do not want to risk offending customers or losing
customers to those competitors that do not assess surcharges for credit card
purchases.
CONSUMER CARD, SMALL BUSINESS AND CONSUMER TRAVEL SERVICES
As a significant part of its proprietary Card issuing business, TRS issues
a wide range of Card products and services to consumers around the world and to
small businesses primarily in the United States. Our consumer travel business,
which provides travel services to Cardmembers and other consumers, complements
our Card business. The proprietary Card business offers a broad set of card
products to attract a greater number of customers. Core elements of our strategy
are:
- focusing on acquiring and retaining high-spending, creditworthy
Cardmembers across multiple groups;
- designing card products with features that appeal to specific
customer segments;
- the use of strong incentives to drive spending on our various card
products, including our Membership Rewards(R) program and other
rewards features;
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- the use of loyalty programs such as Delta SkyMiles, sponsored by our
cobrand and other partners to drive spending;
- the development and nurturing of wide-ranging relationships with
cobrand and other partners;
- a multi-card strategy (having multiple card products in customers'
wallets); and
- high-quality customer service.
We and our licensees offer individual consumer charge cards such as the
American Express Card, the American Express(R) Gold Card, the Platinum Card(R),
and the ultra-premium Centurion(R) Card; revolving credit cards such as Blue
from American Express(R), Blue Cash(R) from American Express and the Optima(R)
Card, among others; and a variety of cards sponsored by and cobranded with other
corporations and institutions, such as the Delta SkyMiles(R) Credit Card from
American Express, the American Express(R) Platinum Cash Rebate Card and True
Earnings Card exclusively for Costco Members and the Hilton HHonors Platinum
Credit Card from American Express.
Charge Cards
Our charge Cards, which are marketed in the United States and many other
countries and carry no pre-set spending limits, are primarily designed as a
method of payment and not as a means of financing purchases of goods or
services. Charges are approved based on a variety of factors including a
Cardmember's account history, credit record and personal resources. Cardmembers
generally must pay the full amount billed each month, and no finance charges are
assessed. Charge card accounts that are past due are subject, in most cases, to
a delinquency assessment and, if not brought to current status, may be canceled.
The no-preset-spending limit and pay-in-full nature of these products attract
high-spending Cardmembers who want to use a charge card to facilitate larger
payments.
The Sign & Travel program gives qualified U.S. Cardmembers the option of
extended payments for airline, cruise and certain travel charges that are
purchased with our charge cards. The Extended Payment Option offers qualified
U.S. Cardmembers the option of extending payment for certain charges on the
Charge Card in excess of a specified amount. Various flexible payment options
are offered to Cardmembers in international markets as well.
Revolving Credit Cards
TRS and its licensees also offer a variety of revolving credit cards in
the United States and other countries. These cards have a range of different
payment terms, grace periods and rate and fee structures. Since late 1994, when
we began aggressively to expand our credit card business, our lending balance
growth has been among the top tier of card issuers. Much of this growth has been
due to the breadth of our lending products, such as Blue from American Express,
Blue Cash from American Express and the Delta SkyMiles Credit Card from American
Express, as well as the increased number of charge Cardmembers who have taken
advantage of our "lending on charge" options (such as the Sign & Travel(R) and
Extended Payment Option programs described above).
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Among other products introduced in 2004, we launched the IN:NYC card, a
fee-free credit card that helps Cardmembers get the most out of New York City by
providing exclusive offers for Cardmembers and double points through a unique
loyalty program, INSIDE REWARDS.
American Express Centurion Bank and American Express Bank, FSB as Issuers of
Certain Cards
Our revolving credit cards in the United States are issued by American
Express Centurion Bank ("Centurion Bank"), and American Express Bank, FSB
("AEBFSB"), each of which is a wholly owned subsidiary of American Express
Travel Related Services Company, Inc. Centurion Bank issues Blue from American
Express, Blue Cash from American Express, the Optima Card, and certain other
American Express-branded revolving credit cards in the United States. In
addition, Centurion Bank has outstanding lines of credit in association with
certain Charge Cards and offers unsecured loans to Cardmembers in connection
with the Sign & Travel and Extended Payment Option programs. Centurion Bank is
also the issuer of certain Charge Cards in the United States.
In 2004, AEBFSB acquired certain credit card accounts and receivables from
Centurion Bank and TRS and home equity loans, deposits and other lending
portfolios from Centurion Bank. In addition, AEBFSB became the issuing bank of
the related American Express charge and credit card accounts, including the
consumer and small business credit cards cobranded with Delta Air Lines and
Costco Wholesale and certain charge cards issued to small business customers.
International Proprietary Card Business
TRS continued to bolster its international proprietary Card business
through the launch of more than 80 new or enhanced Card products during 2004.
These are cards that we issue, either on our own or, as further described below,
as cobrands with partnering institutions. This past year, among other new
proprietary products, we introduced:
- Centurion Cards in The Netherlands, Sweden, France, Italy, Spain and
Australia;
- a Platinum Card in Austria;
- a new American Express Credit Card in Thailand; and
- new Platinum Credit Cards in the Philippines, Puerto Rico, Singapore
and Taiwan.
Cobrand Cards
TRS issues Cards under cobrand agreements with selected commercial firms
both in the United States and internationally. Examples of new or enhanced
cobrand products introduced in 2004 include:
- agreements with Costco Wholesale to issue the True Earnings Card for
consumers and the True Earnings Business Card for small businesses;
- a cobranded credit card with BMW in Thailand;
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- a cobranded charge card with Hotel Okura Co., Ltd., featuring the
Okura Club Point program; and
- a cobranded credit card with Indian Airlines.
During 2004, we also extended our existing cobrand arrangements in the United
States with two of our largest cobrand partners, Delta Air Lines and Costco
Wholesale.
The competition among card issuers and networks for attractive cobrand
card partnerships is quite intense because they can generate high-spending loyal
cardholders. The duration of our cobrand arrangements generally range from five
to ten years. Cardmembers earn rewards provided by the partners' respective
loyalty programs based upon their spending on the cobrand cards, such as
frequent flyer miles, hotel loyalty points and cash back. We make payments to
our cobrand partners, which can be significant, based primarily on the amount of
Cardmember spending and corresponding rewards earned on such spending and, under
certain arrangements, on the number of accounts acquired and retained. We
expense amounts due under cobrand arrangements in the month earned. Payment
terms vary by arrangement, but are monthly or quarterly. Once we make payment to
the cobrand partner, as described above, the partner is solely liable with
respect to providing rewards to the Cardmember under the cobrand partner's own
loyalty program. As the issuer of the cobrand card, we retain all the credit
risk with the Cardmember and bear the receivables funding and operating expenses
with respect to such cards. The cobrand partner retains the risk associated with
the miles, points or other currency earned by the Cardmember under the partner's
loyalty program.
Bank Distribution of Proprietary Cards
We also issue Cards under distribution arrangements with banks, primarily
outside the United States. Such bank distribution agreements involve the
offering of a standard product (issued by TRS or one of its subsidiaries) to
customers of the bank, generally with the bank's logo on the Card. In a bank
distribution arrangement, we make payments to the bank partners that are
primarily based on the number of accounts acquired and retained through the
arrangement and the amount of Cardmember spending on such Cards. The duration of
such arrangements generally ranges from five to seven years.
We also signed an agreement to distribute American Express Platinum and
Gold Cards to customers of Banco Banif, the private banking division of Grupo
Santander in Spain, and a distribution agreement with Alandsbanken in Finland to
distribute American Express-branded products as part of that bank's new Premium
service.
Another example of our distribution partnerships is affinity cards with
fraternal, professional, educational and other organizations. For instance, we
have been successful in penetrating the affinity card segment in Australia,
where we issue cards with the majority of the largest professional associations
in that country. In Australia, affinity cards are a substantial part of our
total revolving portfolio and contribute to our proprietary consumer lending
activities.
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Card Pricing and Account Management
Certain of our Cards, particularly charge Cards, charge an annual fee that
varies based on the type of Card, the number of Cards for each account, the
currency in which the Card is denominated and the country of residence of the
Cardmember. We also offer many revolving credit Cards with no annual fee but on
which we assess finance charges for revolving balances. Depending on the
product, we also charge Cardmember fees to participate in rewards programs, in
respect of account performance (e.g., late fees) or for certain services (e.g.,
additional copies of account statements). We apply standards and criteria for
creditworthiness to each Cardmember through a variety of means both at the time
of initial solicitation or application and on an ongoing basis during the Card
relationship. We use sophisticated credit models and techniques in our risk
management operations and believe that our strong risk management capabilities
provide us with a competitive advantage.
Membership Rewards(R) Program
During 2004, we also continued to expand our U.S. Membership Rewards
program - - the largest program of its kind. Customers enrolled in the
Membership Rewards program earn points toward a variety of travel,
entertainment, and retail rewards. Customers earn one point for virtually every
dollar they spend. Membership Rewards points have no expiration date as long as
the customer maintains a Membership Rewards account with an eligible, enrolled
Card. There is no limit to the number of points earned, and bonus point
opportunities help our customers earn rewards faster. We continued to add new
Membership Rewards partners to the U.S. program, including JetBlue Airways,
Fairmont Hotels, Wyndham Hotels and Resorts, Bloomingdale's, Restoration
Hardware and Benihana. Our Membership Rewards program continues to be an
important driver of Cardmember spending and loyalty.
As in the United States, rewards programs are a strong driver of
Cardmember spending in the international consumer business. We have over 1,200
Membership Rewards partners that participate in our international Membership
Rewards programs with an average of 70 partners in each country; fewer than 30%
of these partners are in the travel industry. Cardmembers can redeem their
points with 35 airlines and over 275 hotel chains. Our non-travel redemption
options include retail - ranging from The Gap to Takashimaya, an upscale
Japanese department store. Other redemption categories include dining, spas,
charities, movie theatres, automobiles, and special events like the MTV Music
Video Awards in Europe. In 2004, we signed 50 new Membership Rewards partners
and continued to enhance our rewards programs in several markets, offering more
flexible choices that enable Cardmembers to redeem points more quickly. In this
vein, during 2004 we launched the Membership Rewards Direct Ticket in New
Zealand, which lowered the amount of money Cardmembers need to spend in order to
earn free travel and allows the Cardmember to redeem points directly with us to
purchase a travel award rather than having to first transfer points to a
Membership Rewards partner. We launched Double Points Membership Rewards in
Indonesia and an enhanced Membership Rewards program in Japan that allows
Cardmembers to carry over their earned Membership Plus points indefinitely.
When a Cardmember enrolled in the Membership Rewards program uses the
Card, we establish balance sheet reserves in connection with estimated future
reward redemptions. When a Membership Rewards program enrollee redeems a reward
using Membership Rewards points, we make a payment to the Membership Rewards
program partner providing the
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reward pursuant to contractual arrangements. Because of higher charge volumes
and greater redemption rates, the expense of the program has increased both in
the United States and internationally over the past several years and continues
to grow. Despite the increasing costs of Membership Rewards as penetration and
usage expand, this program plays a vital role in our profitability. We believe,
based on historical experience, that Cardmembers enrolled in rewards and cobrand
programs yield higher spend, better retention, stronger credit performance and
greater profit for us. By offering a broader range of redemption choices, we
have improved customer satisfaction with the Membership Rewards program and
lowered our average cost per point. We continually seek to contain the overall
cost of the program and make changes to enhance its value to Cardmembers.
Cardmember Special Services and Programs
Throughout the world, Cardmembers have access to a variety of free and
fee-based special services and programs, depending on the type of Cards they
have and their country of residence. We recently introduced American Express
Selects, a new benefit for Cardmembers worldwide, providing shopping, dining and
travel values from merchants in 11 countries. During 2004, we also launched
Identity Theft Assistance, a new benefit available to all Cardmembers at no
extra cost provide dedicated support that can help Cardmembers safeguard their
personal information and determine if their identity has been stolen. Other
special services and programs include:
- - the Membership Rewards program;
- - Global Assist(R) Hotline;
- - Buyer's Assurance Plan;
- - Car Rental Loss and Damage Insurance;
- - Travel Accident Insurance;
- - Purchase Protection Plan;
- - Best Value Guarantee;
- - Emergency Card Replacement;
- - Emergency Check Cashing Privileges;
- - Automatic Flight Insurance;
- - Premium Baggage Protection;
- - Assured Reservations;
- - Online Fraud Protection Guarantee;
- - Credit Card Registry;
- - Credit Bureau Monitoring and Credit Insurance services.
Certain Cards provide Cardmembers with access to additional services, such as a
Year-End Summary of Charges Report.
The Platinum Card, a charge card offered to consumers in the United States
and in virtually all other countries in which we issue Cards, provides access to
additional and enhanced travel, financial, insurance, personal assistance and
other services. We offer the Centurion Card by invitation to consumers in the
United States and 11 other countries. The Centurion Card is an ultra-premium
charge card providing highly personalized customer service and an array of
travel, lifestyle and financial benefits. We send the Customer Relationship
Statements to Personal, Gold, Platinum and Centurion Cardmembers, to communicate
both our and merchants' special offers for products and services.
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Service and Technology Infrastructure
We continue to make significant investments, both in the United States and
internationally, in our card systems and infrastructure to allow faster
introduction and greater customization of products. We also are using technology
to develop and improve our service capabilities to continue to deliver a high
quality customer experience. For example, we maintain a service delivery
platform that our employees use in the card business to support a variety of
customer servicing and account management activities such as account
maintenance, updating of Cardmember information, the addition of new cards to an
account and resolving customer satisfaction issues. In international markets, we
are building flexibility and enhancing our global platforms and capabilities in
revolving credit, our full service banking platform called iWealthview, and
consumer payment options. You can find a description of our arrangement
regarding the outsourcing of many of our technology operations to IBM in the
"Corporate and Other" section of this report.
We continued to leverage the Internet to lower costs and improve service
quality. During 2004, we expanded the number of services and capabilities
available to customers online and increased their utilization. For example,
within the United States, approximately 90% of our card servicing call volume
can now be handled online. We now have more online interactions with U.S.
customers than we do by telephone or in person. Our Online Card sales grew
steadily in 2004 as well.
At year-end, customers enrolled approximately 15 million Cards in our
"Manage Your Card Account Service." This service enables Cardmembers to review
and pay their American Express bills electronically, view and service their
Membership Rewards program accounts and conduct various other functions quickly
and securely online. We now have an online presence in 48 markets.
OPEN: The Small Business Network(SM) from American Express
In addition to its U.S. and international consumer Card businesses, TRS is
also a leading provider of financial services to small businesses (firms that
generally have less than 100 employees and/or sales of $10 million or less), a
key growth area in the United States. OPEN: The Small Business Network from
American Express(SM) ("OPEN") offers small business owners a wide range of
tools, services and savings designed to meet their evolving needs, including
charge and credit cards, access to credit lines and loans up to $100,000,
expense management reporting, enhanced online account management capabilities
and travel services.
During 2004, we continued to expand the breadth of products and services
offered by OPEN. We also introduced the Business Green Rewards Card, Blue
Cash(R) for Business credit card, the Costco TrueEarnings(SM) Business card from
Costco and American Express and new travel benefits for the Executive Business
Card. We also introduced OPEN Savings(SM), a new program for OPEN customers,
offering automatic savings at AT&T, FedEx, Hertz, Staples and others simply by
using their American Express Business card. These savings may be combined with
any existing discounts or offers. In addition, we introduced enhanced electronic
management reports, improved information concerning categories of spend and
limits on supplemental Cards (the ability to set a spending limit on Cards
issued on a cardmember's account to persons authorized by the Cardmember).
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In 2004, we sold the leasing product line of OPEN's small business financing
unit, American Express Business Finance Corporation, with a loan portfolio of
approximately $1.5 billion.
American Express Consumer Travel Network -- USA
The American Express Consumer Travel Network -- USA provides travel,
financial and Cardmember services to consumers through American Express-owned
travel service offices, call centers and participating American Express
Representatives (independently-owned travel agency locations that operate under
the American Express brand). U.S. Consumer Travel has distinguished itself in
the luxury marketplace through its Platinum Travel Services and Centurion Travel
Services, which provide programs such as the International Airline Program,
which offers two-for-one fares on international first and business class
tickets, and the Fine Hotels & Resorts program, a luxury hotel program offering
room upgrades and value-added amenities. Other premium programs developed by
Consumer Travel for Centurion and Platinum cardmembers include Cruise
Privileges, Centurion and Platinum Destinations Vacations and the Private Jets
Program.
In addition, the Consumer Travel business operates a wholesale travel
business in the United States. (A wholesaler purchases inventory, such as hotel
rooms or airline seats, from suppliers and then resells the services to the
customer at retail prices that the wholesaler determines.) Our wholesale travel
business packages American Express Vacations and distributes travel packages
through other retail travel agents, and a cruise subsidiary in the United
States, which markets value-added cruise products called the Mariner's Club.
Consumer Travel also provides Membership Rewards program cruise and tour
fulfillment, fee-free American Express Travelers Cheques, and foreign exchange
services.
In 2004, we enhanced our Consumer Travel Web site with private-label
versions of the Travelocity Inc. booking service for air, hotel and car rental
reservations, and a private-label online cruise booking service from
OurVacationStore.com. Our Web site now offers consumers fares and rates that are
competitive with other leading travel Web sites, along with value-added benefits
for cardmembers, including double Membership Rewards points.
We also attracted 13 new members last year to our representative network,
including Cruise Planner, Inc., the first cruise franchiser to join the American
Express Travel Network.
TRS' worldwide travel network of more than 1,700 retail travel locations
is important in supporting the American Express brand and providing customer
service throughout the world.
Competition
Our proprietary Card business encounters substantial and intense
competition. As a card issuer, we compete in the United States with financial
institutions (such as Citibank, Bank of America, JPMorgan Chase, MBNA and
Capital One Financial) that are members of VISA and/or MasterCard and that issue
general purpose credit cards, primarily under revolving credit plans, on one or
both of those systems, and the Morgan Stanley affiliate that issues the Discover
Card
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on the Discover Business Services network. Internationally, we are also subject
to competition from multinational banks, such as Citibank, HSBC and Banco
Santander, as well as many local banks and financial institutions. Globally, we
view Citibank and HSBC as our strongest competitors as they offer card products
in a large number of markets. We also encounter limited competition from
businesses that issue their own cards or otherwise extend credit to their
customers, such as retailers and airline associations, although these cards are
not generally substitutes for our Cards because of their limited acceptance. As
a result of continuing consolidations among banking and financial services
companies and credit card portfolio acquisitions by major card issuers, there
are now a smaller number of significant issuers and the largest issuers have
continued to grow using their greater resources, economies of scale and brand
recognition to compete.
Competing card issuers offer a variety of products and services to attract
cardholders including premium cards with enhanced services or lines of credit,
airline frequent flyer program mileage credits, cash rebates and other reward or
rebate programs, "teaser" promotional interest rates for both credit card
acquisition and balance transfers, and cobranded arrangements with partners that
offer benefits to cardholders.
Most financial institutions that offer demand deposit accounts also issue
debit cards to permit depositors to access their funds. Use of debit cards for
point-of-sale purchases has grown as most financial institutions have replaced
ATM cards with general purpose debit cards bearing either the VISA or MasterCard
logo. As a result, the volume of transactions made with debit cards in the
United States has continued to increase significantly and, in the United States,
has grown more rapidly than credit and charge card transactions. Debit cards are
marketed as replacements for cash and checks, and transactions made with debit
cards are typically for small dollar amounts. While debit cards may be used
instead of credit and charge cards for certain kinds of transactions, the
ability to substitute debit cards for credit and charge cards is limited because
the consumer must have sufficient funds in his or her demand deposit account to
cover the transaction in question. For example, larger purchases or delayed
purchases may not be appropriate for debit cards. We do not currently issue
point-of-sale debit cards on the American Express merchant network.
The principal competitive factors that affect the card-issuing business
are:
- the features and the quality of the services, including rewards
programs, provided to Cardmembers;
- the number, spending characteristics and credit performance of
Cardmembers;
- the quantity and quality of the establishments that accept a card;
- the cost of cards to Cardmembers;
- pricing, payment and other card account terms and conditions;
- the number and quality of other payment instruments available to
Cardmembers;
- the nature and quality of expense management data capture and
reporting capability;
- the success of targeted marketing and promotional campaigns;
- reputation and brand recognition;
- the ability of issuers to implement operational and cost
efficiencies; and
- the quality of customer service.
21
American Express Consumer Travel competes with traditional "brick and
mortar" travel agents, online travel agents and travel suppliers that distribute
their products to consumers directly via the internet or telephone-based
customer service centers. In recent years we have experienced increasing
competition from online travel agents utilizing the merchant business model
under which the agent receives inventory (hotel rooms, airline seats, car
rentals, destination services) from suppliers at negotiated rates. The agent
then determines the retail price paid by the customer and processes the
transactions as the merchant of record for the transaction. We believe the
merchant model was particularly effective during the years following the
September 11, 2001 terrorist attacks when travel volumes were depressed and
suppliers tended to make greater amounts of their inventory available to
agencies utilizing this model.
New competition has also emerged in the past year in the form of several
software companies that offer robotic searches of other Web sites to direct
consumers to the site that offers the lowest prices according to the customer's
search parameters.
Financing Activities
American Express Credit Corporation, a wholly owned subsidiary of TRS,
along with its subsidiaries ("Credco"), purchases the majority of Charge Card
receivables arising from the use of Cards issued in the United States and in
certain currencies outside the United States. Credco finances the purchase of
receivables principally through the issuance of commercial paper and the sale of
medium- and long-term notes. Centurion Bank and AEBFSB finance their revolving
credit receivables through the sale of short- and medium-term notes and
certificates of deposit in the United States. TRS, Centurion Bank and AEBFSB
also fund receivables through asset securitization programs. The cost of funding
Cardmember receivables and loans is a major expense of Card operations. (You can
find a discussion of TRS' and Centurion Bank's securitization and other
financing activities on pages 26-27, page 35, pages 37-40, page 41, pages 45-47,
and pages 51-56 under the caption "Financial Review," and Note 4 on pages 97-98
of the Company's 2004 Annual Report to Shareholders, which portions we
incorporate herein by reference.)
Regulation
Centurion Bank is a Utah-chartered industrial loan company regulated,
supervised and regularly examined by the Utah Department of Financial
Institutions and the Federal Deposit Insurance Corporation ("FDIC"). Centurion
Bank is an FDIC-insured depository institution. AEBFSB is a federal savings bank
regulated and supervised by the federal Office of Thrift Supervision ("OTS"), a
division of the United States Department of the Treasury. AEBFSB is an
FDIC-insured depository institution. Among the activities of Centurion Bank and
AEBFSB that are regulated at the federal level are their respective anti-money
laundering compliance activities. We have taken steps to maintain compliance
programs for anti-money laundering and other requirements consistent with
applicable standards. You can find a further discussion of the anti-money
laundering initiatives affecting us under "Corporate and Other" below.
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Centurion Bank is subject to the risk-based capital adequacy requirements
promulgated by the FDIC. Under these regulations, a bank is deemed to be well-
capitalized if it maintains a tier one risk-based capital ratio of at least 6%,
a total risk-based capital ratio of at least 10% and a leverage ratio of at
least 5%. Based on Centurion Bank's tier one risk-based capital, total
risk-based capital and leverage ratios, Centurion Bank was considered to be
well-capitalized as of December 31, 2004.
AEBFSB is subject to the risk-based capital adequacy requirements
promulgated by the OTS. Under these regulations, a federal savings bank is
deemed to be well-capitalized if it maintains a tier one risk-based capital
ratio of at least 6%, a total risk-based capital ratio of at least 10%, and a
tier one core capital ratio of at least 5%. Based on AEBFSB's tier one
risk-based capital, total risk-based capital and tier one core capital ratios,
AEBFSB was considered to be well-capitalized at December 31, 2004.
In 2003, AEBFSB and certain of its affiliates received OTS approval to,
among other things, offer certain credit, charge and consumer lending products,
small business loans, mortgages and mortgage-related products and to operate a
transactional Internet site. The implementation of the changes to AEBFSB's
business plan, which provides more flexibility for us, began in the first
quarter of 2004 with the transfer of certain Card accounts and other assets from
Centurion Bank to AEBFSB. AEBFSB continues to provide personal trust, custodial,
agency and investment management services to individual clients of AEFA. AEBFSB
is registered with the SEC as an investment adviser. AEBFSB is authorized to
transact business in all 50 states and the District of Columbia, and utilizes
AEFA as its primary distribution channel for these services.
The charge card and consumer lending businesses are subject to extensive
regulation in the United States, as well as in foreign jurisdictions. In the
United States, the business is subject to a number of federal laws and
regulations, including:
- the Equal Credit Opportunity Act (which generally prohibits
discrimination in the granting and handling of credit);
- the Fair Credit Reporting Act (which, among other things, regulates
use by creditors of consumer credit reports and credit prescreening
practices and requires certain disclosures when an application for
credit is rejected);
- the Truth in Lending Act (which, among other things, requires
extensive disclosure of the terms upon which credit is granted);
- the Fair Credit Billing Act (which, among other things, regulates
the manner that billing inquiries are handled and specifies certain
billing requirements);
- the Fair Credit and Charge Card Disclosure Act (which mandates
certain disclosures on credit and charge card applications); and
- the Electronic Funds Transfer Act (which regulates disclosures and
settlement of transactions for electronic funds transfers including
those at ATMs).
Certain federal privacy-related laws and regulations govern the collection
and use of customer information by financial institutions (see "Corporate and
Other" below). Federal legislation also regulates abusive debt collection
practices. In addition, a number of states, the European Union, and many foreign
countries in which we operate have significant consumer credit protection,
disclosure and privacy-related laws (in certain cases more stringent than the
laws in the United States). The application of bankruptcy and debtor relief laws
affect us to the extent that such laws result in amounts owed being classified
as delinquent and/or charged off as uncollectible. Card issuers and card
networks are subject to anti-money laundering and anti-terrorism legislation,
including, in the United States, the USA PATRIOT Act. (For a discussion of this
legislation and its effect on our business see, "Corporate and Other" below.)
23
Centurion Bank, AEBFSB and our other bank entities are subject to a
variety of laws and regulations applicable to financial institutions. Changes in
such laws and regulations or in the regulatory application or judicial
interpretation thereof could impact the manner in which we conduct our business
and the costs of compliance. The regulatory environment in which our Card and
lending businesses operate has become increasing complex and robust. More
recently, regulators (as well as various consumer advocacy groups) have begun to
focus increasing attention on the types and levels of fees charged by card
issuers for, among other things, late payments, returned checks, payments by
telephone, copies of statements and the like. We regularly review and, as
appropriate, refine our business practices in light of existing and anticipated
developments in laws, regulations and industry trends so we can continue to
manage our business prudently and consistent with regulatory requirements and
expectations.
