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<SEC-DOCUMENT>0000004962-03-000042.txt : 20030327
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ACCESSION NUMBER: 0000004962-03-000042
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 6
CONFORMED PERIOD OF REPORT: 20021231
FILED AS OF DATE: 20030327
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: AMERICAN EXPRESS CO
CENTRAL INDEX KEY: 0000004962
STANDARD INDUSTRIAL CLASSIFICATION: FINANCE SERVICES [6199]
IRS NUMBER: 134922250
STATE OF INCORPORATION: NY
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-07657
FILM NUMBER: 03619132
BUSINESS ADDRESS:
STREET 1: AMERICAN EXPRESS TWR WORLD FINANCIAL CN
STREET 2: 200 VESEY ST 49TH FLOOR
CITY: NEW YORK
STATE: NY
ZIP: 10285
BUSINESS PHONE: 2126402000
MAIL ADDRESS:
STREET 1: AMERICAN EXPRESS TOWER
STREET 2: 200 VESEY ST 49TH FLOOR
CITY: NEW YORK
STATE: NY
ZIP: 10285
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================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-K
----------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
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
Chicago Stock Exchange
Pacific Stock Exchange
7.00% Cumulative Quarterly Income New York Stock Exchange
Preferred Securities, Series I of American
Express Company Capital Trust I (and the
guarantee of American Express Company
with respect thereto)
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 28, 2002, of voting shares held by
non-affiliates of the registrant was approximately $48.7 billion. Common
shares of the registrant outstanding at March 21, 2003 were 1,314,213,318.
DOCUMENTS INCORPORATED BY REFERENCE
Parts I, II and IV: Portions of Registrant's 2002 Annual Report to Shareholders.
Part III: Portions of Registrant's Proxy Statement dated March 11, 2003.
================================================================================
<Page>
TABLE OF CONTENTS
FORM 10-K
ITEM NUMBER
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I
1. Business................................................................... 1
Introduction.......................................................... 1
Travel Related Services............................................... 2
American Express Financial Advisors................................... 22
American Express Bank................................................. 45
Corporate and Other................................................... 57
Foreign Operations.................................................... 58
Important Factors Regarding Forward-Looking Statements................ 59
Segment Information and Classes of Similar Services................... 64
Executive Officers of the Company..................................... 64
Employees............................................................. 66
2. Properties................................................................. 66
3. Legal Proceedings.......................................................... 67
4. Submission of Matters to a Vote of Security Holders........................ 71
PART II
5. Market for Company's Common Equity and Related Stockholder Matters......... 71
6. Selected Financial Data.................................................... 72
7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.............................................................. 72
7a. Quantitative and Qualitative Disclosures About Market Risk................. 72
8. Financial Statements and Supplementary Data................................ 72
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................ 73
PART III
10. Directors and Executive Officers of the Company............................ 73
11. Executive Compensation..................................................... 73
12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters............................................... 73
13. Certain Relationships and Related Transactions............................. 73
14. Controls and Procedures.................................................... 73
PART IV
15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........... 74
Signatures................................................................. 75
Certifications............................................................. 76
Index to Financial Statements.............................................. F-1
Consent of Independent Auditors............................................ F-2
Exhibit Index.............................................................. E-1
</TABLE>
<Page>
PART I
ITEM 1. BUSINESS
INTRODUCTION
American Express Company (including its subsidiaries, unless the context
indicates otherwise, the "Company") was founded in 1850 as a joint stock
association and was incorporated under the laws of the State of New York in
1965. The Company is primarily engaged in the business of providing travel
related services, financial advisory services and international banking services
throughout the world.*
The Company maintains an Investor Relations website on the Internet at
http://ir.americanexpress.com. The Company's filings with the Securities and
Exchange Commission ("SEC"), including its Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those
reports are available free of charge as soon as reasonably practicable following
the time they are filed with or furnished to the SEC by clicking on the
"SEC Filings" link found on the Investor Relations homepage. Interested persons
are also able to access the Company's Investor Relations website through the
Company's main website at www.americanexpress.com by clicking on the "About
American Express" link, which is located at the bottom of the Company's
homepage.