In January 2003, the Federal Financial Institutions Examination Council
(the "FFIEC"), an interagency body composed of the principal U.S. federal
entities that regulate banks and other financial institutions, issued new
guidance to the industry on credit card account management and loss allowance
practices (the "Guidance"). The Guidance covers five areas: (i) credit line
management, (ii) over-limit practices, (iii) minimum payment and negative
amortization practices, (iv) workout and forbearance practices, and (v) certain
income (fee) recognition and loss allowance practices. The Guidance is generally
applicable to all institutions under the supervision of the federal bank
regulatory agencies that comprise the FFIEC, although it is primarily the result
of the identification by bank regulators in their examinations of other credit
card lenders practices deemed by them to be inappropriate, particularly, but not
exclusively, with regard to subprime lending programs. At present, we do not
have any lending programs that target the subprime market. The Guidance has not
had any material impact on our businesses or practices and we do not believe
that the Guidance will have any material impact on our practices in the future,
nor does the Guidance mandate any changes to our practices.
GLOBAL CORPORATE SERVICES
TRS' Global Corporate Services business ("GCS") helps companies around the
world better manage the costs and processes associated with a range of expenses,
including travel, entertainment and everyday purchases of business products and
services. GCS offers three primary products and services:
- Corporate Card, issued to individuals through a corporate account
established by their employer and designed primarily for travel and
entertainment spending;
- Corporate Purchasing Solutions, an account established by a company
to pay for everyday business expenses such as office and computer
supplies; and
- Business Travel, which helps businesses manage their travel expenses
through a variety of travel-related products and services.
Corporate Card and Corporate Purchasing Solutions
The American Express(R) Corporate Card is a charge card that individuals
may obtain through a corporate account established by their employer for
business purposes. Through the Corporate Card program, companies can manage
their travel, entertainment and purchasing
24
expenses and improve negotiating leverage with suppliers, among other benefits.
We use our direct relationships with merchants to offer Corporate Card clients
superior data about company spending, as well as streamlined dispute resolution.
We issue local currency Corporate Cards in 36 countries, which we distribute
through proprietary operations and partner banks, and international dollar
Corporate Cards in 85 countries. Additionally, with the launch of our Global
Dollar Card offering, we have the capability to offer our products to customers
in over 200 countries. In 2004, we launched the American Express Gold Corporate
Card in Brazil and the Platinum Card in Canada.
Corporate Purchasing Solutions ("CPS") helps large and middle market
companies manage their everyday spending. CPS is used by corporations to buy
everyday goods and services, such as office supplies and industrial supplies and
equipment, in 24 markets around the world. This type of spending by corporations
is less susceptible to economic downturns than traditional travel and
entertainment spending and helps to diversify the spending mix on our Cards.
GCS is a leading provider of expense management services to global,
multinational and large businesses worldwide. GCS established the Global
Business Partnerships group which serves a highly select group of Fortune 100
companies that have globalized their approach to travel and entertainment
expense management and have structured their purchasing requirements in a global
manner to more effectively manage and optimize their investments in travel and
entertainment, as well as everyday corporate expenses.
In addition, our GCS business provides Corporate Card and travel expense
management services to middle market companies (defined in the United States as
firms with annual revenues of $10 million to $1 billion) in developed economies
worldwide, including the United States, Canada, the United Kingdom, France,
Sweden, Germany, Australia, Singapore and Mexico. GCS is focused on continuing
to expand its business with midsize companies, which we believe present us with
significant growth opportunities. Businesses of this size often do not have
corporate card programs. However, once enrolled in the program, midsized
companies, which usually do not have well-defined purchasing programs, will
typically put a significant portion of their business spending (both travel and
entertainment and non-T&E, such as office supplies) on the Card because they can
gain control, savings and employee benefits. In 2004, our GCS business invested
in a wide range of marketing programs and product enhancements, and added sales
staff to generate more Card and travel business with midsize firms. GCS also
offers the Savings at WorkSM program in the United States, as well as similar
programs globally, which provides companies with discounts on everyday products
and services, such as office supplies, and a range of business services.
During 2004, we added or retained several major clients in the United
States and internationally for the Corporate Card, including Johnson & Johnson,
Motorola, ICI, Avaya, Owens Corning, Schering-Plough, Medtronic, and Siemens.
In 2004, we also announced a new business alliance with CorpVat under
which it provides certain value added tax (VAT) recovery services to GCS
commercial card clients. We also announced a new alliance with Deutsche Bank to
launch a jointly-branded Corporate Card and Business Travel Account program to
Deutsche Bank's corporate customers. TRS also
25
entered into a cobrand card alliance with Paradigm Total Salary Management in
Australia for both employees and employers to benefit from outsourced salary
packaging administration.
In addition, in 2004, we entered into an agreement with Navigant
International, Inc., a leading provider of travel management services in the
United States, to distribute our Corporate Cards to its clients in the United
States.
With the increased focus on cost containment by firms, we have experienced
significant growth over the past few years in the Corporate Meeting Card, which
helps U.S.-based companies control company meeting expenses. The Corporate
Meeting Card provides clients with a tool to capture such spending and provides
company meeting planners with a tool to simplify the meetings payment process
and access to data to negotiate with suppliers. GCS also offers the Corporate
Defined Expense Program. This product allows companies to set a maximum amount
to be charged on a Card before expiration and permits them to segregate spending
data for specific purposes on projects. It is designed for companies that want
to allocate funds for a specific purpose, such as employee relocations or
training.
GCS also offers American Express @ Work(R), a secure, web-based suite of
online tools that enables Corporate Card, CPS and Corporate travel customers to
perform account review and servicing and access management reports on a 24/7
basis through a single user interface. This suite helps companies manage
expenses and manipulate spend data more efficiently than offline alternatives,
while decreasing the costs associated with servicing. These products enable
companies to review, combine and manipulate Corporate Card, Corporate Travel and
Corporate Purchasing Solutions data. One of the products also allows companies
to reconcile the data with its internal accounting system.
Competition - Global Commercial Card Business
Competition in the commercial card (Corporate Card and CPS) business is
increasingly intense at both the card network and card issuer levels. At the
network level, Diners Club (which, as mentioned above, is being folded into the
network operated by MasterCard in the United States) remains a significant
global competitor. In addition, both VISA and MasterCard have increased efforts
to support card issuers such as U.S. Bank, JPMorgan Chase, GE Capital Financial
Inc. and Citibank (in the United States and globally), who are willing to build
and support data collection and reporting necessary to satisfy customer
requirements. In the past few years, MasterCard has promoted enhanced web-based
support for its corporate card issuing members, and VISA International supported
the creation of a joint venture by a number of its member banks from around the
world to compete against us and Diners Club for the business of multinational
companies. The key competitive factors in the commercial card business are, in
addition to the factors cited above under "Consumer Card, Small Business and
Consumer Travel Services -- Competition":
- the ability to capture and deliver detailed transaction data and
expense management reports;
- the number and types of businesses that accept the cards;
- pricing;
26
- the range and innovativeness of products and services to suit
business needs
- quality of customer services; and
- global presence.
Global Travel Services
GCS Global Travel Services consists of American Express Business Travel
(BT) and Consumer Travel International & Foreign Exchange Services (CTI&FES).
American Express Business Travel provides travel reservation advice and
booking transaction processing; travel expense management policy consultation;
supplier negotiation and consultation; management information reporting, data
analysis and benchmarking; and group and incentive travel services.
Business Travel services customers directly in 36 key markets worldwide,
of which 31 are proprietary operations and five are managed through joint
ventures. In addition, Business Travel also serves customers in numerous other
markets through franchise partnerships. We continued to expand our global reach
with our 2003 acquisition of Rosenbluth International, the integration of which
was completed in the second half of 2004. We believe that the Rosenbluth
acquisition has helped us expand an advantage over other competitors by
enhancing our servicing capabilities, the integration of superior customer
products and services, adding high performing talent and creating economies of
scale.
In 2004, we were awarded the corporate travel business of, among other new
clients, General Motors, Electronic Data Systems A.T. Kearny, the European
Aeronautic Defence and Space Company, DHL and the U.K. Ministry of Defence.
Business Travel continues to modify its economic model and invest in new
products, services and technologies to address ongoing travel industry
challenges and opportunities. For example, we have substantially reduced our
reliance on commission revenues from suppliers (such as airlines or hotels), and
now generate revenues primarily from customers who pay for the services that we
provide. We announced a comprehensive cost-saving travel management offering for
the small- and mid-sized business travel segment in the United States, featuring
webfare guarantees, a new travel management loyalty program with double
Membership Rewards(R) points for individual travelers and automatic ticket
refunds. In addition, Business Travel launched the Preferred Extras Hotel
Program and Preferred Savings Programs for our North America customer base.
Business Travel also offers the TravelBahn(R) Distribution Solution, a
proprietary distribution solution alternative that provides access to the best
airline inventory and fares for American Express Business Travel customers with
a number of carriers, in North America and in select international markets.
Business Travel has moved many of its business processes and customer
servicing online, which streamlines processes, reduces costs, increases
productivity and enhances the quality of customer service. To this end, we
launched a redesign of our Business Travel website at the end of 2004. By the
end of 2004, in the United States, 33% of all of GCS' corporate travel
27
transactions were processed online, and online penetration rates in the United
Kingdom, Canada, Mexico and Australia achieved levels within the 6% to 18%
range.
Global Travel Services, through its CTI&FES organization, provides
American Express customers around the globe with travel related products and
services. CTI&FES encompasses four key areas of business: Premium Travel and
Lifestyle Services, Travel Service Network, Retail Foreign Exchange, and
Corporate Foreign Exchange.
Premium Travel and Lifestyle Services provides concierge services, a
unique benefit that exemplifies the world-class customer experience provided to
Platinum and Centurion Card customers through 22 exclusively dedicated
international call centers. Our retail leisure travel service network manages
customer relationships on our behalf worldwide through more than 1,700 travel
office locations in more than 130 countries. We are aggressively expanding our
retail presence worldwide through franchising, nearly tripling the size of our
international franchise network in the past three years alone.
Our retail foreign exchange business has a presence in many of our travel
offices, as well as in 26 of the world's major international airports, including
London's Heathrow, the Aeroports de Paris and Changi Airport in Singapore.
Today, American Express is the third largest currency provider in airports. For
corporate clients, our International Payments online payment product allows
companies and banks to make cross-border payments in more than 110 foreign
currencies at competitive rates. Wholesale banknote services are also provided
to select financial institutions and travel-related companies.
Competition - Travel Services
Business Travel faces intense competition in the United States and
internationally from numerous traditional and online travel management
companies, as well as from direct sales by airlines and other travel suppliers.
Competition among travel management companies is mainly based on price, service,
convenience, global capabilities and proximity to the customer. In addition,
competition comes from corporate customers themselves, as some companies have
become accredited as in-house corporate travel agents.
In 2004, several U.S.-based online travel agencies expanded their
offerings and marketing efforts beyond their traditional target customer set,
with increasing focus on corporate travel. Orbitz, Expedia and Travelocity have
all begun to pursue midsized and larger corporate travel customers in North
America. While the majority of the online agencies' efforts to penetrate the
managed corporate travel sector has to date occurred in the United States, it is
likely that they will focus more of their efforts to expand into key, developed
international markets like Canada, the United Kingdom and other European markets
in 2005.
Since 1995, travel agents have received reduced levels of revenue from
airlines, and this trend is expected to continue. The airline industry has been
under severe financial pressure in recent years and, as a result, has increased
its efforts to reduce distribution expenses. In March 2002, U.S. airlines and
some international carriers stopped paying "base" commissions to travel
28
agents for tickets sold in the United States and Canada on all domestic and
international travel. Subsequently, airlines in many international markets
followed suit. In addition, low-cost carriers have begun to target business
travelers to help fuel their growth, putting further strain on the ability of
the traditional carriers to remain competitive. Low-cost carriers do not rely on
travel agents to distribute their products and services. The traditional
carriers have also increased the number of transactions they book directly
through their Web sites and other means. These trends have reduced the revenue
opportunities for travel agents who do not receive distribution revenue from
directly booked transactions.
Overall, the ongoing trends of airline direct transactions, rise of
low-cost carriers and ongoing reductions in airline commissions continue to put
pressure on revenue for travel agents. We believe that the restructuring of the
business model over the last few years, transitioning many of our services
online and reducing other costs has helped us to balance these revenue
pressures.
GLOBAL TRAVELERS CHEQUES AND PREPAID SERVICES
We have been in the business of issuing and selling travelers checks for
well over 100 years. Today, that business is operated through our Global
Travelers Cheques and Prepaid Services Group ("TCPS"). TCPS also offers the
TravelFunds Direct(R) service, which provides direct delivery of foreign bank
notes and Travelers Cheques in selected markets.
We sell the American Express Travelers Cheque ("Travelers Cheque" or
"Cheque") as a safe and convenient alternative to cash. The Travelers Cheque has
no expiration date and is payable by the issuer in the currency of issuance when
presented for the purchase of goods and services or for redemption. Travelers
Cheques are available in nine currencies, including Euros. We also issue and
sell other forms of travelers checks: American Express Gift Cheques are designed
for gift-giving purposes, and the American Express-Secure Funds is offered in
certain countries as a safe way to keep cash at home. American Express Gift
Cheques are available in U.S. and Canadian dollars. American Express
Cheques-Secure Funds are issued in U.S. dollars and Euros.
Since 2002, we began to expand our prepaid offerings beyond paper into
plastic cards. In 2004, TCPS continued to offer two prepaid gift cards in the
United States: the American Express Gift Card, which can be used in the United
States at retail as well as restaurant establishments that accept American
Express Cards, and the Be My Guest(R) Card, specifically designed for restaurant
dining. Also in 2004, TCPS expanded sales of gift cards through shopping malls
and a limited number of retail establishments in the United States. At the end
of 2004, TCPS began to sell a Japanese Yen-denominated American Express Gift
Card in Japan for use in that country at selected retail locations that accept
our Cards.
In October 2003, we launched the American Express TravelFunds Card
("TFC") in the United States, and in 2004, we launched TFC in Germany under the
name "Travelers Cheque Card." The TFC is a reloadable, prepaid card that we
market as a plastic form of our Travelers Cheque. The TFC is available in U.S.
dollars, British pounds sterling and Euros, is sold in the
29
United States, the United Kingdom and Germany and can be used worldwide at all
merchants and ATMs that accept the American Express Card. The TFC offers the
same customer service and security of the Travelers Cheque, including passport
and credit card replacement assistance.
TCPS is continually evaluating additional prepaid products to offer to our
customers.
As noted, we sell American Express paper and plastic prepaid card products
through a variety of channels. We sell these products ourselves directly to
consumers via phone and the Internet, and these sales, while representing a
relatively small portion of all sales, continued to grow in 2004. Paper
Travelers Cheques and Gift Cheques are sold primarily through a broad network of
selling outlets worldwide, including American Express travel offices;
independent travel agents; financial institutions; and many other financial,
travel and commercial businesses. Many of the same sellers also sell our prepaid
cards. We sometimes compensate selling outlets for their sales. We are
increasingly seeking new travel and commercial sellers for our prepaid cards. We
also continued to expand the distribution channels for prepaid products with the
addition of retail, airline, car rental, and hotel sellers, as well as postal
services in Australia, Canada and the United States.
Arrangements with a diverse group of sellers continue to be critical to
TCPS' expansion of its sales distribution network. In 2004, TCPS gained a number
of new distributors, including department stores and convenience stores.
During the year, overall Travelers Cheque sales (including TFC sales)
increased 2% globally, and consumer Gift Product sales (including sales of paper
Gift Cheques and Gift Cards) increased 49%. Gift Cheque growth, which is
calculated from a much lower base than Travelers Cheques, is primarily the
result of new advertising and marketing programs. An improved travel environment
contributed to an increase in both Traveler's Cheque and TFC sales.
We invest the proceeds from sales of our Travelers Cheques and prepaid
cards issued by TRS predominantly in highly rated debt securities consisting
primarily of intermediate- and long-term state and municipal obligations.
Regulation - Travelers Checks and Prepaid Cards
As an issuer of travelers checks, TRS is regulated in the United States
under the "money transmitter" laws of most states. These laws require travelers
check (and, where applicable, prepaid card) issuers to obtain licenses, to meet
certain safety and soundness criteria, to hold outstanding proceeds of sale in
highly rated and secure investments, and to provide detailed reports. Many
states audit licensees annually. In addition, travelers check issuers are
required by the laws of many states to comply with state unclaimed and abandoned
property laws under which issuers must pay to states the face amount of any
travelers check that is uncashed or unredeemed after 15 years. A few states have
amended their abandoned property laws to apply to prepaid cards. Some states
have recently enacted laws pertaining to the issuance and the sale of gift
certificates, which may also cover the gift cards we issue. Some of these laws
restrict the fees that consumers can be charged and the expiration dates of the
cards. We continue to monitor state legislative activity in this area very
closely to ensure we comply with all applicable
30
regulation, which varies from state to state. Federal anti-money laundering
regulations require, among other things, the registration of traveler check
issuers as "Money Service Businesses" and compliance with anti-money laundering
recording and reporting requirements by issuers and selling outlets. At this
time, stored value issuers and redeemers, while considered to be "Money Service
Businesses," are not required to register. Outside the United States, there are
varying anti-money laundering requirements, including some that are similar to
those in the United States.
Competition - Travelers Checks and Prepaid Cards
Travelers Cheques compete with a wide variety of financial payment
products, including cash, foreign currency, checks, other brands of travelers
checks, and, increasingly, debit and ATM cards, as well as credit and charge
cards (even though travelers checks and prepaid cards are not substitutes for
charge and credit cards) and, to a limited extent, competing prepaid cards. The
principal competitive factors affecting the travelers check and prepaid card
industry are:
- the number and location of merchants willing to accept the form of
payment;
- the availability to the consumer of other forms of payment;
- the amount of fees charged to the consumer;
- the compensation paid to, and frequency of settlement by, selling
outlets;
- the accessibility of sales and refunds for the products;
- the success of marketing and promotional campaigns; and
- the ability to service the customer satisfactorily, including for
lost or stolen instruments.
Our prepaid cards (cards that can be used at many different unaffiliated
locations) compete with all of the same payment methods; however, gift cards
compete primarily with cash and checks.
OTHER PRODUCTS AND SERVICES
American Express Tax and Business Services Inc. ("TBS") is a tax,
accounting, consulting and business advisory firm that primarily provides
services to small and middle market companies. TBS delivers a wide range of
services, including tax planning and accounting, litigation support, business
reorganization, business management advisory, business technology, internal
audit outsourcing and other accounting, advisory and consulting services to its
customers. TBS is not licensed to practice public accounting, but employs
certified public accountants who deliver, along with other professionals, the
non-attest services described above. TBS has a continuing professional services
relationship with several independent, licensed public accounting firms to which
it leases personnel. These public accounting firms offer attest services to
their clients. TBS has more than 35 offices in 12 states with approximately
2,400 employees.
Through American Express Publishing, we also publish luxury lifestyle
magazines such as Travel+Leisure(R), T+L Family, a supplement to Travel+Leisure,
T+L Golf(R), Food & Wine(R) and Departures(R); travel resources such as
SkyGuide(R); business resources such as the American Express Appointment Book
and SkyGuide Executive Travel, a business traveler supplement; a
31
variety of general interest, cooking, travel, wine, financial and time
management books; branded membership services; a growing roster of international
magazine editions; as well as directly sold and licensed products. American
Express Publishing also has a custom publishing group and is expanding its
service-driven Web sites such as: travelandleisure.com, foodandwine.com,
departures.com, tlgolf.com, tlfamily.com and skyguide.net.
32
AMERICAN EXPRESS FINANCIAL ADVISORS
Our American Express Financial Advisors operating segment ("AEFA")
principally includes American Express Financial Corporation ("AEFC") and its
subsidiaries and affiliates described below. AEFA has two principal businesses:
- ASSET ACCUMULATION AND INVESTMENTS provided by AEFC and certain of
its subsidiaries; and
- INSURANCE products issued by IDS Life Insurance Company ("IDS Life")
and its subsidiaries (collectively, the "IDS Life Companies"), as
well as IDS Property Casualty Insurance Company ("IDS Property
Casualty") and its subsidiaries.
The products and services of these businesses are principally offered through
AEFA's network of over 12,300 financial advisors. Through this business model,
AEFA builds long-term relationships with clients based on trusted, knowledgeable
advice.
For discussion of the Company's plans to pursue a spin-off of AEFA, see
the "Introduction" to this report above.
ASSET ACCUMULATION AND INVESTMENTS
Through its asset accumulation and investments business, AEFA offers a
broad array of proprietary and non-proprietary investment products and services
to help retail and institutional clients meet their financial goals. For retail
clients, AEFA's financial advisors are guided by the financial planning process
as defined by the "Principles for Financial Planning," issued by the Certified
Financial Planner Board of Standards, Inc. Retail clients, including clients
with an AEFA financial plan, and institutional clients select among investment
products such as mutual funds, annuities, face-amount certificates, collective
funds, real estate investment trusts, collateralized debt obligations and hedge
funds; and investment services including wrap programs, financial planning
services and separately managed accounts. Additionally, AEFA offers a variety of
tax-qualified products, including individual retirement accounts,
employer-sponsored retirement plans and Section 529 college savings plans;
personal trust services; and retail securities brokerage through American
Express Financial Advisors Inc. ("AEFAI"), an AEFC subsidiary.
Approximately 76% of AEFA's revenues and 70% of AEFA's pre-tax income in
2004 were attributable to its asset accumulation and investments business. Our
asset accumulation and investments business primarily derives revenues from the
fees we receive from the asset management, financial planning and distribution
services we provide, along with the spread income earned on annuity assets held
in fixed accounts. AEFA currently has over $410 billion in assets owned, managed
and administered.
One of our primary goals is to increase the competitiveness of AEFA's
proprietary products and services for both retail and institutional customers.
In furtherance of this goal, there were several key accomplishments during 2004
that helped to enhance product and retail service offerings,
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improve our competitive position, strengthen our asset management capabilities,
and improve investment management performance, including:
- continued development of our AXP family of mutual funds, including
the merger of several equity funds and the launch of a series of
strategic asset allocation funds;
- nationwide rollout of American Express Gold Financial Services,
designed for retail clients with more than $100,000 in assets with
AEFA;
- broadening of our asset management reach internationally through the
successful integration of Threadneedle Asset Management Holdings
Limited ("Threadneedle"), an AEFC subsidiary, and the creation of a
global fund of hedge funds platform; and
- enhancing investment management leadership, talent and
infrastructure.
We achieved record financial planning sales and fee revenue in 2004. Our
investment management business benefited in 2004 from an increase in management
fee revenue resulting from higher average assets under management. This
reflected, in large part, the full-year impact of the Threadneedle acquisition
in the fall of 2003, along with improved equity market performance and overall
net asset inflows for AEFA. Outflows from the AXP retail mutual funds (the "AXP
Funds") and non-Threadneedle institutional assets partially offset the gains in
assets under management. Since most fees that AEFA receives for asset management
and related services are based on assets under management, market appreciation
results in increased revenues, and inversely, market depreciation will act to
depress revenues. Revenues will also fluctuate due to net inflows or outflows of
assets.
RETAIL PRODUCTS AND SERVICES
AXP Family of Mutual Funds
AEFAI acts as the principal underwriter (distributor of shares) for the
AXP family of mutual funds. In addition, AEFC acts as investment manager and
AEFC and its subsidiaries perform various services for the funds, including
accounting, administrative, transfer agency and custodial services. As of
December 31, 2004, the AXP family of mutual funds consisted of two groups of
funds: (1) the AXP Funds, a group of retail mutual funds offered to the public
primarily through proprietary channels, and (2) the AXP Variable Portfolio Funds
("VP Funds"), which are a series of variable product portfolios. The VP Funds
are available only as underlying investment options in our proprietary variable
annuity and variable life products and through certain non-proprietary variable
annuity products. Both the AXP Funds and the VP Funds include domestic and
international equity, fixed income, cash management and balanced funds with a
variety of investment objectives.
The AXP family of mutual funds has increased its use of subadvisors over
the last few years to diversify and enhance investment management expertise. As
of June 2004, Threadneedle International Limited ("TINTL"), a Threadneedle
company and an indirect wholly owned subsidiary of AEFC, began subadvising the
international equity funds within the AXP family of funds. Previously, these
mutual funds were managed by Threadneedle personnel through an arrangement with
American Express Asset Management International, Inc. ("AEAMI"). Kenwood Capital
Management LLC ("Kenwood"), another AEFC affiliate, also
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provides sub-advisory services to one small cap AXP Fund and one small cap VP
Fund. In addition to TINTL and Kenwood, 20 unaffiliated sub-advisors provide
investment management services to the AXP Partners Funds, part of the AXP Funds.
Eight new AXP Funds and four new VP Funds were launched during 2004:
- six AXP(R) Portfolio Builder Series mutual funds, a collection of
strategic asset allocation funds of mutual funds that address
multiple investment needs;
- the AXP Real Estate Fund, which invests primarily in stocks of real
estate investment trusts (REITs);
- the AXP Inflation Protected Securities Fund, which invests primarily
in inflation-indexed bonds; and
- four VP Funds with a variety of fixed income and equity strategies.
In 2004, several AXP Funds and VP Funds were also merged into existing AXP
Funds and VP Funds, respectively, primarily to achieve economies of scale by
combining similar funds into larger funds. In addition, the board of directors
of AXP MidCap Index Fund approved the liquidation of that fund.
The AXP family of mutual funds now has 89 funds with more than $83.5
billion in assets under management compared to 83 funds with more than $84.5
billion at December 31, 2003. As of December 31, 2004, the AXP Funds consisted
of 66 retail mutual funds, including the eight launched in 2004, with varied
investment objectives. The AXP Funds had combined assets at December 31, 2004 of
$65.3 billion compared to $68.8 billion at the end of 2003. At December 31,
2004, the AXP Funds were the 31st largest retail mutual fund family in the
United States and, excluding money market funds, were the 23rd largest according
to Strategic Insight. The VP Funds consist of 23 variable product portfolios
(four of which commenced operations in 2004) that offer a variety of investment
strategies including cash management, fixed income and domestic and
international equity. The VP Funds had combined assets at December 31, 2004, of
$18.2 billion compared to $15.7 billion at the end of 2003.
As stated above, we have taken some major steps to improve investment
performance of the AXP family of mutual funds by enhancing investment management
leadership, talent and infrastructure. Focused on outperforming specific
benchmarks, we began improving our fixed income performance in 2003, followed up
with a strong 2004. We also implemented Blackrock Solutions(R) as our primary
portfolio management, trading and risk management system for fixed income
investment management. In equities, we saw strong results in many funds,
particularly those in which new fund managers were hired over the past few
years. Notwithstanding these efforts, a few large AXP equity funds
underperformed their benchmarks in 2004. Also, many of the AXP Funds have
certain asset levels that do not allow them to benefit from the economies of
scale experienced by our competitors, which results in expense ratios that may
be higher than competing funds. Overall, the AXP Funds experienced significant
asset outflows in 2004.
AEFC earns management fees for managing the assets of the AXP family of
mutual funds based on the underlying asset values. AEFC and certain of its
subsidiaries also earn fees by
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providing other services to the AXP family of mutual funds. AXP Funds that are
equity or balanced funds have a performance incentive adjustment ("PIA"). This
PIA adjusts the level of management fees received, both upward and downward,
based on the fund's performance as measured against a designated external index
of peers, which has a corresponding impact on management fee revenue. Aggregate
management fees from the AXP family of mutual funds were adjusted downward by
$21.1 million for performance incentive adjustments attributable to calendar
year 2004.
AEFAI earns commissions for distributing the AXP Funds through sales
charges (front-end or back-end loads) on certain classes of shares and
distribution (12b-1) fees based on a percentage of fund assets, and receives
intercompany allocation payments from AEFC.
AEFC affiliates also serve as sub-advisors to certain offshore mutual
funds sponsored by AEB that are organized as Luxembourg funds and advised by
American Express Asset Management (Cayman) Ltd.
Non-Proprietary Mutual Funds
We have increased our sale of non-proprietary products, particularly
mutual funds, to meet the demands of clients for a broader choice of investment
products. In 2004, our retail sales of non-proprietary mutual funds accounted
for a substantial portion of our total retail mutual fund sales. We offer more
than 2,000 non-proprietary mutual funds from more than 200 mutual fund families.
In 2003, we created the Select Group Program for mutual funds. As of the end of
2004, this program consisted of 12 fund families, including the AXP Funds,
offering approximately 790 mutual funds. We chose non-proprietary fund families
to participate in the Select Group Program based on several criteria including
brand recognition, product breadth, investment performance, advisor training and
wholesaling support, and revenue sharing payments. In exchange for certain
benefits, such as broader access to our financial advisors, non-proprietary fund
families in the Select Group Program are required to pay us for participation in
the program by sharing a portion of the revenue generated from the sales of
those funds and from the ongoing management of fund assets attributable to our
clients' ownership in shares of Select Group funds. We also receive payment from
certain other non-proprietary fund families whose products are available through
our financial advisors and online brokerage. As described below under
"Regulation - Asset Accumulation and Investments," AEFA and other industry
participants are the subject of various regulatory inquiries with respect to
several mutual fund industry practices, including revenue sharing. We expect to
adopt revised revenue sharing practices in 2005, which are likely to result in a
reduction of revenue sharing rates and could result in a reduction in revenues.
We also receive administrative services fees from most mutual funds sold through
our distribution network.
We make available both proprietary and non-proprietary mutual funds on a
"stand-alone" basis (i.e., outside of wrap accounts, which are described under
"Wrap Accounts" below). Sales of non-proprietary mutual funds on a stand-alone
basis generally are less profitable to us than sales of proprietary mutual
funds.
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Wrap Accounts
In addition to purchases of proprietary and non-proprietary mutual funds
on a stand-alone basis, clients may purchase mutual funds, among other
securities, in connection with "wrap" and other fee-based programs or services
and pay fees based on a percentage of their assets. Investors in wrap accounts
generally pay an asset-based fee on investments made within the wrap account. In
2004, a small portion of our proprietary mutual fund sales and approximately
one-half of our non-proprietary mutual fund sales were made in these wrap
programs. The sale of mutual funds made through wrap programs generally is more
profitable than the sale of mutual funds on a stand-alone basis.
One such wrap program we sponsor is American Express(R) Strategic
Portfolio Service Advantage ("SPS"), a non-discretionary investment advisory
wrap program designed for investments in proprietary and non-proprietary mutual
funds and other individual securities. The SPS wrap program had total client
assets valued at $35 billion at December 31, 2004 compared to $24 billion at the
end of 2003.
We also provide American Express(R) Premier Portfolio Services
("Premier"), a service that allows customers to receive consolidated reporting
and information on one or more fee-based accounts. The fee-based accounts
available in Premier currently include non-discretionary brokerage accounts, for
which clients pay an asset-based fee in lieu of individual sales charges and/or
commissions on mutual fund and individual securities transactions. Also
available in Premier is the Separately Managed Account Program, an investment
advisory wrap program in which clients select one or more professional
independent and/or affiliated investment managers to provide discretionary asset
management services. Clients in American Express(R) Wealth Management Service
("WMS"), another professionally managed discretionary investment advisory wrap
service sponsored by AEFAI that is being discontinued, have been given the
option to transition to the Separately Managed Account Program within Premier.
The Premier and WMS wrap programs had total combined client assets valued at
$1.9 billion at December 31, 2004 compared to $1.6 billion at the end of 2003.
An operating division of American Express Asset Management Group Inc.
("AEAMG"), an AEFC subsidiary, also serves as the discretionary manager for
clients participating in discretionary wrap programs sponsored by AEAMI and AEB.
Annuities
AEFA offers both variable and fixed annuity products issued primarily by
the IDS Life Companies. Our financial advisors do not offer annuity products of
our competitors, except for annuities specifically designed for use in the small
employer 401(k) market that are issued by two insurance companies not affiliated
with American Express. AEFAI serves as the distributor of variable annuities
issued by IDS Life and IDS Life of New York.
IDS Life is one of the largest issuers of annuities in the United States.
For the year ended December 31, 2004, the IDS Life Companies, on a consolidated
basis, ranked eleventh in new sales of variable annuities according to VARDS(R),
an independent annuity rating service. AEFA continues to expand distribution by
delivering annuity products issued by
37
the IDS Life Companies through non-affiliated representatives and agents of
third-party distributors. These products are specifically offered through
American Enterprise Life Insurance Company ("American Enterprise Life") and
American Centurion Life Assurance Company ("American Centurion Life"), both IDS
Life subsidiaries.
The IDS Life Companies posted fixed and variable annuity cash sales in
2004 of $6.1 billion, a slight decrease from 2003, reflecting increased variable
annuity sales, offset by decreased fixed annuity sales. The relative proportion
between fixed and variable annuity sales is generally driven by the relative
performance of the equity and fixed income markets. In times of lackluster
performance in equity markets, fixed sales are generally stronger. In times of
superior performance in equity markets, variable sales are generally stronger.
The relative proportion between fixed and variable annuity sales is also
influenced by product design and other factors.
The IDS Life Companies' earnings from fixed annuities are based upon the
spread between the interest crediting rate on our fixed annuity contracts and
the returns earned on investment of premiums and deposits in the IDS Life
Companies' general accounts. Variable annuities provide us with fee-based
revenue in the form of mortality and expense charges, and fees charged for
optional features elected by the contract owner and other contract charges. We
also receive fees charged on assets allocated to our separate accounts to cover
administrative costs, as well as a portion of the management fees from the
underlying investment accounts in which assets are invested, as discussed below
under "Variable Annuities." Investment management performance is critical to the
profitability of our annuity business.
Variable and fixed annuities issued by IDS Life and its subsidiaries may
be deferred, where assets accumulate until the contract is surrendered, the
contract owner dies, or the contract owner begins receiving benefits under an
annuity payout option; or immediate, where payments begin within one year of
issue and continue for life or for a fixed period of time.
A discussion of certain insurance-related aspects of the annuity products
we provide, including a discussion of deferred acquisition costs and our
insurance company ratings, is included under the "Insurance" section below.
Variable Annuities. A variable annuity provides a contract owner with
investment returns linked to underlying investment accounts of the contract
owner's choice. These investment options may include the VP Funds discussed
above as well as non-proprietary funds. Variable annuity products also offer a
fixed account investment option with guaranteed minimum interest crediting rates
ranging from 0% to 4% at December 31, 2004.
Contract owners can also choose among various contract provisions,
including guaranteed minimum death benefit ("GMDB") and guaranteed minimum
income benefit ("GMIB") riders. The GMDB rider protects contract beneficiaries
from a drop in death benefits due to performance of the underlying subaccounts.
The GMIB rider guarantees, after a certain waiting period from contract
issuance, minimum annuity payments based on a specified rate of contract
accumulation value growth and predetermined annuity purchase rates. The general
account assets of the IDS Life Companies support the obligations under the GMDB
and GMIB riders (see "Institutional Products and Services - IDS Life Companies
General Accounts" section
38
below). As a result, the IDS Life Companies bear the risk that protracted
under-performance of the financial markets could result in GMDBs and GMIBs being
higher than what current account values would support. The IDS Life Companies'
exposure to risk from GMDBs and GMIBs generally will increase when equity
markets decline.
Fixed Annuities. The IDS Life Companies' fixed annuity products provide
cash value that increases by a fixed interest rate. The rate is periodically
reset at the discretion of the IDS Life Companies subject to certain policy
terms relative to minimum interest crediting rates. The IDS Life Companies reset
interest rates based on a number of factors, including interest rate scenario
models and risk/return measures. The annuity contracts issued by the IDS Life
Companies provide guaranteed minimum interest crediting rates ranging from 1.5%
to 5% at December 31, 2004. In 2003 and in response to a declining interest rate
environment, several states adopted an interim regulation allowing for a
guaranteed minimum interest crediting rate of 1.5% and/or a model regulation
providing for a guaranteed rate that was indexed. A number of states now follow
the model regulation. In response, the IDS Life Companies filed a number of
contract changes in 2003 and 2004 to begin taking advantage of lower minimum
guarantees. The IDS Life Companies will continue to implement contract changes
as states adopt the new model regulation or as the interim regulation sunsets.
Liabilities and Reserves. The IDS Life Companies must maintain adequate
financial reserves to cover the risks associated with GMDB, GMIB and certain
other riders they offer. Generally, reserves represent estimated assets that the
IDS Life Companies need to provide adequately for future benefits and expenses.
Actual experience may differ from the IDS Life Companies' estimates. You can
find a discussion of liabilities and reserves related to our annuity products in
Note 1 to the Company's consolidated financial statements under "Insurance and
Annuity Reserves" on pages 89-90 of our 2004 Annual Report to Shareholders,
which portion of such report is incorporated herein by reference.
Face-Amount Certificates
American Express Certificate Company ("AECC"), a wholly owned subsidiary
of AEFC, issues face-amount certificates and similar products. AECC is
registered as an investment company under the Investment Company Act of 1940.
AECC currently issues nine different types of certificate products. Owners of
AECC certificates invest funds with AECC and are entitled to receive, at
maturity or the end of a stated term, a determinable amount of money equal to
their aggregate investments in the certificate plus interest at rates declared
from time to time by AECC, less any withdrawals and early withdrawal penalties.
For three types of certificate products, the rate of interest is calculated in
whole or in part based on any upward movement in a broad-based stock market
index up to a variable maximum return.
We believe that AECC is the largest issuer of face-amount certificates in
the United States. At December 31, 2004, it had approximately $6 billion in
assets. AECC's earnings are based upon the spread between the interest rates
credited to certificate holders and the interest earned on the certificate
assets invested by AECC. A portion of these earnings are used to compensate the
various affiliated and unaffiliated entities that provide management,
administrative and other services to AECC. AECC's certificates compete with many
other
39
investments offered by banks, savings and loan associations, credit unions,
mutual funds, insurance companies and similar financial institutions, which may
be viewed by potential customers as offering a comparable or superior
combination of safety and return on investment. In times of weak performance in
the equity markets, certificate sales are generally stronger. AEFAI serves as
the distributor of face-amount certificates issued by AECC.
AEFC also operates a joint venture called American Express International
Deposit Company ("AEIDC") in the Cayman Islands with its affiliate, AEB. AEIDC
offers deposits similar to face-amount certificates in U.S. dollar, Euro, pound
sterling and Australian dollar denominations.
Financial Planning Services
AEFA's financial planning services assist clients in meeting important
financial goals, like retirement, education and home buying. The financial
planning process generally begins with gathering client data, including goals.
The financial advisors provide clients with a written analysis based on the
clients' personal goals and needs. Based on the written advice, our financial
advisors work with their clients to identify suitable proprietary and
non-proprietary products and services to help them meet their needs and achieve
their financial goals.
In providing our financial planning services, we are guided by the
"Principles for Financial Planning," issued by the Certified Financial Planner
Board of Standards, Inc. Clients pay fees to us for financial planning services
based upon the services they select and the complexity of their financial
situation. We charge clients a flat fee, an hourly rate or a combination of the
two. The fee is not based on, or related to, the performance of a client's funds
or assets. Depending on what is appropriate for their situation, clients may
select a limited engagement period or may elect to receive ongoing financial
planning services from their financial advisor. Financial planning clients are
under no obligation to purchase products from AEFA in order to implement the
recommendations in their financial plan, but if they choose to implement with
us, AEFA and our financial advisors generally receive a sales commission for the
investment, insurance and other financial products that clients purchase, which
is separate from and in addition to the fee they receive for the provision of
financial planning advice.
We achieved record financial planning sales and fee revenue in 2004. Plan
sales increased by 14% and fees from financial planning relationships increased
by 15% over 2003. During 2004, just over 52% of our new retail clients had a
financial plan developed for them by one of our financial advisors, up slightly
from 51% in 2003. Historically, we have found that financial planning clients
tend to have deeper and longer-term relationships with us. Product sales
generated through financial planning services were 75% of total advisor sales in
2003 and 2004. As of December 31, 2004, we had over one million current clients
with a financial plan, an increase of 3% over 2003.
We continue to invest in the development of tools and training for our
financial advisors to further strengthen their ability to offer sound advice and
ongoing financial planning services. In late 2002, we contracted with
Morningstar Associates, LLC to provide investment advice tools that serve both
retail and workplace markets. As a complement to our own proprietary
40
suite of financial planning tools, we rolled-out Morningstar(R) Advisor
Workstation(SM) (which includes the proprietary American Express Lifetime
Optimizer(SM)) to all advisors in 2004. This tool further enables our advisors
to meet the ongoing financial and investment planning needs of clients,
especially the needs of more affluent clients.
We believe that our focus on financial planning and advice, coupled with
an ability to provide broad-based products and services on a relationship basis,
is a competitive advantage. We believe this business model is more relevant
today than in the past as a result of the significant market volatility
experienced during the past few years, the increased number and types of
products available to investors, increased consumer focus on preparing for
retirement, and the increased complexity of the financial markets.
Brokerage Services and Other Products
Our online brokerage business, American Express Brokerage, allows clients
to purchase and sell securities online, obtain independent research and
information about a wide variety of securities, use self-directed asset
allocation and financial planning tools, contact a financial advisor, as well as
have access to proprietary and non-proprietary mutual funds, among other
services.
Our American Express One(R) Financial Account is an integrated financial
management account that combines a client's investment, banking and lending
relationships into a single account. The American Express One Financial Account
enables clients to access a single cash account to fund a variety of financial
transactions, including investments in mutual funds and other securities.
Additional features of the American Express One Financial Account include
unlimited check writing with overdraft protection, an American Express Gold or
Platinum Card (subject to certain eligibility requirements), online bill
payments, ATM access and a high-yield savings account. We also offer an
incentive program that pays Membership Rewards(R) program Bonus Points and
American Express Gift Cheques to persons opening and funding an American Express
One Financial Account who also take additional steps to transfer funds into the
account on an ongoing basis through direct deposit or bank authorization.
We also offer Financial Accounts data aggregation service to clients,
which is an online capability that enables clients to view and manage their
entire American Express relationship (i.e., brokerage, Card, 401(k), banking,
financial advisor) in one place via the Internet. The Financial Accounts service
also allows clients to add third party account information, providing a
consolidated view of their financial services account relationships.
Our financial advisors may also sell real estate investment trusts
("REITs") issued by other companies. We believe that we are one of the largest
distributors of privately-issued REITs in the United States. In addition, we
service, but do not sell, managed futures limited partnerships in which an AEFC
subsidiary is a co-general partner. These products subject AEFAI and its
co-general partner subsidiary to regulation by the Commodity Futures Trading
Commission ("CFTC").
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American Enterprise Investment Services Inc. ("AEIS"), a wholly owned
subsidiary of AEFC, provides securities execution and clearance services for our
retail and institutional clients. As of December 31, 2004, our AEIS subsidiary
administered or otherwise held over $80 billion in assets for clients, an
increase of over $18 billion from December 31, 2003.
Personal Trust
AEFAI is the primary distribution channel for Personal Trust Services
("PTS"), a division of American Express Bank, FSB ("AEBFSB"), which provides
personal trust, custodial, agency and investment management services to
individual clients. AEBFSB is a federal savings bank regulated and supervised by
the Office of Thrift Supervision (the "OTS"). It is also registered with the SEC
as an investment adviser. As discussed earlier in the TRS section of this
report, AEBFSB and certain of its affiliates also offer certain credit, charge
and consumer lending products, small business loans, mortgages and
mortgage-related products and operate a transactional Internet site. You can
find additional information regarding AEBFSB under "Consumer Card, Small
Business and Consumer Travel Services."
RETAIL DISTRIBUTION
Financial Advisors
AEFA's investment products and services are provided to retail clients
primarily through our network of financial advisors. Our financial advisors work
with retail clients to develop strong relationships and long-term financial
strategies. As registered representatives of AEFAI, our financial advisors also
provide clients access to the broad array of investment products and services
discussed above, as well as a variety of insurance products, including life
insurance, disability income insurance, long term care insurance, and property
and casualty insurance described under "Insurance" below. AEFA also operates a
non-American Express-branded independent platform, Securities America, Inc.
("SAI"), a broker-dealer owned by AEFC. SAI distributes mutual funds, annuities
and insurance products, in addition to providing securities brokerage services
to its clients.
At December 31, 2004, we maintained a nationwide sales force of over
12,300 financial advisors, including over 10,700 affiliated with AEFAI and over
1,600 affiliated with SAI, which represented a 1.8% increase over 2003. Our
financial advisors served more than 2.7 million clients throughout the United
States at December 31, 2004, compared to more than 2.5 million clients at the
end of 2003.
AEFAI's organizational structure consists of two options for branded
advisors to affiliate with the organization. Each affiliation offers separate
levels of support and compensation.
- Employee Advisors. The employee financial advisor affiliation
provides compensation to the advisor, an American Express employee,
as a draw against commissions. Our employee advisors receive a
higher level of support in exchange for a lower payout rate.
- American Express-Branded Franchisee Advisors And Associate Advisors.
In our branded franchisee advisor affiliation, advisors are
independent contractor franchisees affiliated with AEFAI, who have
the right to associate themselves with the American
42
Express brand. Franchisee advisors earn a higher payout rate, but
pay their own business expenses, such as real estate and staff,
including any associate advisors employed by the franchisee.
Approximately 26% of AEFAI's financial advisors are American Express
employees; approximately 61% are American Express-branded franchisees; and
approximately 13% are associate advisors. AEFAI pays a significant portion of
the revenue received in the form of financial planning fees, wrap account fees,
sales charges and 12b-1 distribution fees to advisors for their role in serving
clients. The rate of commission AEFAI pays to each advisor is determined by a
schedule that takes into account the type of service provided or product sold,
the type of advisor affiliation and other criteria.
During 2004, we continued to focus on improving our recruitment, selection
and training of employee advisors, which has resulted in improved retention of
first-year advisors. We also improved the service and tools provided to
franchisee advisors. In addition, we continued efforts to increase our dedicated
field force to further enhance our ability to attract and serve new clients and
compete effectively with the large sales forces of certain competitors. As noted
above, we did realize a net increase in the field force in 2004.
AEFA's strategy focuses on building relationships with high-value clients
in the mass affluent segment -- individuals with $100,000 to $1 million in
investable assets. In May 2004, we began the nationwide rollout of American
Express Gold Financial Services to offer personalized solutions to recognize
and reward our clients with more than $100,000 invested with us. Clients with
over $500,000 invested with us may qualify for Platinum Financial Services,
offered by a subset of specially qualified financial advisors who are trained to
provide guidance on these clients' special financial needs. Clients must meet
detailed eligibility and maintenance rules to qualify for and retain Gold or
Platinum status. These tiered offerings provide a one-on-one relationship with
one of our financial advisors, front-of-the-line customer service, annual fee
waiver on IRA rollovers, quarterly fee waiver on the American Express ONE(R)
Financial Account, upgrade to the highest tier interest rate on the ONE
High-Yield Savings Account and preferred pricing and bonus rates on special
product offers, subject to the terms of those offers. Financial planning
services are available for a separate fee as described above under "Retail
Products and Services - Financial Planning Services." In addition, Gold and
Platinum Financial Services clients receive a fee-waived American Express
Preferred Rewards Gold or Platinum Card(SM), respectively, with access to all
the privileges and services that Card membership provides.
Alliances
An important aspect of AEFA's strategy is to leverage the client
relationships of our other businesses by working with major companies to create
alliances that help generate new financial services clients for us. In 2004, we
continued our relationship with Costco Wholesale Corporation ("Costco") and
Delta Loyalty Management Services, Inc. ("Delta") in 2004 and
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created new alliances with American Century Services Corporation ("American
Century"), Target Corporation ("Target") and Marriott Ownership Resorts, Inc.
("Marriott"). The relationship with Costco offers advisors an opportunity to
market financial planning and advice services to millions of Costco members
through various marketing channels. The Delta marketing alliance provides us
with the opportunity to market financial planning and advice services to the
millions of consumers who have a relationship with Delta Air Lines through its
Delta SkyMiles(R) program, including those consumers who already carry the
cobranded American Express/Delta SkyMiles credit card. In April 2004, we entered
into a new marketing alliance with American Century. This alliance provides us
with the opportunity to market our financial planning and advice services to
shareholders of American Century's proprietary mutual fund family. In May 2004,
we established a relationship with Target that provides us with an opportunity
to market our financial planning and advice services to Target customers. Under
our agreement with Marriott, which was entered into in November 2004, our
advisors conduct financial education sessions at vacation ownership properties
marketed by Marriott under its Marriott Vacation Club International label.
Financial Services Center
In 2004, we established the Financial Services Center, a special call
center for remote-based sales and service. The Financial Services Center
provides client services for those retail customers who do not have access to or
do not need a face-to-face relationship with an advisor. Financial consultants
in the Financial Services Center provide personal service and guidance through
phone-based interactions and may provide product choices in the context of the
clients' needs and objectives.
INSTITUTIONAL PRODUCTS AND SERVICES
Separately Managed Accounts
AEAMG provides investment management services to pension, profit-sharing,
employee savings and endowment funds, the accounts of large- and medium-sized
businesses and governmental clients, as well as the accounts of high-net-worth
individuals and smaller institutional clients, including tax-exempt and
not-for-profit organizations. The management services AEAMG offers include the
investment of funds on a discretionary or non-discretionary basis, and related
services including trading, cash management and reporting. AEAMG and other AEFC
affiliates share certain portfolio management and trading personnel across
entities.
AEAMG offers various fixed and equity investment strategies for
institutional separate account management and advice. Through a subadvisory
arrangement with TINTL and Kenwood, AEAMG also offers certain international and
U.S. equity strategies.
At December 31, 2004, AEAMG, either directly or through its affiliates,
managed institutional separate account assets on behalf of clients (including
assets managed or administered on behalf of the Company and its affiliates) of
$6.8 billion compared to $9.9 billion at December 31, 2003.
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For its investment management services, AEAMG generally receives fees
based on the market value of assets under management. Clients may also pay fees
to AEAMG based on the performance of their portfolio.
IDS Life Companies General Accounts
AEFC and certain of its affiliates provide investment management services
for assets held in the "general accounts" of the IDS Life Companies. The general
account assets are managed according to a fixed-income strategy designed to
provide for a consolidated and targeted rate of return on investments while
controlling risk. At December 31, 2004, AEFC managed general account assets on
behalf of IDS Life and its subsidiaries of approximately $32 billion, which was
unchanged from the end of 2003.
To guide AEFC in its management of the general account assets, and in
accordance with regulatory investment guidelines, the IDS Life Companies,
through their respective Boards of Directors' investment committees or staff
functions, review models projecting different interest rate scenarios,
risk/return measures, and their effect on profitability. They also review the
distribution of assets in the portfolio by type and credit risk sector. The
objective is to structure the investment security portfolio in the general
accounts to meet contractual obligations under our insurance and annuity
products and achieve targeted levels of profitability within defined risk
parameters.
Hedge Funds
AEAMG and AEAMI provide investment advice and related services to private,
pooled investment vehicles organized as limited partnerships, limited liability
corporations or foreign (non-U.S.) entities. These funds are exempt from U.S.
fund registration under the Investment Company Act of 1940 and are organized as
either domestic or foreign funds. AEFC affiliates also serve as investment
advisers to several separately managed accounts that offer a hedge fund
investment option. AEFC also provides investment advice and related services to
an SEC-registered closed-end, non-diversified management company that is a fund
of hedge funds.
In 2004, we strategically aligned our funds to better meet the needs of
the marketplace by adding four new fund strategies, including increasing our
offering of opportunistic funds, and exiting two fund strategies. In February
2004, we announced the creation of a global fund of hedge funds platform that
includes funds of hedge funds managed in the United States and Switzerland. This
platform is operated by both AEB and AEFA.
At December 31, 2004, AEFC affiliates managed hedge fund assets (including
separate account assets with a hedge fund strategy) totaling $2.2 billion.
Included in this total is $936 million from funds of hedge fund assets that were
migrated to AEAMI from American Express Bank (Cayman).
For their investment management services, AEFC affiliates generally
receive fees based on the market value of assets under management. Depending on
the fund, AEFC affiliates may also receive performance-based fees.
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CDOs/SLTs
AEAMG provides investment management services as collateral manager to
special purpose vehicles that issue collateralized debt obligations ("CDOs"),
which are securities collateralized by a pool of assets, typically high-yield
bonds and bank loans. AEAMG also provides investment management services to
secured loan trusts ("SLTs"), which provide returns to investors primarily based
on the performance of an underlying portfolio of bank loans. For its management
of CDOs and SLTs, AEAMG earns fees based on assets under management and may also
receive performance-based fees. In 2004, AEAMG assumed the management of the
collateral pool for one new CDO. AEAMG also ceased management of an SLT that was
liquidated in 2004.
AEAMG or one or more other AEFC affiliates has invested its own money in
CDOs and SLTs, including in residual or "equity" interests, which are illiquid
and the most subordinated (and accordingly, riskiest and most volatile)
interests in such vehicles. The IDS Life Companies and AEFC also have an
interest in a securitization trust discussed below, which is comprised
principally of CDO securities. CDOs are illiquid investments. As of December 31,
2004, the carrying value of the CDO residual tranches owned by AEAMG or another
AEFA affiliate but not consolidated pursuant to FASB Interpretation No. 46, as
revised ("FIN 46") was $27 million.
The IDS Life Companies' and AEFC's investment return on a CDO correlates
to the performance of portfolios of high-yield bonds and/or bank loans included
in that CDO. Deterioration in the value of high-yield bonds or bank loans would
likely result in deterioration of investment return on the relevant CDO. In the
event of significant deterioration of a portfolio, the relevant CDO may be
subject to early liquidation, which could result in further deterioration of the
investment return or, in severe cases, loss of the CDO carrying amount.
Deterioration of a portfolio would likely have a negative impact on collateral
management fees.
During 2001, the IDS Life Companies and AEFC placed a majority of their
rated CDOs and related accrued interest, as well as a relatively minor amount of
other liquid securities, having an aggregate book value at such time of $905
million, into a securitization trust. In return, IDS Life Companies and AEFC
combined received a total of $120 million in cash (excluding transaction
expenses) relating to sales to unaffiliated investors and retained interests in
the trust with allocated book amounts aggregating $785 million. As of December
31, 2004, the retained interests had a carrying value of $705 million, of which
$523 million is considered investment grade. Neither the Company nor any of its
AEFA subsidiaries have any obligations, contingent or otherwise, to the
unaffiliated investors to whom interests in the trust were sold, nor do they
provide management services to the trust.