American Express entered 2002 after one of the most challenging years in
its recent history. The Company established several important goals for the
year: to deliver solid earnings, improve the underlying economics of its
business, continue to lower certain risks in the business and increase its
investment in business-building activities. By the end of the year, management
believed that it had achieved significant success against these goals,
particularly in light of weak economies and financial markets around the world.
The Company's 2002 financial results reflected solid growth in the
Company's card businesses; lower expenses due to the success of ongoing
reengineering programs; strong credit quality with very low write-off rates in
the Company's charge card portfolio; and the benefits of lower funding costs
from historically low interest rates, which resulted in a benefit to the Company
of more than $500 million in interest savings. For a complete discussion of the
Company's financial results, see pages 26-84 of the Company's 2002 Annual Report
to Shareholders, which are incorporated herein by reference. For a discussion of
the Company's principal sources of revenue, see pages 58-59 of the Company's
2002 Annual Report to Shareholders. In 2003, the Company expects continued
uncertainty in the global economy and financial markets. In addition, the
ongoing war in Iraq, the threat of terrorism and other geopolitical uncertainty
could have a negative impact on the global economy, consumer confidence and the
Company's results.
During 2002, the Company undertook several measures to continue to
strengthen its business model so that it is more flexible and adaptable and less
reliant on good economic cycles
- ----------
* Various forward-looking statements are made in this 10-K Annual Report, which
generally include the words "believe," "expect," "anticipate," "optimistic,"
"plan," "intend," "aim," "will," "should," "could," "likely" and similar
expressions. Certain factors that may cause actual results to differ materially
from these forward-looking statements are discussed on pages 59-64.
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to deliver strong results. The Company continued its reengineering initiatives
and delivered over $1 billion in benefits while also improving major business
processes. It expanded the use of the Internet to serve customers and continued
to diversify card spending by lowering reliance on merchants in the travel and
entertainment sectors. It continued to focus on strengthening its balance sheet
and improving its risk profile by increasing reserves for card receivables and
merchant bankruptcies and continuing to lower its corporate lending balances
while building a more diversified consumer and private banking loan
portfolio. The Company developed new strategic relationships that enhanced
capabilities, and invested in business-building activities, which resulted in
the expansion of its card portfolio in the U.S. and internationally, as well
as growth in its Global Network Services business in international markets.
In addition to the measures the Company undertook to strengthen its
business, improve its risk profile and invest in business-building activities,
the Company also placed renewed emphasis on managing its business with integrity
and with the strong values that have guided it throughout its history. The
Company supported the various corporate governance reforms adopted under the
Sarbanes-Oxley Act of 2002 and proposed by the New York Stock Exchange. Though
many of the measures required by the new regulations were already in place at
the Company, the ethical failures uncovered at a number of companies in late
2001 and 2002 served to refocus management on ensuring that the Company strives
to meet its financial targets based on the Company's long-term interests rather
than on short-term, expedient solutions.
TRAVEL RELATED SERVICES
American Express Travel Related Services Company, Inc. (including its
subsidiaries, unless the context indicates otherwise, "TRS"), which includes the
Card, travel, merchant and network businesses, as well as the Travelers Cheque
and Prepaid Services group, provides a variety of products and services
worldwide, including, among others, global card network, issuing and processing
services, the American Express'r' Card, the American Express'r' Rewards Green
and American Express'r' Rewards Gold Cards, Blue from American Express'r', the
Optima'r' Card, the American Express'r' Cash Rebate Card, a number of co-brand
Cards, other consumer and corporate lending and banking products, American
Express'r' Travelers Cheques, prepaid card products, business expense management
products and services, corporate travel and travel management services, consumer
travel services, tax, accounting and business consulting services, a network of
automated teller machines ("ATMs"), magazine publishing, merchant transaction
processing and point of sale and back-office products and services. In certain
countries, partly owned affiliates and unaffiliated entities offer some of these
products and services under licenses from TRS.