Collective Funds
American Express Trust Company ("AETC"), a wholly owned subsidiary of
AEFC, is a Minnesota chartered, limited service trust company that provides
investment management services to collective investment funds and also provides
the services described under "Additional Services -- Retirement Services" below.
Collective funds are non-SEC registered investment funds offered primarily
through banks and other financial institutions to institutional clients such as
retirement, pension and profit sharing plans. In
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some situations, AETC may utilize the assistance of an affiliated or
unaffiliated investment adviser in managing a particular collective fund. At
December 31, 2004, AETC served as investment manager to 47 collective funds
covering a broad spectrum of investment strategies. For its investment
management services, AETC receives fees that are generally based upon a
percentage of the market value of assets under management. AETC clients
typically do not pay investment management fees to AETC based on the performance
of their portfolio. At December 31, 2004, AETC had $12.1 billion in collective
fund assets under management compared to $12.6 billion at the end of 2003.
INTERNATIONAL PRODUCTS AND SERVICES - THREADNEEDLE
We also offer international investment management services through our
U.K.-based Threadneedle subsidiary. The Threadneedle group of companies consists
of wholly owned subsidiaries of AEFC that provide investment management services
independent from other AEFC affiliates. Threadneedle offers a full range of
asset management services, including segregated asset management, mutual funds
and hedge funds, to institutional clients and to intermediaries, banks and fund
platforms primarily in the United Kingdom, Germany, Austria and elsewhere in
Europe. These services comprise most asset classes, including equities, fixed
income, cash and real estate.
Through its TINTL subsidiary, Threadneedle also offers investment
management services to U.S. investment companies and other U.S. institutional
clients, including certain AXP Funds and VP Funds.
The acquisition of Threadneedle by AEFC in September 2003 has helped
facilitate consolidation of our international asset management activities in the
United Kingdom. Threadneedle has benefited from growth in assets under
management both through new client business and organic market growth of
existing funds.
Threadneedle is headquartered in London and has a branch office in
Germany, and representative offices in Austria, France and Switzerland.
Threadneedle has approximately 785 employees.
Threadneedle's distribution is organized along three lines: retail,
institutional and strategic alliances.
Retail. The retail business line includes Threadneedle's U.K. mutual fund
family, which ranks as the third largest retail fund complex in the United
Kingdom in terms of retail assets under management. Threadneedle sells mutual
funds mostly in the United Kingdom and Germany through financial intermediaries
and institutions. The retail business unit also includes Threadneedle's hedge
funds comprising three long/short equity funds and one fixed income fund.
Institutional. Threadneedle's institutional business offers traditional
segregated asset management to U.K. and international pension funds and other
institutions as well as offering
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mutual fund and insurance-based products to pension clients. Threadneedle
experienced growth in the management of assets for U.K. institutions during
2004.
Strategic Alliances. Threadneedle's strategic alliances business comprises
the asset management activities undertaken by Threadneedle for The Zurich Group,
and for American Express companies and certain other clients. The Zurich Group
is Threadneedle's single largest client. Threadneedle manages assets for The
Zurich Group for both its U.K. and international life funds and for its general
insurance assets, as well as offering Threadneedle managed funds through
Zurich's sales distribution channels. Under the terms of the agreement AEFC
entered into with The Zurich Group when AEFC acquired Threadneedle, Threadneedle
will continue to manage certain assets of Zurich Financial Services U.K., which
includes a majority of Threadneedle assets under management, subject to its
meeting standard performance criteria. There are under seven years remaining
under this agreement.
Threadneedle also has a controlling interest in an institutional
multi-manager business (MM Asset Management, formerly known as Attica Asset
Management) with $1.1 billion under management. This business manages two
Dublin-based institutional fund-of-funds that are sold to smaller pension fund
clients in the United Kingdom through consulting actuary firms. Threadneedle
intends to support the continued growth of this business in the institutional
and multi-manager markets in the United Kingdom.
Threadneedle expects to develop additional hedge funds and other products
for both the retail and institutional markets as well as to continue its efforts
to attract new retail and institutional clients. In 2004, Threadneedle was the
first group to launch U.K.-domiciled mutual funds with true performance fees in
its new Accelerando funds and introduced its first fund of hedge funds aimed
primarily at the German retail market.
At December 31, 2004, the Threadneedle group of companies managed $116.9
billion in the aggregate compared to $95.6 billion at the end of 2003.
ADDITIONAL SERVICES
Retirement Services
In addition to the investment management services it provides on
collective investment fund assets, described above, AETC, often through the
American Express Retirement Services ("AERS") banner, also provides trustee,
custodial, recordkeeping, securities lending and common trust fund services for
employer-sponsored retirement plans, including pension, profit sharing, 401(k)
and other qualified and non-qualified employee retirement plans. The primary
market is for retirement plans with at least $10 million in assets. These
retirement plans are generally sponsored by mid- and large-size private
employers, governmental entities and labor unions. Additional services are
provided to employer-sponsored retirement plans by affiliates of AETC. Some
additional services include providing a wide array of proprietary and
non-proprietary mutual fund investment options, participant education offerings
and both telephone and Internet-based plan servicing. Through its trustee and
custodial services, AETC may enter into agreements to provide services to
qualified employer-sponsored retirement plans holding employer stock.
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In 2004, we introduced a retirement plan product called "NEXTPlan" aimed
at retirement plans with between $5 and $50 million in assets. The NEXTPlan
product is introduced to plan sponsors by the AERS direct sales force,
unaffiliated broker-dealers, and American Express financial advisors. Plan
administration and recordkeeping services under NEXTPlan are outsourced to a
third-party recordkeeper.
At December 31, 2004, AETC acted as directed trustee or custodian of 263
benefit plans, which represented approximately $31.4 billion in assets managed
or administered (including approximately $5.2 billion of assets managed or
administered on behalf of the Company), and approximately 900,000 participants.
In addition to the services described above, AETC also acts as custodian,
and AEFAI acts as broker, for Individual Retirement Accounts, Tax-Sheltered
Custodial Accounts and other retirement plans for individuals and small and
mid-sized businesses. As of December 31, 2004, these tax-qualified assets
equaled $81.8 billion, which is approximately 19% of total institutional and
retail assets owned, managed and administered by AEFA.
AETC also provides institutional asset custodial services to AEFC
affiliates providing mutual funds, face-amount certificates, asset management
and life insurance. As of December 31, 2004, AETC's institutional assets under
custody were approximately $111.3 billion. AETC receives fees for its custody
services that are generally based upon a percentage of the market value of
assets under management. AETC also receives transaction-related fees for its
institutional custody services.
Financial Education and Planning Services
AEFA's Financial Education and Planning Services ("FEPS") group provides
workplace financial education and advisory services programs to the 401(k)
client base of AERS and AETC and to other major corporations and small
businesses. FEPS focuses on the goal of creating advisor relationships with
individual employees of client companies. It trains and supports advisors
working on-site at company locations to present educational seminars, conduct
one-on-one meetings and participate in client educational events. In 2004, we
expanded our on-site activities with 401(k) clients and increased sales of
financial education relationships to companies that do not have a 401(k)
relationship with AERS.
We also provide financial advice service offerings, such as FEPS Executive
Financial Services, tailored to discrete employee segments. The growth and
success of FEPS is consistent with industry research and our belief that
marketplace demand for employee financial education is expected to remain high,
particularly given the continuing trend toward increased employee responsibility
for selecting retirement investments. As this service need grows, so too does
the number of competitors seeking to provide employee education and planning
services.
Competition - Asset Accumulation And Investments
Competition in the financial services industry focuses primarily on cost,
investment performance, yield, depth and breadth of products, convenience,
service, reliability, safety,
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innovation, distribution systems, reputation, brand recognition, and insurance
company ratings. Reputation and brand integrity are becoming increasingly more
important as the mutual fund industry generally and certain firms in particular
have come under regulatory and media scrutiny. See "Regulation - Asset
Accumulation and Investments" below. Competition in this industry is very
intense. AEFA competes with a variety of financial institutions such as banks,
securities brokers, mutual funds and insurance companies. Some of these
institutions are larger, have greater resources and have a greater global
presence than AEFA. Many of these financial institutions also have products and
services that increasingly cross over the traditional lines that previously
distinguished one type of institution from another, thereby heightening
competition for AEFA. The ability of certain financial institutions to offer
online investment and information services has also affected the competitive
landscape over the past few years.
Following are competitive factors related to specific products and
services provided through our asset accumulation and investments business:
Asset Management. AEFA competes against a substantial number of larger
firms to acquire and maintain assets under management. Competitive factors in
the asset management business include:
- the quality, reputation and "track record" of portfolio managers;
- relative and absolute investment performance;
- global capabilities;
- the range of investment strategies offered;
- the ability to effectively market investment management services;
- the quality and timeliness of client service; and
- fee arrangements.
AEFA also faces intense competition in attracting and retaining qualified
employees. Our ability to continue to compete effectively depends upon our
ability to attract and retain skilled and high performing investment
professionals and non-investment professionals who play a critical role in the
administration of our asset management business.
Mutual Funds. The AXP Funds face competition from non-proprietary funds,
including funds that have no sales charge ("no-load" funds), funds distributed
through independent brokerage firms and exchange traded funds. Mutual funds also
face competition from an increasing number of alternative investment products.
The competitive factors affecting the sale of mutual funds include the
following:
- relative and absolute investment performance;
- the variety of products and services offered;
- sales charges paid;
- administrative expenses;
- the quality of customer service;
- the ability to attract and retain a network of third-party
distributors;
- convenience to the investor;
- the effectiveness of advertising and promotional campaigns; and
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- general market conditions.
Additionally, for mutual funds, high ratings from rating services, such as
Morningstar and Lipper, or favorable mention in financial publications may
influence sales and lead to increases in assets under management. As a mutual
fund's assets increase, management fee revenue increases and the fund may
achieve economies of scale that make it more attractive to investors because of
potential resulting reductions in the fund's expense ratio.
Annuities. The IDS Life Companies' annuity business competes with numerous
other insurance companies, as well as certain banks, securities brokerage firms,
independent financial advisors and other financial intermediaries that market
annuities, mutual funds and other retirement-oriented products. Competitive
factors affecting the sale of annuities include:
- mortality, expense and other contract charges;
- investment performance;
- financial strength ratings from rating agencies such as A.M. Best;
- the breadth, quality and design of products and services offered;
- the effectiveness of advertising and promotional campaigns;
- reputation and recognition in the marketplace;
- distribution capabilities and compensation;
- the level of interest crediting rates; and
- the quality of customer service.
With respect to variable annuities, customers also focus on guaranteed
payment features that help to insulate them from equity market risk.
Retail Distribution. Our AEFAI subsidiary competes with financial planning
firms, insurance companies, securities broker-dealers and other financial
institutions in attracting and retaining members of the field force.
Retirement Services. The retirement services business is highly
competitive. AERS competes against a substantial number of larger firms in
seeking to acquire and maintain assets under management. Competitive factors in
this business include fees, recordkeeping and technological capabilities,
investment performance and client servicing.
Regulation - Asset Accumulation and Investments
AEFA's asset accumulation and investments business is regulated by the
SEC, NASD, the Commodity Futures Trading Commission, the National Futures
Association, state securities regulators and state insurance regulators. Certain
aspects of AEFA's retirement services business are regulated by the U.S.
Department of Labor ("DOL") and the U.S. Department of Treasury ("Treasury"). As
has the rest of the financial services industry, AEFA has experienced, and
believes it will continue to be subject to, increased regulatory oversight of
the securities and commodities industries at all levels. During the past year,
mutual funds and investment advisers were required by the SEC to adopt and
implement written policies and procedures designed to
51
prevent violation of the federal securities laws and to designate a chief
compliance officer responsible for administering these policies and procedures.
The SEC and NASD have also heightened requirements for and continued scrutiny of
the effectiveness of supervisory procedures and compliance programs of
broker-dealers, including certification by senior officers regarding the
effectiveness of these procedures and programs. The SEC and NASD recently
adopted regulatory requirements regarding revenue sharing, market timing,
increased disclosures of breakpoint discounts in mutual fund prospectuses and an
investment adviser code of ethics. Because these new regulatory requirements
have been either recently implemented or adopted, there is uncertainty over how
these new requirements will ultimately impact AEFA's business, including the
extent to which increased technology expenditures may be necessary to comply
with such requirements. In addition, the SEC and NASD proposed revisions to
rules on trading and market structure for broker-dealers, suitability
requirements for variable annuity sales, as well as increased transaction
disclosure information on customer confirmations. While there is a significant
amount of uncertainty as to what legislative and regulatory initiatives may
ultimately be adopted, these initiatives could affect industry participants'
results, including AEFA's, in future periods.
AEFAI does business as a broker-dealer and investment adviser in all 50
states and the District of Columbia. AEFAI is registered as a broker-dealer and
investment advisor regulated by the SEC and is a member of the NASD. AEFAI's
financial advisors must obtain all required state and NASD licenses and
registrations. AEIS is also registered as a broker-dealer with the SEC, is a
member of the NASD and the Chicago Stock Exchange and is registered with
appropriate states.
AEFC and certain subsidiaries also do business as registered investment
advisers and are regulated by the SEC and state securities regulators where
required. The IDS Life Companies are subject to regulation by state insurance
regulators as described under "Insurance - Regulation of Insurance." IDS Life is
also registered as a broker-dealer with the SEC and is a member of the NASD.
AETC is primarily regulated by the Minnesota Department of Commerce
(Banking Division) and is subject to net capital requirements under Minnesota
law. AETC may not accept deposits or make personal or commercial loans. As a
provider of products and services to tax-qualified retirement plans and IRAs,
certain aspects of AEFA's business, including the activities of AETC, fall
within the compliance oversight of the DOL and the Treasury, particularly the
Employee Retirement Income Security Act of 1974 ("ERISA") and the tax reporting
requirements applicable to such accounts.
Compliance with these and other regulatory requirements adds to the cost
and complexity of operating AEFA's business. In addition, the SEC, DOL,
Treasury, self-regulatory organizations and state securities and insurance
regulators may conduct periodic examinations and administrative proceedings,
which may result in censure, fine, the issuance of cease-and-desist orders or
suspension or expulsion of a broker-dealer or an investment adviser and its
officers or employees. Individual investors also can bring complaints against
AEFA. Because AEFA is structured as a franchise system, it is also subject to
Federal Trade Commission and state franchise requirements.
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As has been widely reported, the SEC, the NASD and several state attorneys
general have brought numerous enforcement proceedings challenging several mutual
fund industry practices, including late trading (allowing mutual fund customers
to receive 4:00 PM ET prices for orders placed or confirmed after 4:00 PM ET),
market timing (abusive rapid trading in mutual fund shares), disclosure of
revenue sharing arrangements (payments by fund advisers or companies to
brokerage firms who agree to sell those funds), and inappropriate sales of (no
front end load) Class B shares. AEFA has received requests for information and
has been contacted by regulatory authorities concerning its practices and is
cooperating fully with these inquiries. In May 2004, AEFAI received notification
from the NASD indicating that it had made a preliminary determination to
recommend enforcement action against AEFAI for potential violations of the
federal securities laws and the rules and regulations of the SEC and the NASD.
The NASD's allegations relate to AEFAI's revenue sharing arrangements described
under "Retail Products and Services -- Non-Proprietary Mutual Funds" above. In
February 2005, the New Hampshire Bureau of Securities Regulation filed a
petition alleging that AEFAI failed to disclose revenue sharing and directed
brokerage payments, incentives for advisors to sell proprietary products and
other alleged conflicts of interest. AEFAI also has settled an NASD enforcement
action regarding mutual fund breakpoints (discounts from sales charges on mutual
fund purchases). You can read more about these issues in the "Legal Proceedings"
section.
A description of the insurance-related regulation of AEFA's annuities
business can be found under "Regulation - Insurance" below.
INSURANCE
IDS Life and IDS Property Casualty, and their respective subsidiaries,
collectively, are the issuers of a variety of insurance products, including life
insurance, disability income insurance, long term care insurance, and property
and casualty insurance. IDS Life and its subsidiaries are also the issuers of
the annuity products described under "Asset Accumulation and Investments -
Retail Products and Services - Annuities." The insurance products we provide are
important products to AEFA's overall business. Approximately 24% of AEFA's
revenues and 30% of AEFA's pre-tax income in 2004 were attributable to the
insurance business. AEFA's insurance businesses generate income from the spread
between the IDS Life Companies' earnings on the investment of general account
assets and the interest rates credited to contract owners fixed accounts, and
from fees and charges under the policies it issues, including management fees
and the cost of insurance.
IDS Life Companies
IDS Life and its subsidiaries are the issuers of variable life insurance,
universal life insurance, traditional life insurance, including whole life and
term life, disability income insurance and long term care insurance. A wholly
owned subsidiary of AEFC, IDS Life is a stock life insurance company organized
under Minnesota law. IDS Life has four wholly owned subsidiaries: IDS Life
Insurance Company of New York, a New York stock life insurance company ("IDS
Life of New York"); American Partners Life Insurance Company, an Arizona
53
stock life insurance company ("American Partners Life"); American Enterprise
Life, an Indiana stock life insurance company; and American Centurion Life, a
New York stock life insurance company. For convenience, we refer to IDS Life and
its four insurance company subsidiaries as the "IDS Life Companies" and
individually as an "IDS Life Company."
- IDS LIFE issues insurance and annuity products to residents of the
District of Columbia and all states except New York.
- IDS LIFE OF NEW YORK issues insurance and annuity products to New
York residents.
- AMERICAN PARTNERS LIFE issues its annuity products directly to
consumers, generally persons holding an American Express Card,
outside New York.
- AMERICAN CENTURION LIFE issues fixed and variable annuity
contracts to New York residents primarily through financial
institutions and independent broker-dealers, and also markets
directly to persons generally holding an American Express Card.
- AMERICAN ENTERPRISE LIFE issues fixed and variable annuity contracts
primarily through regional and national financial institutions and
regional and/or independent broker-dealers, in all states except New
York.
Insurance Products and Features
The IDS Life Companies issue a wide range of insurance products, each
described below. IDS Life's sales of individual life insurance in 2004, as
measured by scheduled annual premiums and excluding lump sum and excess
premiums, consisted of 87% variable life, 43% universal life and 10% term and
whole life, based on year-end cash sales reports. The IDS Life Companies issue
only non-participating policies, which do not pay dividends to policyholders
from the insurer's earnings.
Assets supporting policy values associated with fixed account life
insurance products, as well as those assets associated with fixed account
investment options under variable insurance products (collectively, the "fixed
accounts"), are part of the IDS Life Companies' general accounts. Under fixed
accounts each IDS Life Company bears the investment risk. More information on
the IDS Life Companies general accounts is found in the "Institutional Products
and Services - IDS Life Companies General Accounts" section under "Asset
Accumulation and Investments" above.
Variable Life Insurance. IDS Life's and IDS Life of New York's biggest
selling life insurance products are variable life insurance policies. Variable
life insurance provides life insurance coverage along with investment returns
linked to underlying investment accounts of the policyholder's choice, options
which may include the VP Funds discussed above as well as non-proprietary funds.
These products also offer a fixed account investment option with guaranteed
minimum interest crediting rates ranging from 4.0% to 4.5% at December 31, 2004.
For the year ended December 31, 2004, IDS Life ranked second in variable life
insurance sales on the basis of premiums, according to the Value Survey provided
by Tillinghast, a consulting firm that provides research, consulting and other
services to insurance and financial services companies worldwide.
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Universal Life Insurance. IDS Life's and IDS Life of New York's universal
life insurance products provide life insurance coverage and cash value that
increases by a fixed interest rate. The rate is periodically reset at the
discretion of the issuing company subject to certain policy terms relative to
minimum interest crediting rates. Policies provide guaranteed minimum interest
crediting rates ranging from 4% to 5% at December 31, 2004.
Traditional Life Insurance Products. IDS Life's and IDS Life of New York's
traditional life insurance products include whole life insurance and term life
insurance. Whole life insurance combines a death benefit with a cash value that
generally increases gradually in amount over a period of years and does not pay
a dividend (non-participating). IDS Life and IDS Life of New York have sold very
little traditional whole life insurance in recent years. Term life insurance
provides only a death benefit, does not build up cash value and does not pay a
dividend. The policyholder chooses the term of coverage with guaranteed premiums
at the time of issue. During the chosen term, IDS Life and IDS Life of New York
cannot raise premium rates even if claims experience were to deteriorate. At the
end of the chosen term, coverage continues with higher premiums until the
maximum age is attained, at which point the policy expires with no value.
Disability Income Insurance. IDS Life and IDS Life of New York also issue
disability income ("DI") insurance. DI insurance provides monthly benefits to
individuals who are unable to earn income at either their occupation at time of
disability ("own occupation") or at any suitable occupation ("any occupation").
Depending upon occupational and medical underwriting criteria, applicants for DI
insurance can choose "own occupation" and "any occupation" coverage for varying
benefit periods up to age 65. Applicants may also choose various benefit riders
to help them integrate individual DI insurance benefits with Social Security or
similar benefit plans and to help them protect their DI insurance benefits from
the risk of inflation. IDS Life believes it has a significant presence in the DI
insurance market.
Long-Term Care Insurance. As of December 31, 2002, IDS Life and IDS Life
of New York generally discontinued underwriting long-term care ("LTC")
insurance. Although new product sales were generally discontinued during the
fourth quarter of 2002, IDS Life and IDS Life of New York retained 50% of the
risk on existing contracts and ceded the remaining 50% of the risk to General
Electric Capital Assurance Company, one of the Genworth Financial insurance
companies ("GECA"). In addition, in May 2003, IDS Life and IDS Life of New York
began outsourcing claims administration on their existing block of LTC policies
to GECA.
In 2004, IDS Life filed for approval to implement rate increases on its
existing block of nursing home only indemnity LTC insurance policies.
Implementation of these rate increases began in early 2005 and will continue
throughout the year as regulatory approvals are obtained.
Our financial advisors now sell only non-proprietary LTC insurance,
primarily products offered by GECA. In limited circumstances, advisors may sell
LTC products of other unaffiliated insurers.
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Distribution of Insurance Products
The IDS Life Companies sell insurance products almost exclusively through
AEFA's financial advisors. In turn, our financial advisors offer insurance
products issued almost exclusively by the IDS Life Companies, but do offer
insurance products of other unaffiliated carriers in limited circumstances. You
can find a further discussion of AEFAI's financial advisors in the "Retail
Distribution - Financial Advisors" section under "Asset Accumulation and
Investments" above.
Liabilities and Reserves
The IDS Life Companies must maintain adequate financial reserves to cover
the insurance risks associated with the insurance products they issue.
Generally, reserves represent estimated assets that the IDS Life Companies need
to provide adequately for future benefits and expenses. You can find a
discussion of liabilities and reserves related to our insurance products in Note
1 to the Company's consolidated financial statements under "Insurance and
Annuity Reserves" on pages 89-90 of our 2004 Annual Report to
Shareholders, which portion of such report is incorporated herein by reference.
Deferred Acquisition Costs
The IDS Life Insurance Companies' deferred acquisition costs ("DAC")
represent the costs of acquiring new business, principally direct sales
commissions and other distribution and underwriting costs that have been
deferred on the sale of insurance and the annuity products described in the
"Retail Products and Services - Annuities" section under "Asset Accumulation
and Investments" above. These costs are deferred to the extent they are
recoverable from future profits. DAC are amortized over periods approximating
the lives of the business, principally as a percentage of premiums or estimated
gross profits associated with the products.
You can find a complete discussion of DAC on pages 35-36, pages 59-60 and
pages 87-88 of our 2004 Annual Report to Shareholders, which portion of such
report is incorporated herein by reference.
Reinsurance
IDS Life and IDS Life of New York reinsure a portion of the insurance
risks associated with their life and LTC insurance products through reinsurance
agreements with unaffiliated insurance companies. Reinsurance is used in order
to limit losses, reduce exposure to large risks, provide additional capacity
for future growth and to effect business-sharing arrangements. IDS Life and IDS
Life of New York evaluate the financial condition of reinsurers to minimize
exposure to significant losses from reinsurer insolvencies. IDS Life and IDS
Life of New York remain primarily liable as the direct insurers on all risks
reinsured.
Generally, IDS Life and IDS Life of New York reinsure 90% of the death
benefit liability related to individual variable, universal, and term life
insurance products. As a result, IDS Life and IDS Life of New York typically
retain, and are at risk for, at most, 10% of each policy's death benefit from
the first dollar of coverage for new sales of these policies. IDS Life began
reinsuring risks at this level during 2001 for term
56
life insurance and 2002 for variable and universal life insurance. IDS Life of
New York began reinsuring risks at this level during 2002 for term life
insurance and 2003 for variable and universal life insurance. Policies issued
prior to these dates are not subject to these same reinsurance levels.
Generally, the maximum amount of life insurance risk retained by IDS Life and
IDS Life of New York is $750,000 on any policy insuring a single life and $1.5
million on any flexible premium survivorship variable life policy. For existing
LTC policies, IDS Life (and IDS Life of New York for 1996 and later issues)
retained 50% of the risk and ceded the remaining 50% risk to GECA. Risk on
variable life and universal life policies is reinsured on a yearly renewable
term basis. Risk on recent term life and LTC policies is reinsured on a
coinsurance basis, a type of reinsurance in which the reinsurer participates
proportionately in all material risks and premiums associated with a policy.
IDS Life and IDS Life of New York retain all risk for claims on disability
income contracts. Risk is currently managed by limiting the amount of disability
insurance written on any one individual. IDS Life and IDS Life of New York also
retain all risk on accidental death benefit claims and waiver of premium
provisions.
Ratings
IDS Life receives ratings from independent rating agencies. Generally, its
four insurance subsidiaries do not receive an individual rating, but receive the
same rating as IDS Life. These agencies evaluate the financial soundness and
claims-paying ability of insurance companies based on a number of different
factors. The ratings reflect each agency's estimation of the IDS Life Companies'
ability to meet their contractual obligations such as making annuity payouts and
paying death benefits and other distributions to contract holders, as well as
more generally, the IDS Life Companies' financial strength and operating
performance. As such, the ratings relate to the IDS Life Companies' general
accounts and not to the management or performance of the variable accounts of
the contracts.
Ratings are important to maintaining public confidence in the IDS Life
Companies. Lowering of the IDS Life Companies' ratings could have a material
adverse effect on their ability to market their products and could lead to
increased surrenders of their products. Rating agencies continually review the
financial performance and condition of insurers. As of the end of 2004, IDS Life
was rated "A+" (Superior) by A.M. Best Company, Inc. and its claims-paying
ability/financial strength was rated "Aa3" (Excellent) by Moody's Investors
Service, Inc. ("Moody's"), and "AA" (Very Strong) by Fitch. On February 1, 2005,
A.M. Best placed the IDS Life Companies' financial strength rating of A+ under
review with negative implications and Fitch lowered IDS Life Companies'
financial strength rating to "AA-" and placed them on "Rating Watch Negative"
following the Company's announcement that it intends to pursue a spin-off of its
full ownership of AEFC, the holding company for the IDS Life Companies. In
connection with the spin-off, the Company intends to provide additional capital
to AEFA's insurance businesses to confirm its current financial strength
ratings.
57
Risk-Based Capital
The National Association of Insurance Commissioners ("NAIC") defines
Risk-Based Capital ("RBC") requirements for life insurance companies. The RBC
requirements are to be used as minimum capital requirements by the NAIC and
states to identify companies that merit further regulatory action. At December
31, 2004, IDS Life had total adjusted capital of approximately $2.7 billion on
a statutory accounting basis. The Minnesota Department of Commerce, IDS Life's
primary insurance regulator, requires insurance companies to maintain a minimum
RBC called the "authorized control level." If total adjusted capital fell below
the authorized control level, the Minnesota Department of Commerce would be
authorized to exercise management control over IDS Life. For IDS Life, the
authorized control level RBC was $372.9 million at December 31, 2004.
In addition, IDS Life, like other life insurance companies, is expected to
maintain capital above the level at which IDS Life would require it to file an
action plan with the Minnesota Department of Commerce. This is referred to as
the "company action level." For IDS Life, the company action level RBC was
$745.9 million at December 31, 2004.
As described above, the IDS Life Companies maintain levels of RBC in
excess of the authorized control and company action levels required by their
state insurance regulators.
IDS Property Casualty
IDS Property Casualty and its wholly owned subsidiary, AMEX Assurance
Company ("AMEX Assurance") (collectively, the "Property Casualty Companies"),
offer auto, homeowners and American Express Card-related insurance products. IDS
Property Casualty, a subsidiary of AEFC, is a stock insurance company organized
under the laws of Wisconsin. AMEX Assurance is a stock insurance company
organized under the laws of Illinois.
The Property Casualty Companies provide personal auto and homeowner's
coverage to clients in 37 states and the District of Columbia. AMEX Assurance
also provides certain American Express Card-related insurance products such as
travel accident insurance. The Property Casualty Companies market their products
through alliances with financial institutions, affinity groups, such as alumni
associations, and directly to American Express Cardmembers and the general
public. The Property Casualty Companies have a major distribution agreement with
Costco Insurance Agency, Inc., Costco's affiliated insurance agency. As of
December 31, 2004, this arrangement offered auto insurance in 36 states and the
District of Columbia and homeowner's insurance in 35 states to Costco members.
The Property Casualty Companies receive two ratings from A.M. Best, one
related to AMEX Assurance as a separate company and one for the combined
Property Casualty Companies. The rating assigned is developed from an in-depth
evaluation of a company's balance sheet strength, operating performance, and
business profile. Balance sheet strength reflects the company's ability to meet
its current and ongoing obligations to its policyholders and includes analysis
of the company's capital adequacy. The evaluation of operating performance
centers on the stability and sustainability of the company's sources of
earnings. The analysis of business profile reviews the company's mix of
business, market position and depth and experience of management. As of the end
of 2004, both AMEX Assurance and the combined Property Casualty Companies
received A ratings (Excellent) by A.M. Best.
Competition - Insurance
The insurance business is highly competitive, and competitors of the IDS
Life Companies and the Property Casualty Companies consist of both stock and
mutual insurance companies, as well as other financial intermediaries marketing
insurance products.
Competitive factors affecting the sale of life and disability insurance
products include:
- cost of insurance and other contract charges;
58
- the level of premium rates;
- investment performance;
- the level of interest crediting rates;
- financial strength ratings from rating agencies such as A.M. Best;
- the breadth, quality and design of products and services offered;
- the quality of underwriting;
- reputation and recognition in the marketplace;
- the quality of customer service;
- the effectiveness of advertising and promotional campaigns; and
- distribution capabilities and compensation.
Competitive factors affecting the sale of property casualty insurance
products include:
- brand recognition;
- distribution capabilities;
- product pricing;
- breadth;
- quality and design;
- customer service; and
- claims handling.
Regulation - Insurance
The Minnesota Department of Commerce (Insurance Division), the Indiana
Department of Insurance, the Arizona Department of Insurance, the Wisconsin
Office of the Commissioner of Insurance and the Illinois Insurance Department
(collectively, and with the New York Insurance Department, "Domiciliary
Regulators") regulate IDS Life, American Enterprise Life, American Partners
Life, and IDS Property Casualty and Amex Assurance, respectively. The New York
State Department of Insurance regulates American Centurion Life and IDS Life of
New York. In addition to being regulated by their Domiciliary Regulators, the
IDS Life Companies and the Property Casualty Companies are also regulated by
each of the insurance regulators in the states where each is authorized to
transact the business of insurance. These other states also regulate such
matters as the licensing of sales personnel and, in some cases, the marketing
and contents of insurance policies and annuity contracts. The primary purpose of
such regulation and supervision is to protect the interests of policyholders and
contract holders. Financial regulation of the IDS Life Companies and the
Property Casualty Companies is extensive, and their financial and intercompany
transactions (such as intercompany dividends, capital contributions and
investment activity) are often subject to pre-notification and continuing
evaluation by the Domiciliary Regulators. Virtually all states require
participation in insurance guaranty associations, which assess fees to insurance
companies in order to fund claims of policyholders and contract owners of
insolvent insurance companies.
Insurance companies have recently been the subject of increasing
regulatory, legislative and judicial scrutiny. Numerous state and federal
regulatory agencies have commenced investigations regarding sales and marketing
practices, compensation arrangements and anticompetitive activities, and market
timing and late trading in connection with insurance, annuity and mutual fund
products. The IDS Life Companies and the Property Casualty Companies have been
contacted by regulatory agencies for information relating to some of these
investigations and are cooperating with those inquiries. The IDS Life Companies
and the Property Casualty Companies are reviewing their compensation
arrangements and other operations that may be affected by these regulatory
investigations, and the legal precedents and new industry-wide legislation,
rules and regulations that may arise from these investigations.
59
At the federal level, there is periodic interest in enacting new
regulations relating to various aspects of the insurance industry, including
taxation of annuities and life insurance policies, accounting procedures, as
well as the treatment of persons differently because of gender, with respect to
terms, conditions, rates or benefits of an insurance policy. New federal
regulation in any of these areas could potentially have an adverse effect upon
the IDS Life Companies. Also, recent federal legislative proposals aimed at the
promotion of tax-advantaged savings through Lifetime Savings Accounts and
Retirement Savings Accounts may adversely impact IDS Life Companies' sales of
annuity and life insurance products if enacted.
60
AMERICAN EXPRESS BANK
Our American Express Bank operating segment ("AEB") offers products that
meet the financial service needs of three primary client groups: retail
customers, wealthy individuals and financial institutions. AEB's operations are
conducted primarily through our indirect wholly-owned subsidiary, American
Express Bank Ltd., and its subsidiaries. AEB does not directly or indirectly do
business in the United States except as may be incidental to its activities
outside the United States. Accordingly, the following discussion relating to AEB
generally does not distinguish between U.S.- and non-U.S.-based activities.
AEB's three primary business lines are Consumer Financial Services
("CFS"), The Private Bank and the Financial Institutions Group ("FIG"). CFS
provides consumer products in direct response to specific financial needs of
retail customers and includes interest-bearing deposits, unsecured lines of
credit, installment loans, money market funds, mortgage loans, auto loans and
mutual funds. The Private Bank focuses on high net worth individuals by
providing them with investment management, trust and estate planning and banking
services, including secured lending. FIG provides financial institution clients
with a wide range of correspondent banking products including international
payments processing (wire transfers and checks), trade-related payments and
financing, cash management, loans, extensions of credit and investment products,
including third-party distribution of AEB offshore mutual funds. AEB also
provides treasury and capital market products and services to its customers,
including foreign exchange, foreign exchange options and other derivatives and
interest rate risk management products.
With the exit of its corporate banking business virtually completed during
2004, AEB continued its strategy of growing its consumer and financial
institutions businesses. Corporate clients now represent only 1% of AEB's total
loan portfolio. These changes align AEB's businesses more closely with those of
our other business units and positions it to play a more important role in the
delivery of financial services on a global basis. This change in strategy is
reflected in the following loan information: AEB reduced its corporate banking
loans by $97 million to $76 million at December 31, 2004, increased its consumer
and private banking loans by $377 million, and increased its FIG loans by $121
million. Loans outstanding worldwide were $6.9 billion at December 31, 2004 and
$6.5 billion at December 31, 2003. During 2004, The Private Bank client holdings
rose 15% to a total of $18.6 billion, client holdings in CFS decreased 4% and
FIG-related non-credit fee revenue increased by 28%.
AEB's fund products are sold by The Private Bank and CFS business lines to
individual customers and by FIG through distributors in several foreign markets.
AEB continued to expand its number of third-party relationships in Europe and
Asia. During 2004, AEB signed approximately 60 distribution agreements in Europe
and Asia for the sale of its own American Express-branded products, including a
strategic alliance in Taiwan with Shanghai Commercial & Savings Bank Ltd. to
distribute product and service offerings of AEB, AEFA and AEFA's Threadneedle
subsidiary. AEB's assets under management in its fund products and related
managed accounts and administered assets totaled approximately $5.7 billion at
year-end (as compared with $5.3 billion at December 31, 2003).
61
In 2004 AEB added a number of investment portfolios and share classes to
its existing Luxembourg investment company umbrella fund. In addition, AEB
transferred its fund of funds portfolios from a Cayman-domiciled hedge fund
structure to American Express Alternative Investment Fund (LUX), a newly
established Luxembourg fund of funds. By publicly registering its shares in
Luxembourg, the fund will be allowed to seek public registration of its shares
in a variety of other jurisdictions and thereby enhance AEB's distribution
activities. AEB also introduced new investment options, which combine standard
mutual funds, hedge funds and cash products within its discretionary asset
management wrap structure and increased the number of third-party products
available to customers. The asset management business of AEFA (which includes
Threadneedle) provides investment management services to many of AEB's
Luxembourg umbrella fund portfolios.
AEB also continued to work closely with other parts of American Express to
cross-sell a range of payment, lending, insurance and financial service products
and build deeper relationships with affluent and pre-affluent consumer and small
business customers in key international markets. AEB markets Private Bank
services to a highly selective group of Cardmembers outside the United States.
AEB offers credit products such as installment loans and revolving lines of
credit to both Cardmembers and non-Cardmembers in Germany, Greece, United
Kingdom, Hong Kong, India, Singapore and Taiwan. AEB also markets a wide range
of investment and savings products to Cardmembers and select non-Cardmembers in
Germany, Greece, Hong Kong, India, Indonesia, Singapore, Taiwan and Philippines.
AEB has also contracted with AECC to market AECC's investment certificates, and
separately operates a joint venture (American Express International Deposit
Company) with AEFC in the Cayman Islands that issues deposit certificates
denominated in U.S. dollars, Euros, pounds sterling and Australian dollars.
AEB has a global network with offices in 45 countries. Its worldwide
headquarters is located in New York City. It maintains an international banking
agency in New York City and facility offices in San Francisco, San Diego and Los
Angeles, California. Its wholly owned Edge Act subsidiary, American Express Bank
International ("AEBI"), is headquartered in Miami, Florida, and has branches in
New York City and Miami.
In November 2004, AEB entered into an agreement to sell certain of its
operations in Luxembourg. The sale was completed in January 2005. In addition,
in December 2004, AEB made the decision to sell certain of its operations in
Bangladesh, Egypt and Pakistan.
AEB's business does not, as a whole, experience significant seasonal
fluctuations.
Selected Financial Information Regarding AEB
Subject to certain requirements related to transactions with affiliates,
AEB provides banking services to the Company and its subsidiaries. AEB is only
one of many international and local banks used by American Express and its other
subsidiaries. American Express and its subsidiaries constitute only a few of
AEB's many customers.
62
AEB's total assets were $13.4 billion at December 31, 2004 and $14.2
billion at December 31, 2003. Liquid assets, consisting of cash and deposits
with banks, trading account assets and investments, were $4.7 billion at
December 31, 2004 and $5.4 billion at December 31, 2003.
63
The following table sets forth a summary of financial data for AEB at and
for each of the three years in the period ended December 31, 2004 (dollars in
millions):
2004 2003 2002
-------- -------- --------
Net financial revenues $ 825 $ 801 $ 745
Non-interest expenses $ 679 $ 650 $ 624
Net income (a) $ 96 $ 102 $ 80
-------- -------- --------
Cash and deposits with banks $ 1,380 $ 1,890 $ 2,420
Investments $ 3,034 $ 3,341 $ 3,169
Loans, net $ 6,790 $ 6,371 $ 5,466
Total assets $ 13,373 $ 14,232 $ 13,234
-------- -------- --------
Customers' deposits $ 10,445 $ 10,775 $ 9,501
Shareholder's equity $ 924 $ 949 $ 947
-------- -------- --------
Return on average assets (b) .70% .74% .66%
Return on average total shareholder's equity (b) 10.0% 10.8% 9.6%
-------- -------- --------
Reserve for loan losses/total loans 1.38% 1.70% 2.70%
30+ days past due CFS loans as a % of total CFS loans 4.5% 6.6% 5.4%
Total loans/deposits from customers 65.91% 60.17% 59.12%
Average total shareholder's equity/average assets (b) 7.07% 6.85% 6.89%
Risk-based capital ratios: (c)
Tier 1 11.0% 11.4% 10.9%
Total 10.1% 11.3% 11.4%
Leverage ratio (c) 5.8% 5.5% 5.3%
Qualifying capital: (c)
Tier 1 capital $ 754 $ 775 $ 652
Total capital $ 693 $ 767 $ 680
Adjusted risk-weighted assets (c) $ 6,894 $ 6,804 $ 5,985
Adjusted average assets (c) $ 13,119 $ 14,186 $ 12,208
Average interest rates earned: (d) -------- -------- --------
Loans (e) 4.86% 5.19% 6.41%
Investments (f) 4.68% 5.26% 5.88%
Deposits with banks 2.80% 1.87% 2.15%
-------- -------- --------
Total interest-earning assets (f) 4.54% 4.57% 5.44%
-------- -------- --------
Average interest rates paid: (d)
Deposits from customers 1.98% 1.97% 2.38%
Borrowed funds, including long-term debt 1.69% 1.53% 3.46%
-------- -------- --------
Total interest-bearing liabilities 1.96% 1.93% 2.55%
-------- -------- --------
Net interest income/total average interest-earning assets (f) 2.64% 2.77% 3.23%
-------- -------- --------
(a) 2004 net income includes $44 million ($29 million after tax) of
restructuring charges in connection with AEB's decision to sell certain of
its operations in Bangladesh, Egypt, Luxembourg and Pakistan. The aggregate
charges include $30 million of employee severance obligations and $14
million of other costs primarily related to currency translation
64
losses (previously recorded in shareholder's equity) and the early
termination of certain real estate property leases. Included in 2003 net
income is a net restructuring reserve reversal of $2 million ($1 million
after tax). Included in 2002 net income is a net restructuring reserve
reversal of $3 million ($2 million after tax).
(b) Computed on a trailing 12-month basis using total assets and total
shareholder's equity as included in the Consolidated Financial Statements
prepared in accordance with GAAP. Prior period amounts have been revised to
conform to current presentation.
(c) Based on the legal entity financial statements of American Express Banking
Corp.
(d) Based on average balances and related interest income and expense, including
the effect of interest rate products where appropriate and transactions with
related parties.
(e) Interest rates have been calculated based upon average total loans,
including those in non-performing status.
(f) On a tax equivalent basis.
The following tables set forth the composition of AEB's gross loan
portfolio at year-end for each of the five years in the period ended December
31, 2004 (millions):
BY GEOGRAPHIC REGION (A) 2004 2003 2002 2001 2000
- ------------------------ -------- -------- -------- -------- --------
Asia/Pacific $ 2,069 $ 2,320 $ 2,117 $ 2,052 $ 1,791
Europe 2,023 1,502 1,553 1,370 1,500
Latin America 1,454 1,344 801 871 856
North America 889 780 533 273 352
Indian Subcontinent 292 375 439 440 442
Middle East 127 128 94 197 302
Africa 31 35 80 82 100
-------- -------- -------- -------- --------
TOTAL $ 6,885 $ 6,484 $ 5,617 $ 5,285 $ 5,343
======== ======== ======== ======== ========
(a) Based primarily on the domicile of the borrower.
65
2004
------------------------------
Due
After1 Year Due
Due Through After 5
Within 1 5 Years Years
BY TYPE AND MATURITY Year (a) (a) 2004 2003 2002 2001 2000
- --------------------------------------- -------- ----------- ------- ------ ------ ------ ------ -----
Consumer and private banking loans:
Loans secured by real estate $ 29 $ 8 $ 246 $ 283 $ 340 $ 397 $ 486 $ 361
Installment, revolving credit and other 4,145 397 -- 4,542 4,108 3,338 2,705 1,839
------ ---- ------ ------ ------ ------ ------ ------
4,174 405 246 4,825 4,448 3,735 3,191 2,200
------ ---- ------ ------ ------ ------ ------ ------
Commercial loans:
Loans secured by real estate 7 9 3 19 65 61 139 157
Loans to businesses (b) 4 53 -- 57 108 307 732 1,397
Loans to banks and other financial
institutions 1,672 312 -- 1,984 1,863 1,399 1,168 1,519
Loans to governments and official
institutions -- -- -- -- -- 29 28 34
------ ---- ------ ------ ------ ------ ------ ------
1,683 374 3 2,060 2,036 1,796 2,067 3,107
------ ---- ------ ------ ------ ------ ------ ------
All other loans (c) -- -- -- -- -- 86 27 36
------ ---- ------ ------ ------ ------ ------ ------
TOTAL $5,857 $779 $ 249 $6,885 $6,484 $5,617 $5,285 $5,343
====== ==== ====== ====== ====== ====== ====== ======
(a) Loans due after one year at fixed (predetermined) interest rates totaled
$454 million, while those at floating (adjustable) interest rates totaled
$574 million.
(b) Business loans, which accounted for approximately 1% of the portfolio as of
December 31, 2004, were distributed over 26 commercial and industrial
categories.
(c) Included in 2002 are $37 million of loans resulting from a change in
ownership of AEB's Brazilian operations from that of a joint venture to a
consolidated subsidiary.
66
The following tables present information about AEB's impaired (or
non-performing) loans. AEB defines an impaired loan as any loan (other than
certain smaller-balance consumer loans) on which the accrual of interest is
discontinued because the contractual payment of principal or interest has become
90 days past due or if, in management's opinion, the borrower is unlikely to
meet its contractual obligations. For smaller-balance consumer loans, management
establishes reserves it believes to be adequate to absorb credit losses inherent
in the portfolio. Generally, these loans are written off in full when an
impairment is determined (e.g., borrower's personal bankruptcy) or when the loan
becomes 120 or 180 days past due, depending on loan type.
(in millions: December 31,) 2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Loans to businesses $37 $67 $103 $116 $135
Loans to financial institutions and other -- 11 16 7 2
--- --- ---- ---- ----
TOTAL $37 $78 $119 $123 $137
=== === ==== ==== ====
December 31,
-----------------
(in millions) 2004 2003
---- ----
Recorded investment in impaired loans not requiring an
allowance (a) $ - $ 1
Recorded investment in impaired loans requiring an
allowance 37 77
---- ----
Total recorded investment in impaired loans $ 37 $ 78
==== ====
Credit reserves for impaired loans $ 17 $ 43
==== ====
December 31,
-----------------
(in millions) 2004 2003 2002
---- ---- ----
Average recorded investment in impaired loans $ 52 $ 98 $121
Interest income recognized on a cash basis $ 1 $ 1 $ 1
(a) These loans do not require a reserve for credit losses since the values of
the impaired loans equal or exceed the recorded investments in the loans.
In addition to the above, AEB had other non-performing assets totaling $1
million at December 31, 2004 and $15 million at December 31, 2003 and 2002. The
2004, 2003 and 2002 balances primarily consist of matured foreign exchange and
derivative contracts and credit-related commitments.
67
The following table sets forth a summary of AEB's reserve for credit
losses at and for each of the five years in the period ended December 31, 2004
(dollars in millions):
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
Reserve for credit losses -
January 1, $ 121 $ 158 $ 148 $ 153 $ 189
Provision for credit losses (a) 37 102 147 91 28
Translation and other (1) (3) 10 (2) (4)
------ ------ ------ ------ ------
Subtotal 157 257 305 242 213
------ ------ ------ ------ ------
Write-offs:
Consumer loans (b) 72 118 115 38 19
Loans to businesses 9 33 39 72 43
Loans to banks and other financial institutions 5 - 7 - 2
Foreign exchange and derivative contracts - - - 1 6
Recoveries:
Consumer loans (17) (9) (5) (6) (6)
Loans to businesses (9) (5) (8) (10) (3)
Loans to banks and other financial institutions - (1) (1) (1) (1)
------ ------ ------ ------ ------
Net write-offs (recoveries) 60 136 147 94 60
------ ------ ------ ------ ------
Reserve for credit losses
December 31, (c) $ 97 $ 121 $ 158 $ 148 $ 153
====== ====== ====== ====== ======
(a) The increases in 2002 and 2001 were primarily due to credit loss
provisions related to the CFS business in the Asia/Pacific region,
particularly Hong Kong. The provision for 2001 includes a
restructuring-related provision of $26 million relating to the further
reduction of corporate lending activities in parts of Asia, Latin America
and Europe.
(b) The increases in 2003 and 2002 were primarily due to write-offs in the CFS
business in the Asia/Pacific region, primarily Hong Kong.
(c) Allocation:
2004 2003 2002 2001 2000
------ ------ ------ ----- ------
Loans $ 95 $ 113 $ 151 $ 128 $ 137
Other assets, primarily matured
foreign exchange and other
derivatives 1 6 6 4 14
Credit-related commitments 1 2 1 16 2
----- ----- ----- ----- -----
Total reserve for credit losses $ 97 $ 121 $ 158 $ 148 $ 153
===== ===== ===== ===== =====
68
AEB recognizes interest income on an accrual basis. When AEB's management
places loans on non-performing status, it reverses all previously accrued but
unpaid interest against current interest income. AEB recognizes cash receipts of
interest on non-performing loans either as interest income or as a reduction of
principal, based upon management's judgment as to the ultimate collectibility of
principal. Generally, a non-performing loan may be returned to performing status
when all contractual amounts due are reasonably assured of repayment within a
reasonable period and the borrower shows sustained repayment performance, in
accordance with the contractual terms of the loan or when the loan has become
well secured and is in the process of collection.
Interest-earning advances under lines of credit and other similar consumer
loans are written off against the reserve for credit losses upon reaching
specified contractual delinquency stages, or earlier in the event of the
borrower's personal bankruptcy or if the loan is otherwise deemed uncollectible.
Interest income on these loans generally accrues until the loan is written off.
AEB separately maintains and provides for reserves relating to credit
losses for loans, derivatives and other credit-related commitments. The reserve
is established by charging a provision for credit losses against income. The
amount charged to income is based upon several factors, including historical
credit loss experience in relation to outstanding credits, a continuous
assessment of the collectibility of each credit and management evaluation of
exposures in each applicable country as related to current and anticipated
economic and political conditions. Management's assessment of the adequacy of
the reserve is inherently subjective, as significant estimates are required.
Amounts deemed uncollectible are charged against the reserve and subsequent
recoveries, if any, are credited to the reserve.
The reserve for credit losses related to loans is reported as a reduction
of loans. The reserve related to derivatives is reported as a reduction of
trading assets, and the reserve related to other credit-related commitments is
reported in other liabilities.
Risks
The global nature of AEB's business activities is such that concentrations
of credit to geographic regions are not unusual. AEB continually monitors and
actively manages its credit concentrations to reduce the associated risk. At
December 31, 2004, AEB had significant investments in certain on- and
off-balance sheet financial instruments, which were primarily represented by
deposits with banks, securities, loans, forward contracts, contractual amounts
of letters of credit (standby and commercial) and guarantees. The counterparties
to these financial instruments were primarily unrelated to AEB, and principally
consisted of consumers to whom AEB has extended loans, banks and other financial
institutions and foreign government agencies operating geographically within the
Asia/Pacific region, Europe, North America, Latin America, the Indian
Subcontinent and Middle East/Africa.
AEB's earnings are sensitive to interest rates due to the fact that the
maturity of liabilities does not, generally, match the maturity of assets. AEB
invests excess liquidity in high grade fixed income investment securities and
maintains mandatory investment portfolios in a number
69
of countries as required by central banks. AEB monitors and controls interest
rate risk through a rigorous Earnings at Risk process both on a country and
global level. AEB manages the duration/maturity mismatch of assets and
liabilities through adjusting the duration/maturity of assets and/or by using
derivatives. On occasion, AEB may decide to mismatch in anticipation of a change
in future interest rates in accordance with guidelines. AEB sells foreign
exchange products to its customer base and may decide to take proprietary
trading positions as a result of this business. The foreign exchange risk is
managed at the branch and global level through a rigorous Value at Risk process.
AEB manages counterparty credit exposure on foreign exchange and interest rate
derivatives through a dynamic mark-to-market and potential future exposure
process, in which the current positive fair value and potential future exposure
are calculated and managed against counterparty loan equivalent limits. You can
find more information on AEB's management of its foreign exchange risk on pages
43-44 and page 67 under the caption "American Express Company Risk Management -
Market Risk Management Process" in our 2004 Annual Report to Shareholders, which
portion of such report is incorporated herein by reference.
Because AEB conducts significant business in emerging market countries and
in countries that are less politically and economically stable than the United
States or those in Western Europe, its Private Banking, CFS and FIG activities
may be subject to greater credit and compliance risks than are found in more
well-developed jurisdictions. AEB continually monitors its exposures in such
jurisdictions, and regularly evaluates its client base to identify potential
legal risks as a result of clients' use of AEB's banking services.
You can find a discussion of AEB's use of derivative financial
instruments, on pages 43-44 and page 67 under the caption "American Express
Company Risk Management - Market Risk Management Process," and in Note 9 on
pages 104-105 of our 2004 Annual Report to Shareholders, which portions of such
report are incorporated herein by reference.
Competition - Banking Services
The banking services of AEB are subject to vigorous competition everywhere
AEB operates. Competitors include local and international banks whose assets
often exceed those of AEB, other financial institutions (including certain other
subsidiaries of ours) and, in certain cases, governmental agencies.
Regulation - Banking Services
American Express Banking Corp. ("AEBC") is a New York investment company
organized under Article XII of the New York Banking Law and is a wholly owned
direct subsidiary of American Express. American Express Bank Ltd. ("AEBL") is a
wholly owned direct subsidiary of AEBC. AEBC, AEBL and AEBL's global network of
offices and subsidiaries are subject to continuous supervision and examination
by the New York State Banking Department ("NYSBD") pursuant to the New York
Banking Law. AEBC does not directly engage in banking activities.
AEBL's branches, representative offices and subsidiaries are licensed and
regulated in the jurisdictions in which they do business and are subject to the
same local requirements as
70
other competitors that have the same license. Within the United States, AEBL's
New York agency is supervised and regularly examined by the NYSBD. In addition,
the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board") regulates, supervises and examines AEBI and the California Department of
Financial Institutions supervises and examines AEBL's San Francisco, Los Angeles
and San Diego facility offices.