As described more fully below, TRS' general purpose card network and card
issuing business are global in scope. TRS has the largest card issuing business
in the world based on charge volume. In 2002, TRS' charge volume was $311
billion, with approximately 25% coming from Cardmembers domiciled outside the
U.S. Cards are currently issued in 45 currencies, including cards issued by
third-party banks and other qualified institutions. Cards permit Cardmembers to
charge purchases of goods and services in most countries around the world at
establishments that have agreed to accept the Card, and to access cash through
ATMs at more than 500,000 locations worldwide. In 2002, TRS rolled out numerous
new Card products and entered into various co-brand and other Card arrangements
in the U.S. and many foreign
Page 2
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countries. TRS added a net total of 2.1 million cards in force in 2002. Total
cards in force reached 57.3 million at the end of 2002. The global reach of
American Express' brand, card issuing capabilities and general purpose card
network position the Company well to take advantage of the growth opportunities
in the global payments services business, both in the U.S. and internationally.
TRS' business as a whole has not experienced significant seasonal
fluctuation, although 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 service marks and
diligently protects its intellectual property rights around the world.
GLOBAL NETWORK SERVICES
TRS operates a global general purpose charge and credit card network.
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 millions of merchants globally, both online and offline.
One of the key assets of TRS' network is the American Express brand, which
is one of the world's most highly recognized and respected brands. Cards bearing
the American Express logo ("Cards") are issued directly by TRS and by licensed
qualified institutions, and are accepted at ATMs and at all merchant locations
worldwide that accept the American Express Card. TRS issues the vast majority of
Cards on the American Express global network.
In 2002, TRS continued to expand its Global Network Services ("GNS")
business in which it authorizes third-party financial institutions to issue
American Express-branded cards that are accepted on the American Express
merchant network. The Company currently has 77 arrangements in place with banks
and other qualified institutions in 77 countries providing for Card issuance by
those entities. While some GNS arrangements have been in place for more than 20
years, the vast majority have been established since 1995. In 2002, the Company
signed eight new GNS partners, including Toyota Finance Company in Japan and
Samsung Card Company, Ltd. in Korea. Together, GNS partners launched 40 new
products during 2002. These partnerships increase TRS' market presence, drive
more transaction volume onto TRS' merchant network and significantly increase
the number of merchants accepting the American Express Card in selected markets.
TRS may charge fees and royalties for other services to banks and other
financial institutions. Conversely, TRS' partners benefit from association with
the American Express brand and access to TRS' network services. GNS continued to
show strong growth in billed business in 2002.
Local restrictive 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 cards (e.g., Visa and MasterCard cards) prior to their
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issuing cards on the American Express network. Accordingly, TRS' GNS partners
have generally not had difficulty in obtaining appropriate government
authorization in the markets in which TRS has chosen to enter into these
partnership arrangements.
In May 1996, the Company invited banks and other qualified institutions in
the United States to begin issuing Cards on the American Express network. In
contrast to the situation outside the United States, there are no major U.S.
bank issuers on the American Express network in the United States. This
situation is the result of rules and policies of VISA USA, Inc. and MasterCard
International, Incorporated ("MasterCard") in the United States calling for
expulsion of members who issue American Express-branded cards. No banks have
been willing to forfeit membership in VISA USA, Inc. and/or MasterCard to issue
cards on the American Express network. In a lawsuit filed in October 1998
against VISA USA, Inc. and VISA International Corp. (collectively, "VISA") and
MasterCard, the U.S. Department of Justice alleged that these rules and policies
violate the antitrust laws of the United States. In October 2001, the trial
judge ruled in favor of the U.S. Department of Justice, holding that these rules
and policies do violate such laws. TRS views this decision as a major victory
for U.S. consumers because it will ultimately lead to more vigorous competition
and more innovative card products and services. However, VISA and MasterCard
have appealed this decision and have obtained a stay of the court's judgment
while the appeal is pending. Assuming the appeals court affirms the trial
court's decision, the Company expects to launch the GNS business in the U.S.
after the appeals process has been completed.
As a network, TRS encounters intense competition from other card networks.