Since AEBC and AEBL do not do business in the United States, except as may
be incidental to their activities outside the United States, our affiliation
with AEBC and AEBL neither causes us to be subject to the provisions of the Bank
Holding Company Act of 1956, as amended, nor requires us to register as a bank
holding company under the Federal Reserve Board's Regulation Y. AEBC and AEBL
are not members of the Federal Reserve System, are not subject to supervision by
the FDIC, and are not subject to any of the restrictions imposed by the
Competitive Equality Banking Act of 1987 other than anti-tie-in rules with
respect to transactions involving products and services of certain of its
affiliates. AEBC and AEBL are not financial holding companies under the
Gramm-Leach-Bliley Act.
The NYSBD requires AEBC, on a consolidated basis, to monitor its financial
condition in reference to the Federal Reserve Board's risk-based capital
guidelines and complementary leverage constraints applicable to state-chartered
banks that are members of the Federal Reserve System. Pursuant to the FDIC
Improvement Act of 1991, the Federal Reserve Board, among other federal banking
agencies, adopted regulations defining levels of capital adequacy. Under these
regulations, a bank is deemed to be well capitalized if it maintains a Tier 1
risk-based capital ratio of at least 6%, a total risk-based capital ratio of at
least 10%, and a leverage ratio of at least 5%. Based on AEBC's Tier 1
risk-based capital, total risk-based capital and leverage ratios, AEBC is
considered to be well capitalized at December 31, 2004.
In recent years, U.S. and foreign regulatory authorities, together with
international organizations, have raised increasing concerns over the ability of
criminal organizations and corrupt persons to use global financial
intermediaries to facilitate money laundering. In the United States, the
Secretary of the Treasury has issued regulations pursuant to the USA PATRIOT Act
of 2001 (the "Patriot Act") that specifically impact certain money laundering
prevention activities of entities involved, as AEBL is, in correspondent and
private banking activities. Compliance efforts to combat money laundering remain
a high priority for AEBL and it may increase these efforts to address further
regulations expected under the Patriot Act as well as other evolving supervisory
standards and requirements in jurisdictions in which AEBL does business.
In April 2003, the Basel Committee on Banking Supervision (the "Basel
Committee") issued a final consultative paper on the proposed new Basel Capital
Accord ("new Accord"). The new Accord proposes risk-based capital guidelines
that will replace the previous guidelines that have been in effect since 1988.
The Basel Committee is comprised of representatives of central banks and bank
supervisors from the major industrialized countries and develops broad
supervisory standards and guidelines governing the prudential supervision of
banking institutions. The new Accord sets capital requirements for operational
risk and refines the existing capital requirements for credit and market risk
exposures. On May 11, 2004, the Basel Committee announced it achieved consensus
on the new Accord and published the text of the
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framework on June 26, 2004. Despite the release of the framework, it is not
clear at this time whether and in what manner the new Accord will be adopted by
bank regulators with respect to banking organizations that they supervise and
regulate. AEBC will continue to monitor regulatory action on this matter and
assess its potential impact. AEBC believes that implementation of the new
Accord, to the extent applicable to AEBC, could increase minimum risk-based
capital requirements and result in changes to certain of AEBC's information
systems, processes and employee training.
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CORPORATE AND OTHER
BRAND
Our brand and its attributes -- trust, security, integrity, quality and
customer service -- are key assets of the Company. We continue to focus on the
brand by educating employees about these attributes and by incorporating them
into our programs, products and services.
TECHNOLOGY
We have devoted substantial resources to our global technology platforms
and have undertaken significant efforts to protect and manage our proprietary
systems and the data collected and stored on our systems. In this vein, we have
continued to focus on ways to secure our systems from "hackers" and other
unauthorized users.
In 2002, we outsourced most of our technology operations work to IBM. This
arrangement, which has a seven-year term with options to extend, enables us to
benefit from IBM's expertise while lowering our information technology costs.
IBM has taken on responsibility for managing most of our day-to-day technology
operations functions, including mainframe, midrange and desktop systems; web
hosting; database administration; help desk services and data center operations.
Our internal IT organization continues to retain the Company's technology
competencies, including information technology strategy, managing strategic
relationships with technologies' partners, developing and maintaining
applications and databases and managing the technology portfolios of our
businesses.
REGULATION - GENERAL
Most aspects of our business are subject to rigorous regulation by U.S.
Federal and state regulatory agencies and securities exchanges and by non-U.S.
government agencies or regulatory bodies and securities exchanges. Certain of
our public disclosure, internal control environment and corporate governance
principles are subject to the Sarbanes-Oxley Act of 2002 and related regulations
and rules of the SEC and the New York Stock Exchange, Inc. New laws or
regulations or changes to existing laws and regulations (including changes in
interpretation or enforcement) could materially adversely affect our financial
condition or results of operations. As a global financial institution, to the
extent that different regulatory systems impose overlapping or inconsistent
requirements on the conduct of our business, we face complexity and additional
costs in our compliance efforts.
We use information about our customers to develop products and services
and to provide personalized services. Regulatory activity in the areas of
privacy and data protection continues to grow worldwide and is generally being
driven by the growth of technology and related concerns about the rapid and
widespread dissemination and use of information.
The Gramm-Leach-Bliley Act ("GLBA") became effective on July 1, 2001. GLBA
provides for disclosure of a financial institution's privacy policies and
practices and affords customers the right to "opt out" of the institution's
disclosure of their personal financial
73
information to unaffiliated third parties (with limited exceptions). This
legislation does not preempt state laws that afford greater privacy protections
to consumers, and several states have adopted such legislation. For example, in
2003 California enacted that state's Financial Information Privacy Act. We will
continue our efforts to safeguard the data entrusted to us in accordance with
applicable law and our internal data protection policies, including taking steps
to reduce the potential for identity theft, while seeking to collect and use
data to properly achieve our business objectives.
The Fair Credit Reporting Act of 1970 ("FCRA") regulates the disclosure of
consumer credit reports by consumer reporting agencies and the use of consumer
credit report information by banks and other companies. Provisions of FCRA that
preempt states from enacting legislation regarding the sharing of customer
information among affiliates and certain other uses of consumer credit report
information were set to expire on January 1, 2004. The January 1, 2004
expiration date of these provisions was removed by the enactment in December
2003 of the Fair and Accurate Credit Transactions Act ("FACT Act"). The FACT Act
significantly amends the FCRA to make the exchange of consumer information among
affiliates, together with several other activities involving consumer credit
report information, subject to only federal law. (The California Financial
Information Privacy Act ("SB1") became effective on July 1, 2004. SB1 requires,
among other things, that financial institutions either stop sharing personal
financial information among affiliates that are not in the same line of
business, or provide customers with an opportunity to opt out of the disclosure
of the information to the affiliate. Prior to the effective date, the American
Bankers Association filed a lawsuit in an attempt to prevent certain provisions
of SB1 from taking effect. On June 30, 2004, the U.S. District Court for the
Eastern District of California issued a decision holding that SB1 was not
preempted by the FCRA. The decision has been appealed to the U.S. Court of
Appeals for the Ninth Circuit, and a decision on the appeal is expected to be
issued during 2005.) At the same time, the FACT Act requires any company that
receives information concerning a consumer from an affiliate to permit the
consumer to opt out from having that information used to market the company's
products to the consumer.
The FACT Act further amends the FCRA by adding several new provisions
designed to prevent or decrease identity theft and to improve the accuracy of
consumer credit information. New duties are imposed on both consumer reporting
agencies and on businesses that furnish or use information contained in consumer
credit reports. For example, a furnisher of information is required to implement
procedures to prevent the reporting of any information that it learns is the
result of identity theft. Also, if a consumer disputes the accuracy of
information provided to a consumer reporting agency, the furnisher of that
information must conduct an investigation and respond to the consumer in a
timely fashion. The FACT Act also requires grantors of credit that use consumer
credit report information in making a determination to offer a borrower credit
on terms that are "materially less favorable" than the terms offered to most of
the lender's other customers to notify the borrower that the terms are based on
a consumer credit report. In such a case the borrower is entitled to receive a
free copy of the report from the consumer reporting agency. Beginning August 1,
2005, grantors of credit using pre-screened consumer credit report information
in credit solicitations must include an enhanced notice to consumers that they
have the right to opt out from receiving further pre-screened offers of credit.
The effective dates and implementing regulations for many of the other
provisions of the FACT Act are expected to be
74
issued by various federal regulatory agencies during 2005. The Company is
continuing to evaluate the effect of the FACT Act and the implementing
regulations on the Company's business operations or its ability to provide
personalized services to its customers.
In the United States, the Patriot Act of 2001 was enacted in October 2001
in the wake of the September 11th terrorist attacks. The Patriot Act
substantially broadened existing anti-money laundering legislation and the
extraterritorial jurisdiction of the United States. The Patriot Act contains a
wide variety of provisions aimed at fighting terrorism, including provisions
aimed at impeding terrorists' ability to access and move funds used in support
of terrorist activities. Among other things, the Patriot Act requires federal
regulators, led by the Secretary of the Treasury, to regulate or take other
steps to require financial institutions to establish anti-money laundering
programs that meet certain standards, including expanded reporting and enhanced
information gathering and record-keeping requirements. While American Express
has long maintained anti-money laundering programs in our businesses, the
Secretary of the Treasury has issued regulations under the Patriot Act
applicable to certain of our business activities conducted within AEB, TRS, AEFA
and their affiliates, prescribing minimum standards for such anti-money
laundering programs, and we have enhanced existing programs and developed and
implemented new ones in response to these new regulations. For example, in April
2002, the U.S. Treasury issued draft regulations applicable to operators of
credit card networks (such as VISA, MasterCard, Diners Club, Discover and
American Express) that would require credit card networks to have risk-based
programs to screen institutions that are licensed to issue cards or acquire
merchants on their networks. As a result, we developed and implemented a program
for our Global Network Services business, and in 2004 completed our screening of
existing licensed institutions and will apply the screening under this program
to all new licensing relationships. We have also developed and implemented a
Customer Identification Program applicable to many of our businesses, and have
enhanced our Know Your Customer and Enhanced Due Diligence programs in others.
We intend to take steps to comply with any additional regulations that are
adopted. In addition, we will take steps to comply with anti-money laundering
initiatives adopted in other jurisdictions in which we conduct business.
We have significant operations in the European Union, including a number
of regulated businesses. We monitor developments in EU legislation, as well as
in the other markets in which we operate, to ensure that we are in a position to
comply with all applicable legal requirements, including European Union
directives applicable to credit institutions, insurance intermediaries and other
financial institutions. Significant EU developments include the EU Insurance
Mediation Directive pursuant to which each EU member state was required to
authorize general insurance intermediaries in its state by mid-January 2005.
Subject to this authorization, intermediaries will then be permitted to conduct
insurance intermediation in other member states via the EU "passporting" regime.
In addition, the EU directive on the supplementary supervision of financial
conglomerates contemplates that certain financial conglomerates involved in
banking, insurance and investment activities will be subject to a system of
supplementary supervision at the level of the holding company constituting the
financial conglomerate. The Directive requires such financial conglomerates to,
among other things, implement measures to prevent excessive leverage and
multiple gearing of capital, and to maintain internal control processes to
address risk concentrations as well as risks arising from significant intragroup
75
transactions. We are evaluating the applicability of this directive to our
business in light of the proposed spin-off of AEFC.
FOREIGN OPERATIONS
We derive a significant portion of our revenues from the use of our card
products, Travelers Cheques, travel and other financial products and services in
countries outside the United States and continue to broaden the use of these
products and services outside the United States. (For a discussion of our
revenue by geographic region, see Note 19 to our Consolidated Financial
Statement, which you can find on pages 117-120 of our Annual Report to
Shareholders and which is incorporated herein by reference.) Our revenues can be
affected by political and economic conditions in these countries (including the
availability of foreign exchange for the payment by the local card issuer of
obligations arising out of local Cardmembers' spending outside such country, for
the payment of card bills by Cardmembers who are billed in other than their
local currency, and for the remittance of the proceeds of Travelers Cheque
sales). Substantial and sudden devaluation of local Cardmembers' currency can
also affect their ability to make payments to the local issuer of the card in
connection with spending outside the local country. The majority of AEB's
revenues are derived from business conducted in countries outside the United
States. Some of the risks attendant to those operations include currency
fluctuations and changes in political, economic and legal environments in each
such country.
As a result of our foreign operations, we are exposed to the possibility
that, because of foreign exchange rate fluctuations, assets and liabilities
denominated in currencies other than the United States dollar may be realized in
amounts greater or less than the United States dollar amounts at which they are
currently recorded in our Consolidated Financial Statements. Examples of
transactions in which this may occur include the purchase by Cardmembers of
goods and services in a currency other than the currency in which they are
billed; the sale in one currency of a Travelers Cheque denominated in a second
currency; foreign exchange positions held by AEB as a consequence of its
client-related foreign exchange trading operations; and, in most instances,
investments in foreign operations. These risks, unless properly monitored and
managed, could have an adverse effect on our operations.
Our policy in this area is generally to monitor closely all foreign
exchange positions and to minimize foreign exchange gains and losses, for
example, by offsetting foreign currency assets with foreign currency
liabilities, as in the case of foreign currency loans and receivables, which are
financed in the same currency. An additional technique that we may use to manage
exposures is the spot and forward purchase or sale of foreign currencies as a
hedge of net exposures in those currencies. Additionally, Cardmembers may be
charged in United States dollars for their spending outside their local country.
Our investments in foreign operations are hedged by forward exchange contracts
or by identifiable transactions, where appropriate.
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
We have made various forward-looking statements in this report.
Forward-looking statements may also be made in our other reports filed with the
SEC, in our press releases and in
76
other documents. In addition, from time to time, we, through our management, may
make oral forward-looking statements. Forward-looking statements are subject to
risks and uncertainties, including those identified below, which could cause
actual results to differ materially from such statements. 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. We undertake no obligation to update publicly or revise any
forward-looking statements. Factors that could cause actual results to differ
materially from our forward-looking statements include, but are not limited to,
the following:
American Express Company's ability to:
- complete our plan to spin-off the AEFA business unit to our
shareholders, which is subject to final approval by our Board of
Directors, the receipt of necessary regulatory approvals and a
favorable tax ruling and/or opinion of outside counsel, and in
connection with the spin-off, the Company's ability to capitalize
AEFA consistent with rating agency requirements and to manage
transition costs and implement effective transition arrangements
post-spin-off with AEFA;
- grow our business and meet or exceed our return on equity target by
reinvesting approximately 35% of annually-generated capital and
returning approximately 65% of such capital to shareholders, over
time, which will depend, in part, on our ability to manage our
capital needs and the effect of business mix, acquisitions and
rating agency requirements;
- successfully expand our online and offline distribution channels and
cross-selling for financial, travel, card and other products and
services to our customer base, both in the United States and abroad;
- generate sufficient revenues for expanded investment spending, which
will depend in part on the success of reengineering programs, and
the ability to capitalize on such investments to improve business
metrics;
- invest successfully in, and compete at the leading edge of,
technology developments across all businesses, e.g., transaction
processing, data management, customer interactions and
communications, travel reservations systems, prepaid products,
multi-application smart cards and risk management and compliance
systems;
- effectively leverage our assets, such as our brand, customers and
international presence, in the Internet environment;
- recognize evolutionary technology developments by competitors or
others that could hasten business model obsolescence or, because of
patent rights held by such competitors or others, limit or restrict
our use of desired business technology or processes;
- develop and implement successfully enterprise-wide interactive
strategies;
77
- improve online customer satisfaction, Web site performance and
online availability for our customers and clients;
- improve our 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 our revenues;
- successfully achieve in a timely manner significant cost savings and
other benefits (totaling at least $1 billion in the aggregate) from
the reengineering efforts being implemented or considered by us,
including cost management, structural and strategic measures such as
vendor, process, facilities and operations consolidation,
outsourcing functions (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;
- participate in payment and other systems material to our businesses
on a fair and competitive basis;
- control and manage operating, infrastructure, advertising and
promotion and other expenses as business expands or changes,
including the ability to accurately estimate the provision for the
cost of our Membership Rewards program;
- accurately estimate the provision for credit losses in our
outstanding portfolio of loans and receivables;
- manage credit risk related to consumer debt, business loans,
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 our card products and returns on our investment portfolio;
- manage a downturn in our businesses and/or negative changes in our
and our subsidiaries' credit ratings, which could result in
contingent payments under contracts, decreased liquidity and higher
borrowing costs;
- accurately estimate the fair value of the assets in our investment
portfolio and, in particular, those investments that are not readily
marketable, including the valuation of the interest-only (I/O)
strip relating to TRS' lending securitizations; and
- attract and retain qualified employees in all our businesses.
78
TRS' ability to:
- increase consumer and business spending and borrowing on our 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 develop and
issue new or enhanced card and prepaid products and increase
revenues from such products, attract new Cardmembers, reduce
Cardmember attrition, increase merchant coverage, and capture a
greater share of customers' total spending on Cards issued on our
network both in the United States and in our international
operations;
- retain Cardmembers in consumer lending products after low
introductory rate periods have expired;
- sustain premium discount rates on its card products in light of
market and regulatory pressures, increase merchant coverage and
reduce suppression, all of which will depend in part on its ability
to maintain a customer base that appeals to merchants and to develop
deeper merchant relationships through creation of new products and
services;
- expand the Global Network Services business, which will depend in
part on the extent to which such business enhances the Company's
brand, allows the Company to leverage its transaction processing
scale, expands merchant coverage of the network overall, provides
GNS partners with the benefits of greater Cardmember loyalty and
higher spend per customer, and benefits merchants through greater
transaction volume and additional higher spend customers, and manage
risks associated with a GNS partner's failure to meet its settlement
obligations;
- execute the Company's global corporate services strategy including
greater penetration of middle market companies, increasing capture
of non-T&E spending through greater use of the Company's corporate
purchasing solutions and other means, and further globalizing
business capabilities;
- enhance significantly its international operations, which will
depend in part on its ability to reduce expenses for reinvestment in
the international business and expand the proprietary and third
party-issued Card businesses;
- cost effectively manage and expand Cardmember benefits, including
containing the growth of marketing, promotion and rewards expenses;
- manage bankruptcies, restructurings or similar events affecting the
airline or any other industry representing a significant portion of
TRS' billed business, including any potential negative effects 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;
79
- manage the triggering of obligations to make payments to certain
cobrand partners, merchants, vendors and customers under contractual
arrangements with such parties under certain circumstances; and
- manage 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 its loan to Delta of up to $75 million.
AEFA's ability to:
- improve investment performance in AEFA's businesses, including
attracting and retaining high-quality personnel, and reduce outflows
of invested funds;
- 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;
- manage developments relating to AEFA's platform structure for
financial advisors, including the ability to increase advisor
productivity (including adding new clients), increase the growth of
productive new advisors and create efficiencies in the
infrastructure;
- make accurate assumptions related to the amount of amortization of
deferred acquisition costs ("DAC") with respect to sale of annuity,
insurance and certain mutual fund products, or changes in
assumptions relating to DAC, which could impact the amount of DAC
amortization;
- respond effectively to fluctuation in the equity and fixed income
markets, a short-term financial market crash or a long-term
financial market decline or stagnation, or a prolonged period of
relatively low or high interest rates, any of which could affect the
amount and types of investment products sold by AEFA, AEFA's ability
to earn target spreads on fixed account liabilities, the level of
management, distribution and other fees received based on the market
value of managed assets and AEFA's ability to recover DAC, as well
as the timing of that DAC amortization;
- make accurate estimates of the level of reserves required to fund
guaranteed minimum death benefits, guaranteed minimum income
benefits and guaranteed minimum withdrawal benefits paid to clients
under its variable annuity products;
- resolve the potential conflicts inherent in its business model;
- respond effectively to 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,
including fees generated through revenue sharing arrangements,
change mutual fund governance and mandate additional disclosures,
and the ability to make the
80
required investment to upgrade compliance systems and procedures in
response to these changes;
- respond effectively to changes to or elimination of federal tax
benefits for AEFA's products and to other changes in laws and
regulations that could adversely affect sales of mutual fund,
insurance and annuity products;
- respond effectively if the independent directors of the mutual funds
managed by AEFA reduce the compensation paid to AEFA or terminate
the contracts to manage, distribute and/or service those funds; and
- manage potential deterioration in the high-yield sector and other
investment areas, which could result in losses in AEFA's investment
portfolio.
In general:
- the continuation of favorable trends, such as increasing travel and
entertainment spending and the overall level of consumer confidence,
stable to appreciating equity markets and improving credit
provisions;
- relationships with third-party providers of various computer systems
and other services integral to the operations of our businesses;
- fluctuations in foreign currency exchange rates;
- the costs and integration of acquisitions;
- the amount of recovery under our insurance policies for losses
resulting from the September 11, 2001 terrorist attacks;
- the potential negative effect on our businesses and infrastructure,
including information technology systems, of terrorist attacks,
disasters or other catastrophic events in the future;
- political or economic instability in certain regions or countries,
which could affect commercial or other lending activities, among
other businesses, or restrictions on convertibility of certain
currencies;
- outcomes and costs associated with litigation and compliance and
regulatory matters;
- deficiencies or inadequacies in our internal control over financial
reporting, which could result in inaccurate or incomplete financial
reporting; and
- competitive pressures in all of our major businesses.
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SEGMENT INFORMATION AND CLASSES OF SIMILAR SERVICES
You can find information regarding the Company's operating segments,
geographic operations and classes of similar services in Note 19 to the
Consolidated Financial Statements of the Company, which appears on pages 117-120
of the Company's 2004 Annual Report to Shareholders, which Note is incorporated
herein by reference.
EXECUTIVE OFFICERS OF THE COMPANY
Set forth below is a list of all our executive officers as of March 1,
2005. None of our executive officers has any family relationship with any other
executive officer, and none of our executive officers became an officer pursuant
to any arrangement or understanding with any other person. Each executive
officer has been elected to serve until the next annual election of officers or
until his or her successor is elected and qualified. Each officer's age is
indicated by the number in parentheses next to his or her name.
KENNETH I. CHENAULT - Chairman and Chief Executive Officer;
Chairman and Chief Executive Officer, TRS
Mr. Chenault (53) has been Chairman since April 2001 and Chief Executive
Officer since January 2001. Prior thereto he had been President and Chief
Operating Officer of the Company since February 1997. He has also been Chairman
of TRS since April 2001 and Chief Executive Officer of TRS since February 1997.
JONATHAN S. LINEN - Vice Chairman
Mr. Linen (61) has been Vice Chairman since August 1993.
JAMES M. CRACCHIOLO - Group President, Global Financial Services;
President and Chief Executive Officer, AEFC;
Chairman and Chief Executive Officer, AEFA;
Mr. Cracchiolo (46) has been Group President, Global Financial Services
since June 2000, President and Chief Executive Officer of AEFC since November
2000 and Chairman and Chief Executive Officer of AEFA since March 2001. Prior
thereto he had been President and CEO of AEFA since June 2000. Mr. Cracchiolo
also had been President and Chief Executive Officer of TRS International from
May 1998 through July 2003.
GARY L. CRITTENDEN - Executive Vice President and Chief Financial
Officer
Mr. Crittenden (51) has been Executive Vice President and Chief Financial
Officer since June 2000. Prior thereto he had been Senior Vice President and
Chief Financial Officer of Monsanto since September 1998.
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URSULA F. FAIRBAIRN - Executive Vice President, Human Resources
and Quality
Mrs. Fairbairn (62) has been Executive Vice President, Human Resources and
Quality of the Company since December 1996.
EDWARD P. GILLIGAN - Group President, Global Corporate Services
and International Payments, TRS
Mr. Gilligan (45) has been Group President, Global Corporate Services, TRS
since June 2000 and President, International Payments, since July 2003. Prior
thereto he had been President, Corporate Services, TRS since February 1996.
JOHN D. HAYES - Executive Vice President, Global Advertising
and Brand Management and Chief Marketing
Officer
Mr. Hayes (50) has been Executive Vice President, Global Advertising and
Brand Management since May 1995 and Chief Marketing Officer of the Company since
August 2003.
DAVID C. HOUSE - Group President, Global Network and
Establishment Services and Travelers Cheque
and Prepaid Services Group, TRS
Mr. House (54) has been Group President, Global Network and Establishment
Services and Travelers Cheque and Prepaid Services Group, TRS since June 2000.
Prior thereto he had been President, TRS Establishment Services since October
1995.
ALFRED F. KELLY, JR. - Group President, U.S. Consumer and Small
Business Services, TRS
Mr. Kelly (46) has been Group President, U.S. Consumer and Small Business
Services, TRS since June 2000. Prior thereto he had been President, Consumer
Card Services Group, TRS since October 1998.
LOUISE M. PARENT - Executive Vice President and General Counsel
Ms. Parent (54) has been Executive Vice President and General Counsel
since May 1993.
GLEN SALOW - Executive Vice President and Chief
Information Officer
Mr. Salow (48) has been Executive Vice President and Chief Information
Officer since March 2000. Prior thereto he had been Senior Vice President,
E-Commerce, United States Card and Travel Services, TRS since December 1999.
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THOMAS SCHICK - Executive Vice President, Corporate Affairs and
Communications
Mr. Schick (58) has been Executive Vice President, Corporate Affairs and
Communications since March 1993.
EMPLOYEES
We had approximately 77,500 employees on December 31, 2004.
ITEM 2. PROPERTIES
Our principal executive offices are in a 51-story, 2.2 million square foot
building located in lower Manhattan, which also serves as the headquarters for
TRS and AEB. This building, which is on land leased from the Battery Park City
Authority for a term expiring in 2069, is one of four office buildings in a
complex known as the World Financial Center. We have a 49% ownership interest in
the building. In 2002, an affiliate of Brookfield Financial Properties acquired
the 51% interest in the building that had previously been owned by Lehman
Brothers Holdings Inc.
Because of its proximity to the World Trade Center, our headquarters were
damaged as a result of the terrorist attacks of September 11, 2001. As a result
of these events, we were required to temporarily relocate our headquarters and
we entered into five new leases for approximately 750,000 square feet of space
in the New York, New Jersey and Connecticut area. The repair work to our
headquarters was completed on schedule during 2002 and we relocated back into
the Company headquarters. We have subleased a portion of the temporary space,
and we continue our efforts to sublease out the remaining additional space in
the tri-state area. We also relocated back to the World Financial Center
employees from our Jersey City facility who had been permanently based at such
location before September 11, 2001. We have subleased the Jersey City space to a
third party.
Other principal locations of TRS include: the American Express Service
Centers in Fort Lauderdale, Florida; Phoenix, Arizona; Greensboro, North
Carolina; Salt Lake City, Utah; and the Amex Canada Inc. headquarters in
Markham, Ontario, Canada.
AEFA operates its business from two principal locations, both of which are
located in Minneapolis, Minnesota: the American Express Financial Center, which
we lease, and the Client Service Center, which we own. Title to a third
property, the Operations Center, which had been owned by AEFA, was transferred
to TRS in the first quarter of 2004 to better reflect the operations being
performed in the facility. AEFA's lease term for the American Express Financial
Center, which began in November 2000, is for 20 years with several options to
extend the term. AEFA also owns Oak Ridge Conference Center, a training facility
and conference center in Chaska, Minnesota.
IDS Property Casualty, a subsidiary of AEFA, has its corporate
headquarters in Ashwaubenon, Wisconsin, a suburb of Green Bay.
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In December 2004, several of our subsidiaries entered into an agreement to
sell and lease back a total of seven real properties located in the United
States to designated affiliates of The Inland Real Estate Group, Inc. ("Inland")
and closed on the sale of six of those properties. The six properties that were
sold in December 2004 were the American Express Service Centers in Fort
Lauderdale, Florida; Greensboro, North Carolina; and Phoenix, Arizona; the
American Express Data Center in Minneapolis; the IDS Property Casualty Insurance
Corporation headquarters in Ashwaubenon, Wisconsin; and the American Express
Finance Center in Phoenix. The remaining property to be sold under this
agreement is the American Express Service Center in Salt Lake City and that
transaction is expected to close in March 2005, subject to customary closing
conditions. In addition, in January 2005, one of our Canadian subsidiaries
closed on the sale and lease back of the Amex Canada headquarters property
referred to above in Markham, Ontario, Canada. These sale and leaseback
transactions will enable us to monetize the value of these properties and use
the proceeds for re-investment in our businesses.
At each closing, an affiliate of Inland leased the relevant property back
to one of our subsidiaries for a ten-year term, with an option given to us to
renew the lease for up to six renewal terms of five years each. (The same
procedure will apply to the remaining property referenced above.) The leases are
net leases whereby each American Express entity that leases back the property is
responsible for all costs and expenses relating to the property (including
maintenance, repair, utilities, operating expenses and insurance costs) in
addition to annual rent. The eight properties comprise approximately 2.6 million
square feet and have an aggregate net book value of approximately $235 million
and an aggregate sales price of approximately $390 million. The aggregate annual
rent for the first five years of the leases for all the eight properties will be
approximately $25 million. The sale leaseback transactions will not materially
impact our financial results in any year. Gains resulting from completed sale
and leaseback transactions will be amortized over the initial ten-year lease
periods. We continue to consider whether sale-leaseback transactions are
appropriate for other properties that we currently own.
In February 2000, we entered into a ten-year agreement with Trammell Crow
Corporate Services, Inc. for facilities, project and transaction management and
other related services. The agreement covers North and South America and parts
of Europe.
Generally, we and our subsidiaries lease the premises we occupy in other
locations. We believe that the facilities we own or occupy suit our needs and
are well maintained.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in a number of legal and
arbitration proceedings, including class actions, concerning matters arising in
connection with the conduct of our respective business activities. We believe
we have meritorious defenses to each of these actions and we intend to defend
them vigorously. We believe that we are not a party to, nor are any of our
properties the subject of, any pending legal or arbitration proceedings that
would have a material adverse effect on our consolidated financial condition,
results of operations or liquidity. However, it is possible that the outcome of
any such proceedings could have a material
85
impact on our results of operations in any particular reporting period as the
proceedings are resolved. Certain legal proceedings involving the Company are
described below.
CORPORATE PROCEEDINGS
Beginning in mid-July 2002, 12 putative class action lawsuits were filed
in the United States District Court for the Southern District of New York. In
October 2002, these cases were consolidated under the caption In re American
Express Company Securities Litigation. These lawsuits allege violations of the
federal securities laws and the common law in connection with alleged
misstatements regarding certain investments in high-yield bonds and write-downs
in the 2000-2001 timeframe. The purported class covers the period from July 18,
1999 to July 17, 2001. The actions seek unspecified compensatory damages as well
as disgorgement, punitive damages, attorneys' fees and costs, and interest. On
March 31, 2004, the Court granted the Company's motion to dismiss the lawsuit.
Plaintiffs have appealed the dismissal to the United States Court of Appeals for
the Second Circuit.
TRS PROCEEDINGS
The Company has been named in several purported class actions in various
state courts alleging that the Company violated the respective state's laws by
wrongfully collecting amounts assessed on converting transactions made in
foreign currencies to U.S. dollars and/or failing to properly disclose the
existence of such amounts in its Cardmember agreements and billing statements.
The plaintiffs in the actions seek, among other remedies, injunctive relief,
money damages and/or attorneys' fees on their own behalf and on behalf of the
putative class of persons similarly situated. On October 15, 2004, the U.S.
District Court for the Southern District of Florida granted preliminary approval
of a nationwide class action settlement to resolve all lawsuits and allegations
with respect to the Company's collection and disclosure of fees assessed on
transactions made in foreign currencies in the case captioned Lipuma v. American
Express Bank, American Express Travel Related Services Company, Inc. and
American Express Centurion Bank (filed in August 2003). The settlement that has
been preliminarily approved by the Court contemplates that the Company would (a)
deposit $75 million into a fund that would be established to reimburse class
members with valid claims, make certain contributions to charitable
organizations to be identified later and pay attorneys' fees and (b) make
certain changes to the disclosures in its Cardmember agreements and billing
statements regarding its foreign currency conversion practices. The Company has
established reserves to cover the proposed payment that would be made to
reimburse class members and pay attorneys' fees. The preliminary approval order
enjoins all other proceedings that make related allegations pending a final
approval hearing including, but not limited to the following cases: (i)
Environmental Law
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Foundation, et al. v. American Express Company, et al., Superior Court of
Alameda County, California (filed March 2003); (ii) Rubin v. American Express
Company and American Express Travel Related Services Company, Inc., Circuit
Court of Madison County, Illinois (filed April 2003); (iii) Angie Arambula, et
al. v. American Express Company, et al., District Court of Cameron County,
Texas, 103rd Judicial District (filed May 2003); (iv) Fuentes v. American
Express Travel Related Services Company, Inc. and American Express Company,
District Court of Hidalgo County, Texas (filed May 2003); (v) Wick v. American
Express Company, et al., Circuit Court of Cook County, Illinois (filed May
2003); (vi) Bernd Bildstein v. American Express Company, et al., Supreme Court
of Queens County, New York (filed June 2003); (vii) Janowitz v. American Express
Company, et al., Circuit Court of Cook County, Illinois (filed September 2003);
(viii) Paul v. American Express Company, et al., Superior Court of Orange
County, California (filed January 2004); and (ix) Ball v. American Express, et
al., Superior Court of San Joaquin, California (filed August 2004).
In July 2004, a purported class action captioned Ross, et al. v. American
Express Company, American Express Travel Related Services and American Express
Centurion Bank was filed in the United States District Court for the Southern
District of New York. The complaint alleges that AMEX conspired with Visa,
MasterCard and Diners Club in the setting of foreign conversion rates and in the
inclusion of arbitration clauses in certain of their cardmember agreements. The
basis for these allegations is the presence of an American Express lawyer at a
seminar where legal issues common to the financial services industry were
discussed. Those meetings were attended by in-house lawyers of financial
institutions including American Express. The suit seeks injunctive relief and
unspecified damages. The class is defined as "all Visa, MasterCard and Diners
Club general purpose cardholders who used cards issued by any of the MDL
Defendant Banks...." American Express cardholders are not part of the class. The
Company intends to file a motion to dismiss the complaint as to American
Express.
In November 2004, a motion to authorize a class action captioned Sylvan
Adams v. Amex Bank of Canada was filed in the Superior Court of Quebec, District
of Montreal. The motion alleges that prior to December 2003, Amex Bank of Canada
("Amex Bank") charged a foreign currency conversion commission on transactions
to purchase goods and services in currencies other than Canadian dollars and
failed to disclose the commissions in monthly billing statements or
solicitations directed to prospective cardmembers. The proposed class claims
reimbursement of all foreign currency conversion commissions, CDN$1,000 in
punitive damages per class member, interest and fees and costs.
In May 2003, a purported class action, captioned eGeneral Medical, Inc.,
et al. v. Visa U.S.A., Inc. et al., was filed in the Eastern District of North
Carolina alleging that the fees charged to Internet merchants when funds have
been advanced by American Express and are later charged back to those merchants
because a consumer transaction has been determined to be the result of fraud, or
when a transaction has been disputed by the consumer and the dispute is resolved
in the consumer's favor, are excessive. The plaintiffs seek treble damages in an
unspecified amount "but which is, at a minimum, hundreds of millions of
dollars," disgorgement of fees earned, injunctive and other relief. In November
2003 the plaintiffs made a motion seeking the Court's permission to dismiss the
action as to American Express Company without prejudice. Such motion has been
approved and the case has been dismissed.
The Company has been named in a number of purported class actions in which
the plaintiffs allege an unlawful antitrust tying arrangement between the
Company's charge cards, credit cards and debit cards in violation of various
state and federal laws, including the following: (i) Cohen Rese Gallery et al.
v. American Express Company et al., U.S. District Court for the Northern
District of California (filed July 2003); (ii) Italian Colors Restaurant v.
American Express Company et al., U.S. District Court for the Northern District
of California (filed August 2003); (iii) DRF Jeweler Corp. v. American Express
Company et al., U.S. District Court for the Southern District of New York (filed
December 2003); (iv) Hayama Inc. v. American Express Company et al., Superior
Court of California, Los Angeles County (filed December 2003); (v) Chez Noelle
Restaurant v. American Express Company et al., U.S. District Court for the
Southern District of New York (filed January 2004); (vi) Mascari Enterprises
d/b/a Sound Stations v. American Express Company et al., U.S. District Court for
the Southern District of New York (filed January 2004); (vii) Mims Restaurant v.
American Express Company et al., U.S. District Court for the Southern District
of New York (filed February 2004); and (viii) The Marcus Corporation v. American
Express Company et al., U.S. District Court for the Southern District of New
York (filed July 2004). The plaintiffs in these actions seek injunctive relief
and an unspecified amount of damages. Upon motion to the Court by the Company,
the venue of the Cohen Rese and Italian Colors actions was moved to the U.S.
District Court for the Southern District of New York in December 2003. Each of
the above-listed actions (except for Hayama) is now pending in the U.S. District
Court for the Southern District of New York. On April 30, 2004, the Company
filed a motion to dismiss all the actions filed prior to such date that
87
were pending in the U.S. District Court for the Southern District of New York. A
decision on that motion is pending. In addition, the Company has asked the Court
in the Hayama action to stay that action pending resolution of the motion in the
Southern District of New York. The Company has also filed a motion to dismiss
the action filed by The Marcus Corporation.
In December 2004, a purported class action captioned National Supermarkets
Association, Inc., Mascari Enterprises, Inc. d/b/a Sound Stations, and Bunda
Starr Corp. d/b/a Brite Wines and Spirits v. MBNA America Bank, N.A., MBNA
Corp., Citibank (South Dakota) N.A. and Citigroup, Incorporated, was filed in
the United States District Court for the Southern District of New York. The
action is a lawsuit related to the antitrust tying actions described in the
preceding paragraph. Although the Company is not named as a defendant, the
plaintiffs in this action are also plaintiffs in the direct actions against
American Express described in the preceding paragraph. This lawsuit alleges
that, by agreeing to issue American Express-branded cards, MBNA and Citibank
have conspired with the Company in the alleged wrongful tying arrangement
described in the preceding paragraph. The Company believes this lawsuit is
without merit and is contrary to the Department of Justice's successful efforts
to render unenforceable Visa's and MasterCard's rules that prevented banks from
issuing American Express-branded cards in the United States. The Company also
believes that this lawsuit is susceptible to the same defenses available to the
Company in the direct actions filed against it, which are described in the
preceding paragraph, and will seek to intervene in this action and have it
dismissed.
In July 2003, a motion to authorize a class action captioned Option
Consommateurs and Normand Painchaud v. American Express Bank of Canada et al.
was filed in the Superior Court of Quebec, District of Montreal. The motion,
which also names as defendants Citibank Canada, MBNA Canada, Capital One and
Royal Bank of Canada, alleges that the defendants have violated the Quebec
Consumer Protection Act by imposing finance charges on credit card transactions
prior to 21 days following the receipt of the statement containing the charge.
It is alleged that the Quebec Consumer Protection Act provisions which require a
21 day grace period prior to imposing finance charges applies to credit cards
issued by American Express Bank of Canada in Quebec and that finance charges
imposed prior to this grace period violate the Act. The proposed class
seeks reimbursement of all finance charges imposed in violation of the Act, $200
in punitive damages per class member, interest and fees and costs.
In November 2004, the Company filed a lawsuit captioned American Express
Travel Related Services Company, Inc. v. VISA USA Inc., MasterCard
International, Inc. et al. in the U.S. District Court for the Southern District
of New York. The lawsuit seeks unspecified monetary damages against VISA,
MasterCard and eight major banks that are members of the two card associations
for the business lost as a result of the illegal, anticompetitive practices of
the card associations that effectively locked the Company out of the bank-issued
card business in the United States. The lawsuit follows the U.S. Supreme Court's
October 2004 decision not to hear an appeal from VISA and MasterCard that sought
to overturn a lower court ruling that found the two card associations in
violation of U.S. antitrust laws.
AEFA PROCEEDINGS
In November 2002, a suit, captioned Haritos et al. v. American Express
Financial Corporation and IDS Life Insurance Company, was filed in the United
States District Court for the District of Arizona. The suit is filed by
plaintiffs who purport to represent a class of all persons that have purchased
financial plans from AEFA advisors from November 1997 through July 2004.
Plaintiffs allege that the sale of the plans violates the Investment Advisers
Act of 1940 (the "IAA"). The suit seeks an unspecified amount of damages,
rescission of the investment advisor plans and restitution of monies paid for
such plans. In June 2004, the Court denied the Company's motion to dismiss the
action as a matter of law. The Court did indicate, however, that the plaintiffs
may not have a compelling case under the IAA. Notwithstanding the Court's denial
of the Company's motion to dismiss, the Company believes that the plaintiffs'
case suffers from various factual and legal weaknesses and it intends to
continue to defend the case vigorously, and the Company has filed a motion to
dismiss plaintiff's Second Amended Complaint.
In October 2004, a purported class action complaint captioned In re
American Express Financial Advisors Securities Litigation was filed in the
United States District Court for the Southern District of New York. The action
names the following defendants: American Express, American Express Financial,
American Express Advisors and James M. Cracchiolo in his capacity as President
and CEO of American Express Financial and Chairman and CEO of American Express
Advisors. Certain American Express Funds are also named as nominal defendants.
The action is a consolidation of the following actions: (i) Naresh Chand v.
American Express Company, American Express Financial Corporation and American
Express Financial Advisors, Inc. (filed March 2004); (ii) Elizabeth Flenner v.
American Express Company et al. (filed March 2004); (iii) John B. Perkins v.
American Express Company et al. (filed March 2004); (iv) Kathie Kerr v. American
Express Company et al. (filed April 2004); and (v) Leonard D. Caldwell, Gale D.
Caldwell and Richard T. Allen v. American Express Company et al. (filed April
2004). The plaintiffs allege violations of certain federal securities laws
and/or state statutory and common law. The plaintiffs, among other things,
allege that AEFA's financial plans are used as a means to recommend mutual funds
that pay "undisclosed kickbacks" to the Company. The Class Period at issue is
March 10, 1999 through February 9, 2004. Plaintiffs seek to represent one class
consisting of all AEFA clients who purchased the preferred mutual funds during
the relevant period and another class comprised of those AEFA clients who also
purchased financial plans during the relevant period. For their damages,
plaintiffs seek restitution of the "undisclosed kickbacks" and the fees paid to
the Company for the financial plans. The Company has filed a motion to dismiss
the complaint. In addition, two lawsuits making similar allegations (based
solely on state causes of actions) were filed in the Supreme Court of the State
of New York: Beer v. American Express Company and American Express Financial
Advisors and You v. American Express Company and American Express Financial
Advisors. The Company has sought to remove these two actions to the United
States District Court for the Southern District of New York. Plaintiffs have
sought to remand the cases to state court. The Court's decision on the remand
motion is pending.
In July 2003, a National Association of Securities Dealers, Inc. ("NASD")
arbitration panel held Securities America, Inc. ("SAI"), a wholly owned
subsidiary of the Company, liable in connection with certain claims filed by
clients of a former broker of SAI who adopted an assumed identity to work for
SAI and then allegedly engaged in improper practices in connection with his
clients and their accounts. The arbitration panel awarded the clients
approximately $1.4 million in compensatory damages and approximately $4.1
million in punitive damages. SAI filed a motion to have the decision of the
arbitration panel vacated. The matter was subsequently settled for a reduced
amount. To date, 16 additional claims by other clients (or groups of clients) of
the former broker have been filed against SAI in various courts and before the
NASD. Eleven of those claims have been settled or resolved by final judgment.
The SEC, NASD and several state attorneys general have brought numerous
enforcement proceedings against individuals and firms challenging several mutual
fund industry practices
88
including late trading (allowing mutual fund customers to receive 4:00 p.m. ET
prices for orders placed or confirmed after 4:00 p.m. ET), market timing
(abusive rapid trading in mutual fund shares), disclosure of revenue sharing
arrangements, which are paid by fund advisers or companies to brokerage firms
who agree to sell those funds, and inappropriate sales of Class B (i.e., no
front end load) shares. AEFA has received requests for information and has been
contacted by regulatory authorities concerning its practices and is cooperating
fully with these inquiries.
In May 2004, the Company reported that the broker-dealer subsidiary of
AEFA had received notification from the staff of the NASD indicating that it had
made a preliminary determination to recommend that the NASD bring an action
against AEFA for potential violations of federal securities laws and the rules
and regulations of the SEC and the NASD. The notice received by AEFA comes in
the context of a broader industry-wide review of the mutual fund and brokerage
industries that is being conducted by various regulators. The NASD staff's
allegations relate to AEFA's practices with respect to various revenue sharing
arrangements pursuant to which AEFA receives payments from certain
non-proprietary mutual funds for agreeing to make their products available
through AEFA's national distribution network. In particular, the NASD has
alleged that AEFA (i) failed to properly disclose such revenue sharing
arrangements from January 2001 until May 2003, (ii) failed to properly disclose
such revenue sharing arrangements in its brokerage confirmations and (iii)
received directed brokerage from January 2001 until December 2003. The notice
from the NASD staff is intended to give AEFA an opportunity to discuss the
issues it has raised. AEFA has been availing itself of this opportunity and
continues to cooperate fully with the NASD's inquiry regarding this matter, as
well as with all other regulatory inquiries.
On February 17, 2005, the New Hampshire Bureau of Securities Regulation
filed a petition against AEFA. The petition alleges that AEFA violated New
Hampshire and federal securities laws by failing to disclose revenue sharing and
directed brokerage payments received from non-proprietary mutual funds for
agreeing to make their products available through AEFA's national distribution
network. The petition also alleges that AEFA failed to disclose incentives for
advisors to sell proprietary products and other alleged conflicts of interest.
The petition seeks, among other things, an order to show cause why AEFA's
broker-dealer license should not be denied, suspended or revoked, a proposed
fine and restitution of financial planning fees during the relevant period
(principally 1999 to 2003) in the amount of $17.5 million, and disgorgement of
revenue sharing and directed brokerage payments and other relief. AEFA intends
to cooperate fully in this matter.
In addition to the foregoing, in February, 2004 AEFA was one of 15 firms
that settled an enforcement action brought by the SEC and the NASD relating to
breakpoint discounts (i.e., volume discounts available to investors who make
large mutual fund purchases) pursuant to which AEFA agreed to pay a fine of $3.7
million and to reimburse customers to whom the firm failed to deliver such
discounts.
89
In June 2004, an action captioned John E. Gallus et al. v. American
Express Financial Corp. and American Express Financial Advisors, Inc. was filed
in the United States District Court for the District of Arizona. The plaintiffs
allege that they are investors in several "AXP" mutual funds and they purport to
bring the action derivatively on behalf of those funds under the Investment
Company Act of 1940. The plaintiffs allege that fees allegedly paid to the
defendants by the funds for investment advisory and administrative services are
excessive. The plaintiffs seek remedies including restitution and rescission of
investment advisory and distribution agreements. The plaintiffs voluntarily
agreed to transfer this case to the United States District Court for the
District of Minnesota. The Company has filed a motion to dismiss the complaint.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of our security holders during the
last quarter of our fiscal year ended December 31, 2004.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
(a) Our Common Shares trade principally on The New York Stock Exchange
under the trading symbol AXP. In addition, in the United States our Common
Shares are also listed on the Boston, Chicago and Pacific Stock Exchanges. As of
December 31, 2004, we had 50,394 common shareholders of record. You can find
price and dividend information concerning our
91
Common Shares in Note 21 to the Consolidated Financial Statements, which can be
found on page 123 of our Annual Report to Shareholders, which Note is
incorporated herein by reference. You can find information on securities
authorized for issuance under our equity compensation plans under the captions
"Executive Compensation -- Share Plans" and "--Equity Compensation Plan
Information" in the Company's definitive proxy statement for our Annual Meeting
of Shareholders that is scheduled to be held on April 27, 2005. The information
found under such captions is incorporated herein by reference. Our proxy
statement for the Annual Meeting will be filed with the SEC not later than April
30, 2005 (i.e., within 120 days of the close of our most recently completed
fiscal year).
(b) Not applicable.
(c) The table below sets forth the information with respect to purchases
of our common stock made by or on behalf of the Company during the quarter ended
December 31, 2004.
Total Number of Maximum Number of
Shares Purchased as Shares that May Yet
Part of Publicly Be Purchased Under
Total Number of Average Price Announced Plans or the Plans or
Period Shares Purchased Paid Per Share Programs(3) Programs
- ---------------------------- ---------------- -------------- ------------------- -------------------
October 1-31, 2004
Repurchase program (1) 1,500,000 $ 52.69 1,500,000 87,959,423
Employee transactions (2) 310,854 $ 52.36 N/A N/A
November 1-30, 2004
Repurchase program (1) 9,210,700 $ 55.23 9,210,700 78,748,723
Employee transactions (2) 728,682 $ 54.43 N/A N/A
December 1-31, 2004
Repurchase program (1) 4,252,300 $ 56.06 4,252,300 74,496,423
Employee transactions (2) 887,664 $ 55.86 N/A N/A
---------- ------------ ----------
Total
Repurchase program (1) 14,963,000 $ 55.21 14,963,000
Employee transactions (2) 1,927,200 $ 54.76 N/A
(1) Our Board of Directors authorized the repurchase of 120 million shares of
common stock in November 2002. At present, there are approximately 74.5 million
shares remaining under such authorization. Such authorization does not have an
expiration date, and at present, there is no intention to modify or otherwise
rescind such authorization. Since September 1994, we have acquired 495.5 million
shares of our common stock under various Board authorizations to repurchase up
to an aggregate of 570 million shares, including purchases made under agreements
with third parties.
(2) Includes: (a) shares delivered by or deducted from holders of employee stock
options who exercised options (granted under our incentive compensation plans in
satisfaction of the exercise price and/or tax withholding obligation of such
holders) and (b) restricted shares withheld (under the terms of grants under our
incentive compensation plans) to offset tax withholding obligations that occur
upon vesting and release of restricted shares. Our incentive compensation plans
provide that the value of the shares delivered or attested to, or
92
withheld, shall be the average of the high and low price of the Company's common
stock on the date the relevant transaction occurs.
(3) Share purchases under publicly announced programs are made pursuant to open
market purchases or privately negotiated transactions (including with employee
benefit plans) as market conditions warrant and at prices we deem appropriate.
ITEM 6. SELECTED FINANCIAL DATA
The "Consolidated Five-Year Summary of Selected Financial Data" appearing
on page 123 of the Company's 2004 Annual Report to Shareholders is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The information set forth under the heading "Financial Review" appearing
on pages 26-73 of the Company's 2004 Annual Report to Shareholders is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information set forth under the headings "American Express Company
Risk Management" and "Risk Management" appearing on pages 41-44, page 56, page
64 and page 67 and Note 9 to the Consolidated Financial Statements on pages
104-105 of the Company's 2004 Annual Report to Shareholders is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The "Report of Independent Registered Public Accounting Firm," the
"Consolidated Financial Statements" and the "Notes to Consolidated Financial
Statements" appearing on pages 77-122 of the Company's 2004 Annual Report to
Shareholders are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) as of the end of the period covered by this
report. Based on such evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of such period, the
Company's disclosure controls and procedures are effective.
93
There have not been any changes in the Company's internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the Company's fourth fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
"Management's Report on Internal Control over Financial Reporting," which
sets forth management's evaluation of internal control over financial reporting,
and the "Report of Independent Registered Public Accounting Firm on Internal
Control over Financial Reporting," appearing on pages 75-76 of the Company's
2004 Annual Report to Shareholders, are incorporated herein by reference.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY;
EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS; CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
We will file with the SEC, not later than April 30, 2005 (i.e., within
120 days after the close of our last fiscal year), a definitive proxy statement,
pursuant to Regulation 14A of the SEC in connection with our Annual Meeting of
Shareholders to be held April 27, 2005, which involves the election of
directors. The following portions of such proxy statement are incorporated
herein by reference:
o paragraph 6, sentence 1 included under the caption "Corporate Governance -
Summary of the Corporate Governance Principles";
o information under the caption "Corporate Governance - Board Meetings";
o information included in the table under the caption "Corporate Governance -
Membership on Board Committees";
o information under the caption "Corporate Governance - Compensation and
Benefits Committee";
o information under the caption "Corporate Governance - Nominating and
Governance Committee";
o information included under the caption "Corporate Governance - Audit
Committee";
o information included under the caption "Compensation of Directors";
o information included under the caption "Ownership of Our Common Shares";
o information included under the caption "Items to be Voted on by
Shareholders - Item 1 - Election of Directors";
o information included under the caption "Executive Compensation" (excluding
the Report of the Compensation and Benefits Committee, which precedes the
Summary Compensation Table, and excluding the information under the
caption "- Performance Graph");
o information under the caption "Certain Transactions"; and
o information under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance."
In addition, the information regarding executive officers called for by
Item 401(b) of Regulation S-K may be found under the caption "Executive
Officers of the Company" in this report.
We have adopted a set of Corporate Governance Principles, which together
with the charters of the five standing committees of the Board of Directors
(Audit; Compensation and Benefits; Executive; Nominating and Governance; and
Public Responsibility) and our Code of
94
Conduct (which constitutes the Company's code of ethics), provide the framework
for the governance of the Company. A complete copy of our Corporate Governance
Principles, the charters of each of the Board committees, the Code of Conduct
(which applies not only to our Chief Executive Officer, Chief Financial Officer
and Comptroller, but also to all other employees of the Company) and the Code of
Business Conduct for the Members of the Board of Directors may be found by
clicking on the "Corporate Governance" link found on our Investor Relations Web
site at http://ir.americanexpress.com. You may also access our Investor
Relations Web site through the Company's main Web site at
www.americanexpress.com by clicking on the "About American Express" link, which
is located at the bottom of the Company's homepage. (Information from such sites
is not incorporated by reference into this report.) You may obtain free copies
of these materials by also writing to our Secretary at the Company's
headquarters.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information set forth under the heading "Item 2 -- Selection of
Auditors -- Audit Fees"; "-- Audit-Related Fees"; " -- Tax Fees"; " -- All Other
Fees"; " -- Services to Associated Organizations"; and " -- Policy on
Pre-Approval of Services Provided by Independent Registered Public Accountants,
which will appear in the Company's definitive proxy statement in connection with
our Annual Meeting of Shareholders to be held April 27, 2005, is incorporated
herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements:
The financial statements filed as a part of this report are listed on
page F-1 hereof under "Index to Financial Statements covered by Report
of Independent Registered Public Accounting Firm", which is incorporated
herein by reference.