Global competition comes from VISA, MasterCard, Diners Club, Discover Financial
Services, a business unit of Morgan Stanley & Co. (U.S. only), and JCB Co., Ltd.
(primarily in Japan). The principal competitive factors that affect the network
business are (i) the number of cards in force and amount of spending on these
cards; (ii) the quantity and quality of establishments that accept the cards;
(iii) the economic attractiveness to card issuers and merchant acquirers of
participating in the network; (iv) the success of targeted marketing and
promotional campaigns; (v) reputation and brand recognition; (vi) the ability to
develop and implement innovative systems and technologies cost effectively on a
global basis; (vii) the ability to develop and implement innovative types of
card products and support services for merchants, issuers and acquirers on the
network; (viii) success in implementation of strategies to reduce suppression --
when merchants that accept cards encourage a customer to use another card or
cash; (ix) the availability of alternative payment systems; and (x) the quality
of customer service.
GLOBAL MERCHANT SERVICES
During 2002, TRS continued its ongoing efforts to encourage consumers to
use the American Express Card as their card of choice for everyday spending at
establishments such as supermarkets, gas stations, drug stores and home
improvement stores, as well as for their travel and entertainment spending. TRS
also continued to increase the range of merchants in retail and everyday
spending categories that accept the Card. Key signings in the United States
included The Stop & Shop Supermarket Company, Dairy Queen, Time Warner Cable and
H&R Block. As of the end of 2002, TRS estimates that the merchant network in the
United States accommodated
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more than 95 percent of American Express Cardmembers' general purpose charge and
credit card spending.
As a result of the expansion of the types of merchants accepting charge and
credit cards and the utilization of a more discriminating approach to identify
and cancel inactive merchant accounts, in 2002, TRS continued to refine its
calculation of international merchant coverage. Based on this refinement, as of
the end of 2002, in markets in which TRS is the merchant acquirer, TRS'
international merchant coverage accommodated approximately 84 percent of
Cardmembers' general purpose charge and credit card spending, up from
approximately 83 percent a year ago. TRS continued to make strong progress
globally in signing key merchants and merchants in new industry categories,
including quick-service restaurants, government, utilities and
telecommunications. New signings in international markets included Mayne Group
Limited-Pharmacy Services in Australia; Canadian Tire; Cora Hypermarkets in
France; Arkio in Mexico; and NTT DoCoMo, a telecommunications provider in Japan.
Along with expanding merchant coverage, TRS also launched new card products and
promotions to build spending in retail and everyday locations.
During 2002, TRS completed the implementation of its various agreements
with JCB Co., Ltd., the largest card issuer and merchant acquirer in Japan,
whereby TRS became the third-party merchant acquirer for JCB card transactions
in Australia, Canada, India, Mexico, and New Zealand. As a result of these
agreements, over 150,000 TRS Service Establishments in those countries began
accepting the JCB card. During 2002, TRS also completed the second phase of
implementing the agreement under which JCB became the third-party merchant
acquirer for TRS in Japan. As a result of this implementation, over 500,000
additional merchants in Japan began accepting the Card, significantly expanding
the extent of American Express merchant coverage in the country.
TRS' objective is to achieve merchant coverage wherever and however
Cardmembers want to use the Card. TRS signs up new merchants through a number of
sales channels: a proprietary sales force, third-party sales agents, the
Internet, telemarketing and inbound "Want to Honor" calls (i.e., merchants
desiring to accept the Card contacting the Company directly).
TRS earns "discount revenue" from fees charged to "service establishments"
for accepting Cards where TRS is the "merchant acquirer." The discount, which is
the fee charged by the Company to the service establishment for accepting Cards,
is deducted from the amount of the payment that TRS pays to a service
establishment for charges submitted. A service establishment is defined as a
merchant that enters into an agreement to accept Cards as a method of payment
for goods and services. A merchant acquirer is the entity that maintains the
merchant Card acceptance relationship, receives all Card transactions from the
merchant and pays the merchant for these transactions. When a Cardmember
presents the Card for payment, the service establishment creates a record of
charge for the transaction and submits it to the merchant acquirer for payment.