2. Financial Statement Schedules:
The financial statement schedules required to be filed in this report
are listed on page F-1 hereof under "Index to Financial Statements
covered by Report of Independent Registered Public Accounting Firm",
which is incorporated herein by reference.
3. Exhibits:
The list of exhibits required to be filed as exhibits to this report are
listed on pages E-1 through E-5 hereof under "Exhibit Index", which is
incorporated herein by reference.
95
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMERICAN EXPRESS COMPANY
March 10, 2005 /s/ Gary L. Crittenden
----------------------------
Gary L. Crittenden
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the date indicated.
/s/ Kenneth I. Chenault /s/ Peter R. Dolan
- ---------------------------------------------- -------------------
Kenneth I. Chenault Peter R. Dolan
Chairman, Chief Executive Officer and Director Director
/s/ Gary L. Crittenden /s/ Vernon E. Jordan, Jr.
- ---------------------------- -------------------------
Gary L. Crittenden Vernon E. Jordan, Jr.
Executive Vice President and Director
Chief Financial Officer
/s/ Joan C. Amble
- ------------------------------------- ---------------
Joan C. Amble Jan Leschly
Senior Vice President and Comptroller Director
/s/ Daniel F. Akerson /s/ Richard A. McGinn
- --------------------- ---------------------
Daniel F. Akerson Richard A. McGinn
Director Director
/s/ Charlene Barshefsky /s/ Edward D. Miller
- ----------------------- --------------------
Charlene Barshefsky Edward D. Miller
Director Director
/s/ William G. Bowen /s/ Frank P. Popoff
- -------------------- -------------------
William G. Bowen Frank P. Popoff
Director Director
/s/ Ursula M. Burns /s/ Robert D. Walter
- ------------------- --------------------
Ursula M. Burns Robert D. Walter
Director Director
March 10, 2005
96
AMERICAN EXPRESS COMPANY
INDEX TO FINANCIAL STATEMENTS
COVERED BY REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
(ITEMS 15(a)(1) and
15(a)(2) of Form 10-K)
ANNUAL REPORT TO
SHAREHOLDERS
FORM 10-K (PAGE)
--------- ----------------
American Express Company and Subsidiaries:
Data incorporated by reference from 2004 Annual Report to
Shareholders:
Management's report on internal control over financial reporting... 75
Report of independent registered public accounting firm on
internal control over financial reporting........................ 76
Report of independent registered public accounting firm............. 77
Consolidated statements of income for the three
years ended December 31, 2004.................................... 78
Consolidated balance sheets at December 31, 2004
and 2003......................................................... 79
Consolidated statements of cash flows for the
three years ended December 31, 2004.............................. 80
Consolidated statements of shareholders' equity for the
three years ended December 31, 2004.............................. 81
Notes to consolidated financial statements........................... 82-122
Consent of independent registered public accounting firm................. F-2
Schedules:
I - Condensed financial information of the Company.................... F-3 - F-7
II - Valuation and qualifying accounts for the three years ended
December 31, 2004................................................. F-8
All other schedules for American Express Company and subsidiaries have
been omitted since the required information is not present or not present in
amounts sufficient to require submission of the schedule, or because the
information required is included in the respective financial statements or notes
thereto.
***
The consolidated financial statements of American Express Company
(including the report of independent registered public accounting firm) listed
in the above index, which are included in the Annual Report to Shareholders for
the year ended December 31, 2004, are hereby incorporated by reference. With the
exception of the pages listed in the above index, unless otherwise incorporated
by reference elsewhere in this Annual Report on Form 10-K, the 2004 Annual
Report to Shareholders is not to be deemed filed as part of this report.
F-1
EXHIBIT 23
CONSENT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in this Annual Report on
Form 10-K of American Express Company of our reports dated February 18, 2005,
with respect to the consolidated financial statements of American Express
Company, and management's assessment of the effectiveness of internal control
over financial reporting and the effectiveness of internal control over
financial reporting of American Express Company, which are included in the 2004
Annual Report to Shareholders of American Express Company (the "Company").
Our audits also included the financial statement schedules of American
Express Company listed in Item 14(a). These schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, as to which the date is February 18, 2005, the
financial statement schedules referred to above, when considered in relation to
the basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements (Form S-8 No. 2-46918, No. 2-59230, No. 2-64285, No. 2-73954, No.
2-89680, No. 33-01771, No. 33-02980, No. 33-28721, No. 33-33552, No. 33-36422,
No. 33-48629, No. 33-62124, No. 33-65008, No. 33-53801, No. 333-12683, No.
333-41779, No. 333-52699, No. 333-73111, No. 333-38238, and No. 333-98479; Form
S-3 No. 2-89469, No. 33-43268, No. 33-50997, No. 333-32525, No. 333-45445, No.
333-47085, No. 333-55761, No. 333-51828, No. 333-113768, and No. 333-117835) and
in the related Prospectuses of our report dated February 18, 2005, with respect
to the consolidated financial statements of American Express Company
incorporated herein by reference, our report dated February 18, 2005, with
respect to American Express Company management's assessment of the effectiveness
of internal control over financial reporting and the effectiveness of internal
control over financial reporting of American Express Company, included herein,
and our report in the preceding paragraph with respect to the financial
statement schedules of American Express Company included in this Annual Report
on Form 10-K of American Express Company.
/s/ Ernst & Young LLP
New York, New York
March 7, 2005
F-2
AMERICAN EXPRESS COMPANY AND CONSOLIDATED SUBSIDIARIES
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF THE COMPANY
CONDENSED STATEMENTS OF INCOME
(PARENT COMPANY ONLY)
(MILLIONS)
Years Ended December 31,
-------------------------------
2004 2003 2002
------- ------- -------
Revenues $ 220 $ 185 $ 241
------- ------- -------
Expenses:
Interest 427 383 339
Human resources 105 99 88
Other 186 121 242
------- ------- -------
Total 718 603 669
------- ------- -------
Pretax loss (498) (418) (428)
Income tax benefit (205) (159) (209)
------- ------- -------
Net loss before equity in net income of subsidiaries (293) (259) (219)
and affiliates
Equity in net income of subsidiaries and affiliates
(a) 3,738 3,246 2,890
------- ------- -------
Net income $ 3,445 $ 2,987 $ 2,671
======= ======= =======
(a) 2004 includes a $109 million non-cash pretax charge ($71 million
after tax) relating to the January 1, 2004 adoption of Statement of
Position 03-1, "Accounting and Reporting by Insurance Enterprises for
Certain Nontraditional Long-Duration Contracts and for Separate Accounts."
2003 includes a $20 million non-cash pretax charge ($13 million after tax)
relating to the December 31, 2003 adoption of Financial Accounting
Standards Board Interpretation No. 46, "Consolidation of Variable Interest
Entities," revised December 2003.
See Notes to Condensed Financial Information of the Parent Company on page F-6.
F-3
AMERICAN EXPRESS COMPANY AND CONSOLIDATED SUBSIDIARIES
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF THE COMPANY
CONDENSED BALANCE SHEETS
(PARENT COMPANY ONLY)
(MILLIONS, EXCEPT SHARE AMOUNTS)
December 31,
---------------------
2004 2003
-------- --------
ASSETS
Cash and cash equivalents $ 3 $ 4
Equity in net assets of subsidiaries and affiliates 16,231 16,456
Accounts receivable and accrued interest, less
reserves 6 5
Land, buildings and equipment - at cost, less
accumulated depreciation: 2004, $82; and 2003, $77 47 47
Due from subsidiaries 6,033 6,286
Other assets 261 363
-------- --------
Total assets $ 22,581 $ 23,161
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and other liabilities $ 424 $ 321
Long-term debt 5,740 5,739
Due to subsidiaries 397 1,778
-------- --------
Total liabilities 6,561 7,838
Shareholders' equity:
Common shares, $.20 par value,
authorized 3.6 billion shares; issued and
outstanding 1,249 million shares in 2004
and 1,284 million shares in 2003 250 257
Additional paid-in capital 7,316 6,081
Retained earnings 8,196 8,793
Accumulated other comprehensive income (loss), net of
tax:
Net unrealized securities gains 760 931
Net unrealized derivatives losses (142) (446)
Foreign currency translation adjustments (344) (278)
Minimum pension liability (16) (15)
-------- --------
Total accumulated other comprehensive income 258 192
-------- --------
Total shareholders' equity 16,020 15,323
-------- --------
Total liabilities and shareholders' equity $ 22,581 $ 23,161
======== ========
See Notes to Condensed Financial Information of the Parent Company on page F-6.
F-4
AMERICAN EXPRESS COMPANY AND CONSOLIDATED SUBSIDIARIES
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF THE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(PARENT COMPANY ONLY)
(MILLIONS)
Years Ended December 31,
-------------------------------
2004 2003 2002
------- ------- -------
Cash flows from operating activities: $ 3,445 $ 2,987 $ 2,671
Net income
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Equity in net income of subsidiaries
and affiliates (3,738) (3,246) (2,890)
Dividends received from subsidiaries
and affiliates 3,435 1,688 1,812
Other operating activities, primarily with subsidiaries (76) (2,380) (705)
------- ------- -------
Net cash provided by (used in) operating activities 3,066 (951) 888
------- ------- -------
Purchase of land, building and equipment (10) (19) (93)
------- ------- -------
Net cash used in investing activities (10) (19) (93)
------- ------- -------
Cash flows from financing activities:
Issuance of American Express common shares 1,055 348 161
Repurchase of American Express
common shares (3,578) (1,391) (1,153)
Dividends paid (535) (471) (430)
Net increase in debt 1 2,994 625
Redemption of intercompany debentures -- (515) --
------- ------- -------
Net cash (used in) provided by financing activities (3,057) 965 (797)
------- ------- -------
Net decrease in cash and cash equivalents (1) (5) (2)
Cash and cash equivalents at beginning of year 4 9 11
------- ------- -------
Cash and cash equivalents at end of year $ 3 $ 4 $ 9
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest (net of amounts capitalized) in 2004, 2003 and 2002 was
$174 million, $182 million and $169 million, respectively. Net cash received for
income taxes in 2004, 2003 and 2002 was $384 million, $152 million and $231
million, respectively.
See Notes to Condensed Financial Information of the Parent Company on page F-6.
F-5
AMERICAN EXPRESS COMPANY AND CONSOLIDATED SUBSIDIARIES
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF THE COMPANY
NOTES TO CONDENSED FINANCIAL INFORMATION OF THE COMPANY
(PARENT COMPANY ONLY)
1. Principles of Consolidation
The accompanying condensed financial statements include the accounts of
American Express Company (the "Parent Company") and, on an equity basis,
its subsidiaries and affiliates. Parent Company revenues and expenses,
other than human resources expenses and interest expense on long-term
debt, are primarily related to intercompany transactions with subsidiaries
and affiliates. These financial statements should be read in conjunction
with the consolidated financial statements and the accompanying notes
thereto of American Express Company and its subsidiaries.
Certain amounts from prior years have been reclassified to conform to the
current presentation.
2. Long-term debt consists of (millions):
December 31,
-----------------
2004 2003
------ -------
1.85% Convertible Senior Debentures due
December 1, 2033 $2,000 $2,000
3 3/4% Notes due November 20, 2007 747 746
4 3/4% Notes due June 17, 2009 499 --
4 7/8% Notes due July 15, 2013 994 993
5 1/2% Notes due September 12, 2006 1,001 1,002
6 3/4% Senior Debentures due June 23, 2004 -- 500
6 7/8% Notes due November 1, 2005 499 498
------ ------
$5,740 $5,739
====== ======
The Parent Company's 1.85% Convertible Senior Debentures due 2033 (the
"Convertible Debentures") have a current base conversion price of $69.41
and a contingent conversion threshold of $86.76 per share. Prior to the
third quarter of 2004, these Convertible Debentures were contingently
convertible into cash or common shares of the Parent Company at the Parent
Company's option. During the third quarter of 2004, in response to the
issuance of EITF 04-08 (Emerging Issues Task Force 04-08, "The Effect of
Contingently Convertible Instruments on Diluted Earnings Per Share"), the
Parent Company notified the trustee and holders of the Convertible
Debentures that the Parent Company was exercising its election stipulated
in the Convertible Debentures that, upon conversion of the Convertible
Debentures at any time after the date of such notice, the Parent Company
will be required to deliver cash in an amount at least equal to the
accreted principal amount of the Convertible Debentures converted. As a
result of this election, the Parent Company will also be required to
F-6
AMERICAN EXPRESS COMPANY AND CONSOLIDATED SUBSIDIARIES
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF THE COMPANY
NOTES TO CONDENSED FINANCIAL INFORMATION OF THE COMPANY
(PARENT COMPANY ONLY)
deliver only cash in connection with any principal value conversion
pursuant to the trading price condition. The Parent Company may not revoke
this election without the consent of holders of a least a majority of the
original principal amount of the Convertible Debentures.
As a result of the proposed spin-off of American Express Financial
Corporation, a wholly-owned subsidiary of the Parent Company, the
Convertible Debentures will be convertible at the current base conversion
price of $69.41 per share for a period of at least 20 days beginning on
the day the Parent Company provides notice of the special dividend to the
holders of the Convertible Debentures and ending on the day immediately
prior to the commencement of "ex-dividend" trading of the distributed
shares. The Parent Company will be obligated to pay at least the accreted
principal amount in cash for any Convertible Debentures that are converted
during the period. In addition, the per-share prices and conversion ratios
contained in the Convertible Debentures will be adjusted under
anti-dilution provisions.
Aggregate annual maturities of long-term debt for the five years ending
December 31, 2009 are as follows (millions): 2005, $499; 2006, $1,001;
2007, $747; 2008, $0; and 2009, $499.
3. Intercompany debentures consisted solely of Junior Subordinated Debentures
issued to American Express Company Capital Trust I, a wholly owned
subsidiary of the Company. The Company exercised its option to redeem such
Junior Subordinated Debentures, in whole, on July 16, 2003.
F-7
AMERICAN EXPRESS COMPANY AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 2004
(MILLIONS)
Reserve for credit losses, Reserve for doubtful
loans and discounts accounts receivable
------------------------------- -------------------------------------
2004 2003 2002 2004 2003 2002
------- ------- ------- ------- ------- -------
Balance at beginning of period $ 1,121 $ 1,226 $ 993 $ 934 $ 958 $ 1,166
Additions:
Charges to income 1,188 1,336 1,526 1,254(a) 1,304(a) 1,334(a)
Recoveries of amounts previously
written-off 94 61 101 -- -- --
Deductions:
Charges for which reserves were
provided (1,319) (1,502) (1,394) (1,292) (1,328) (1,542)
------- ------- ------- ------- ------- -------
Balance at end of period $ 1,084 $ 1,121 $ 1,226 $ 896 $ 934 $ 958
======= ======= ======= ======= ======= =======
(a) Before recoveries on accounts previously written-off, which are credited
to income (millions): 2004 - $196, 2003 - $223 and 2002 - $241.
F-8
EXHIBIT INDEX
The following exhibits are filed as part of this Annual Report. The exhibit
numbers preceded by an asterisk (*) indicate exhibits electronically filed
herewith. All other exhibit numbers indicate exhibits previously filed and are
hereby incorporated herein by reference. Exhibits numbered 10.1 through 10.21,
10.23 through 10.31 and 10.35 through 10.37 are management contracts or
compensatory plans or arrangements.
3.1 Company's Restated Certificate of Incorporation (incorporated by
reference to Exhibit 4.1 of the Company's Registration Statement on
Form S-3, dated July 31, 1997 (Commission File No. 333-32525)).
3.2 Company's Certificate of Amendment of the Certificate of Incorporation
(incorporated by reference to Exhibit 3.1 of the Company's Quarterly
Report on Form 10-Q (Commission File No. 1-7657) for the quarter ended
March 31, 2000).
3.3 Company's By-Laws, as amended through January 24, 2005 (incorporated by
reference to Exhibit 3.1 of the Company's Current Report on Form 8-K
(Commission File No. 1-7657) dated November 22, 2004 (filed January 28,
2005)).
4. The instruments defining the rights of holders of long-term debt
securities of the Company and its subsidiaries are omitted pursuant to
Section (b)(4)(iii)(A) of Item 601 of Regulation S-K. The Company
hereby agrees to furnish copies of these instruments to the SEC upon
request.
10.1 American Express Company 1989 Long-Term Incentive Plan, as amended and
restated (incorporated by reference to Exhibit 10.1 of the Company's
Quarterly Report on Form 10-Q (Commission File No. 1-7657) for the
quarter ended March 31, 1996).
10.2 American Express Company 1989 Long-Term Incentive Compensation Plan
Master Agreement, dated February 27, 1995 (incorporated by reference to
Exhibit 10.4 of the Company's Current Report on Form 8-K (Commission
File No. 1-7657), dated November 22, 2004 (filed January 28, 2005)).
10.3 Amendment dated February 28, 2000 of American Express Company 1989
Long-Term Incentive Compensation Plan Master Agreement dated February
27, 1995 (incorporated by reference to Exhibit 10.2 of the Company's
Quarterly Report on Form 10-Q (Commission File No. 1-7657) for the
quarter ended March 31, 2000).
10.4 American Express Company 1998 Incentive Compensation Plan, as amended
on April 22, 2002 (incorporated by reference to Exhibit 10.1 of the
Company's Quarterly Report on Form 10-Q (Commission File No. 1-7657)
for the quarter ended March 31, 2002).
10.5 American Express Company 1998 Incentive Compensation Plan Master
Agreement, dated April 27, 1998 (incorporated by reference to Exhibit
10.1 of the Company's Quarterly Report on Form 10-Q (Commission File
No. 1-7657) for the quarter ended September 30, 2004).
E-1
10.6 Amendment of American Express Company 1998 Incentive Compensation Plan
Master Agreement, dated April 27, 1998 (incorporated by reference to
Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q (Commission
File No. 1-7657) for the quarter ended March 31, 2000).
10.7 Description of Compensation Payable to Non-Management Directors
(incorporated by reference to Exhibit 10.1 of the Company's Current
Report on Form 8-K (Commission File No. 1-7657), dated November 22,
2004 (filed January 28, 2005)).
10.8 American Express Company Deferred Compensation Plan for Directors, as
amended through July 28, 2003 (incorporated by reference to Exhibit
10.3 of the Company's Current Report on Form 8-K (Commission File No.
1-7657), dated November 22, 2004 (filed January 28, 2005)).
10.9 Description of American Express Company Pay-for-Performance Deferral
Program (incorporated by reference to Exhibit 10.2 of the Company's
Current Report on Form 8-K (Commission File No. l-7657), dated November
22, 2004 (filed January 28, 2005)).
*10.10 American Express Company 2005 Pay-for-Performance Deferral Program
Guide
10.11 American Express Company 1983 Stock Purchase Assistance Plan, as
amended (incorporated by reference to Exhibit 10.6 of the Company's
Annual Report on Form 10-K (Commission File No. 1-7657) for the fiscal
year ended December 31, 1988).
10.12 American Express Company Retirement Plan for Non-Employee Directors, as
amended (incorporated by reference to Exhibit 10.12 of the Company's
Annual Report on Form 10-K (Commission File No. 1-7657) for the fiscal
year ended December 31, 1988).
10.13 Certificate of Amendment of the American Express Company Retirement
Plan for Non-Employee Directors dated March 21, 1996 (incorporated by
reference to Exhibit 10.11 of the Company's Annual Report on Form 10-K
(Commission File No. 1-7657) for the fiscal year ended December 31,
1995).
10.14 American Express Key Executive Life Insurance Plan, as amended
(incorporated by reference to Exhibit 10.12 of the Company's Annual
Report on Form 10-K (Commission File No. 1-7657) for the fiscal year
ended December 31, 1991).
10.15 Amendment of American Express Company Key Executive Life Insurance Plan
(incorporated by reference to Exhibit 10.3 of the Company's Quarterly
Report on Form 10-Q (Commission File No. 1-7657) for the quarter ended
September 30, 1994).
10.16 Amendment of American Express Company Key Executive Life Insurance Plan
(incorporated by reference to Exhibit 10.4 of the Company's Quarterly
report on Form 10-Q (Commission File No. 1-7657) for the quarter ended
March 31, 2000).
E-2
10.17 American Express Key Employee Charitable Award Program for Education
(incorporated by reference to Exhibit 10.13 of the Company's Annual
Report on Form 10-K (Commission File No. 1-7657) for the fiscal year
ended December 31, 1990).
10.18 American Express Directors' Charitable Award Program (incorporated by
reference to Exhibit 10.14 of the Company's Annual Report on Form 10-K
(Commission File No. 1-7657) for the fiscal year ended December 31,
1990).
10.19 American Express Company Salary/Bonus Deferral Plan (incorporated by
reference to Exhibit 10.20 of the Company's Annual Report on Form 10-K
(Commission File No. 1-7657) for the fiscal year ended December 31,
1988).
10.20 Amendment of American Express Company Salary/Bonus Deferral Plan
(incorporated by reference to Exhibit 10.4 of the Company's Quarterly
Report on Form 10-Q (Commission File No. 1-7657) for the quarter ended
September 30, 1994).
10.21 Amendment of American Express Salary/Bonus Deferral Plan (incorporated
by reference to Exhibit 10.5 of the Company's Quarterly Report on Form
10-Q (Commission File No. 1-7657) for the quarter ended March 31,
2000).
10.22 Tax Allocation Agreement, dated May 27, 1994, between Lehman Brothers
Holdings Inc. and the Company (incorporated by reference to Exhibit
10.2 of Lehman Brothers Holdings Inc.'s Transition Report on Form 10-K
(Commission File No. 1-9466) for the transition period from January 1,
1994 to November 30, 1994).
10.23 American Express Company 1993 Directors' Stock Option Plan, as amended
(incorporated by reference to Exhibit 10.11 of the Company's Quarterly
Report on Form 10-Q (Commission File No. 1-7657) for the quarter ended
March 31, 2000).
10.24 American Express Senior Executive Severance Plan Effective January 1,
1994 (as amended and restated through May 1, 2000) (incorporated by
reference to Exhibit 10.10 of the Company's Quarterly Report on Form
10-Q (Commission File No. 1-7657) for the quarter ended March 31,
2000).
10.25 Amendments to the American Express Senior Executive Severance Plan,
effective November 26, 2001 (incorporated by reference to Exhibit
10.30 of the Company's Annual Report on Form 10-K (Commission File No.
1-7657) for the year ended December 31, 2001).
10.26 Amendment of Long-Term Incentive Awards under the American Express
Company 1979 and 1989 Long-Term Incentive Plans (incorporated by
reference to Exhibit 10.6 of the Company's Quarterly Report on Form
10-Q (Commission File No. 1-7657) for the quarter ended September 30,
1994).
E-3
10.27 Amendments of (i) Long-Term Incentive Awards under the American
Express Company 1979 and 1989 Long-Term Incentive Plans, (ii) the
American Express Senior Executive Severance Plan, (iii) the American
Express Supplemental Retirement Plan, (iv) the American Express
Salary/Bonus Deferral Plan, (v) the American Express Key Executive
Life Insurance Plan and (vi) the IDS Current Service Deferred
Compensation Plan(incorporated by reference to Exhibit 10.37 of the
Company's Annual Report on Form 10-K (Commission File No. 1-7657) for
the fiscal year ended December 31, 1997).
10.28 American Express Company Supplemental Retirement Plan Amended and
Restated Effective March 1, 1995 (incorporated by reference to Exhibit
10.1 of the Company's Quarterly Report on Form 10-Q (Commission File
No. 1-7657) for the quarter ended September 30, 1999).
10.29 Amendment to American Express Company Supplemental Retirement Plan
Amended and Restated Effective March 1, 1995 (incorporated by
reference to Exhibit 10.3 of the Company's Quarterly Report on Form
10-Q (Commission File No. 1-7657) for the quarter ended March 31,
2000).
10.30 American Express Directors' Stock Plan (incorporated by reference to
Exhibit 4.4 of the Company's Registration Statement on Form S-8, dated
December 9, 1997 (Commission File No. 333-41779)).
10.31 American Express Annual Incentive Award Plan (incorporated by
reference to Exhibit 10.6 of the Company's Quarterly Report on Form
10-Q (Commission File No. 1-7657) for the quarter ended March 31,
2000).
10.32 Agreement dated February 27, 1995 between the Company and Berkshire
Hathaway Inc. (incorporated by reference to Exhibit 10.43 of the
Company's Annual Report on Form 10-K (Commission File No. 1-7657) for
the fiscal year ended December 31, 1994).
10.33 Agreement dated July 20, 1995 between the Company and Berkshire
Hathaway Inc. and its subsidiaries (incorporated by reference to
Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q
(Commission File No. 1-7657) for the quarter ended September 30,
1995).
10.34 Amendment dated September 8, 2000 to the agreement dated February 27,
1995 between the Company and Berkshire Hathaway Inc. (incorporated by
reference to Exhibit 99.3 of the Company's Current Report on Form 8-K
(Commission File No. 1-7657) dated January 22, 2001).
10.35 Description of a special grant of a stock option and restricted stock
award to Kenneth I. Chenault, the Company's President and Chief
Operating Officer (incorporated by reference to Exhibit 10.2 of the
Company's Quarterly Report on Form 10-Q (Commission File No. 1-7657)
for the quarter ended June 30, 1999).
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10.36 American Express Company 2003 Share Equivalent Unit Plan for
Directors, as adopted and effective April 28, 2003 (incorporated by
reference to Exhibit 10.1 of the Company's Quarterly Report on
Form 10-Q (Commission File No. 1-7657) for the quarter ended
March 31, 2003).
*10.37 Description of Base Salaries of Named Executive Officers for 2005.
*12 Computation in Support of Ratio of Earnings to Fixed Charges.
*13 Portions of the Company's 2004 Annual Report to Shareholders that are
incorporated herein by reference.
16 Letter from Ernst & Young LLP regarding change in certifying accountant
(incorporated by reference to Exhibit 16.1 of the Company's Current ,
which have been omitted from the filed copy and filed separately with
the Securities and Exchange Commission. Report on Form 8-K (Commission
File No. 1-7657), dated November 22, 2004 (as amended by the Company's
Current Report on Form 8-K/A (Commission File No. 1-7657), dated
November 22, 2004 (filed December 9, 2004) and the Company's Current
Report on Form 8-K/A (Commission File No. 1-7657), dated November 22,
2004 (filed March 10, 2005.))).
*21 Subsidiaries of the Company.
*23 Consent of Ernst & Young LLP (contained on page F-2 of this Annual
Report on Form 10-K).
*31.1 Certification of Kenneth I. Chenault, Chief Executive Officer, pursuant
to Rule 13a-14(a) promulgated under the Securities Exchange Act of
1934, as amended.
*31.2 Certification of Gary L. Crittenden, Chief Financial Officer, pursuant
to Rule 13a-14(a) promulgated under the Securities Exchange Act of
1934, as amended.
*32.1 Certification of Kenneth I. Chenault, Chief Executive Officer, and Gary
L. Crittenden, Chief Financial Officer, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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