The discount (i.e., value of charge times discount rate) is deducted from
payment to the service establishment and is recorded as discount revenue at the
time the transaction is captured. Where TRS acts as the merchant acquirer and
the Card presented at a service establishment is issued by a third-party bank or
financial institution, such as in the case of TRS' GNS partnership arrangements,
TRS will make financial settlement with the Card issuer. Such amounts shared are
recorded as a reduction of discount revenue. Where the merchant acquirer is a
third-party bank or financial institution, TRS also receives a portion of the
discount revenue charged to such service establishments. Such amounts shared
with and paid to TRS are recorded as discount revenue.
The discount rate, which is generally expressed as a percentage of the
amount charged on a Card, is contractually agreed with the service
establishment. The level of the discount rate charged is principally determined
by the value that is delivered to the service establishment and generally
includes a premium to other cards. Value is delivered to the service
establishment through higher spending Cardmembers, the volume of spending by all
Cardmembers and the
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insistence of Cardmembers to use their Cards when enrolled in loyalty or other
Card usage programs.
The discount rate varies with the type of participating establishment, the
charge volume, the timing and method of payment to the establishment, the method
of submission of charges and, in certain instances, the average charge amount
and the amount of information provided. TRS has generally been able to charge
higher discount rates to participating establishments than its competitors as a
result of TRS' attractive Cardmember base. While many establishments understand
this pricing in relation to the value provided, TRS has encountered
dissatisfaction from some establishments, as well as suppression of the Card's
use. TRS continues to devote significant resources to respond to this issue, and
has made progress by concentrating on acquiring merchants where Cardmembers want
to use the Card, providing better and earlier communication of the American
Express value proposition and, when necessary, by canceling merchants who
suppress usage of the American Express Card. Over time, the Company has
experienced some erosion in its discount rate, primarily reflecting its
business decision to expand its merchant coverage base to lower rate "everyday
spend" merchant categories, and the stronger than average growth rates in those
categories.
TRS focuses on understanding and addressing key factors that influence
merchant satisfaction, on executing programs that increase Card usage at
merchants and on strengthening its relationships with merchants through an
expanded roster of services that help them meet their business goals. In 2002,
TRS continued to offer value added front-office solutions designed to support
merchants' billing needs. These fee-based solutions include the Purchase Express
product that enables merchants to authorize and settle transactions from their
PCs and capture additional data required for Corporate Purchasing Card
transactions. TRS also continues to support merchant implementations on the
Automated Bill Payment Platform that allows merchants to bill Cardmembers on a
regular basis for repeated charges such as insurance premiums and subscriptions.
Wherever TRS manages both the acquiring relationship with merchants and
the Card-issuing side of the business, there is a "closed loop," which
distinguishes the American Express network from the bank card networks in that
there is access to information at both ends of the Card transaction. This
enables TRS to provide targeted marketing opportunities for merchants and
special offers to Cardmembers through a variety of channels.
During 2002, TRS continued to address credit quality issues on the merchant
side of its business and the growing risk related to merchant bankruptcies in
light of the difficult economy. To reduce this risk, particularly in the travel
industry where merchants may be paid by the Company well before the time they
actually render the services to Cardmembers, the Company holds payments to
service establishments where appropriate. In some cases, the Company has
lengthened the time between when the Card charges are submitted by the merchant
and when the Company pays the merchant and has taken other appropriate steps to
manage risk.
At year-end 2002, TRS was the sixth-largest owner/operator of ATMs in the
United States with more than 7,300 terminals, which are operated under the ATM
Axis'r' brand.
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In recent years there has been considerable interest on the part of a
number of government regulators around the world in the fees that merchants are
charged to accept credit cards. Most significantly, regulators in the United
Kingdom, European Union and Australia have conducted extensive investigations
into the way that VISA and MasterCard members collectively set the
"interchange," which is the fee paid to the card issuing bank and the
fundamental element of merchant pricing, and are imposing regulations on this
process. Regulators have also considered the industry practice of prohibiting
merchants from passing these fees along to consumers through surcharges on
credit card purchases. Although the regulatory focus has for the most part been
specifically on VISA and MasterCard, government regulation of the card
associations' pricing could ultimately affect all card service providers by
increasing pressure on the levels of interchange and merchant discount. Downward
movement of interchange and merchant discount may impact the relative economic
attractiveness to card issuers and merchant acquirers of participating in a
particular network, and may drive card service providers to look for other
sources of revenue such as annual card fees. In addition, any legal or
regulatory bar on the "no surcharging" rules may result in merchant surcharging
to consumers who choose to pay with credit and charge cards. As a result of
action taken by the Reserve Bank of Australia, merchants in Australia are
permitted to surcharge credit card transactions, including American Express Card
transactions, as of January 1, 2003.
CONSUMER CARD, SMALL BUSINESS AND CONSUMER TRAVEL SERVICES
As described above, TRS' Card business has a significant presence both in
the U.S. and internationally. TRS and its licensees offer individual consumers
charge cards such as the American Express'r' 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', the Optima'r' Card and the
recently launched American Express'r' Cash Rebate Card, among others; and a
variety of cards sponsored by and co-branded with other corporations and
institutions, such as the Delta SkyMiles'r' Credit Card from American Express,
American Express'r' Platinum Cash Rebate Card exclusively for Costco Members and
the American Express'r' Costco Business Card from OPEN: The Small Business
Network.
Charge Cards, which are marketed in the U.S. 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. Charge Cards generally require payment by
the Cardmember of 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.
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 the
Company began aggressively to expand its credit card business, its lending
balance growth has been among the top tier of card issuers. Much of this growth
has been due to the breadth of the Company's lending products, such as Blue from
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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
the Company's "lending on charge" options (such as Sign & Travel). TRS continued
to bolster its proprietary business through the introduction of more than 100
new proprietary card products in 17 countries during 2002. These are cards that
American Express issues, either on its own or co-branded with partnering
institutions.
The wide array of new or enhanced international products included Blue
from American Express in Mexico and Indonesia (bringing the total number of
international "Blue" markets to 18), the American Express Tiger Woods Credit
Card in Canada, and co-branded cards with such high-value partners as Costco
in Puerto Rico, Alitalia in Italy and Shinsei Bank in Japan. TRS also acquired
a credit card portfolio from AMP Bank, one of Australia's leading financial
services companies.
American Express Centurion Bank ("Centurion Bank"), a wholly owned
subsidiary of TRS, issues Blue from American Express, the Optima Card, and all
other American Express-branded revolving credit cards in the United States and
owns most of the receivables arising from the use of these Cards. In addition,
Centurion Bank has outstanding lines of credit in association with certain
Charge Cards and offers unsecured loans to Cardmembers in connection with its
Sign & Travel and Extended Payment Option programs. The Sign & Travel'r' program
gives qualified U.S. Cardmembers the option of extended payments for airline,
cruise and certain travel charges that are purchased with the Charge Card. 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. Centurion Bank is also the issuer of certain Charge Cards in
the U.S. Various flexible payment options are offered to Cardmembers in
international markets as well.
TRS issues Cards under co-brand agreements with selected commercial firms
and affinity programs with certain marketing partners. Examples of TRS'
co-brand arrangements include agreements with Aero Mexico, Air France, Loyalty
Management Group Canada, Inc. (Air Miles), Alitalia, British Airways, Costco,
Delta Airlines, Hilton Hotels, Madison Square Garden (New York Knicks/New York
Rangers), Shop Rite supermarkets, Singapore Airlines, SOGO - UNY (Hong Kong),
and Starwood Hotels & Resorts. The lengths of arrangements generally range
from 5 to 10 years. Cardmembers earn rewards provided by the commercial firms'
respective loyalty programs based upon their spending on the co-brand cards,
such as frequent flyer miles, hotel loyalty points and rebates. TRS makes
payments to the commercial firms with which it has co-brand card arrangements.
Payments by TRS are primarily based 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. TRS expenses
amounts due under co-brand arrangements in the month earned. Payment terms
vary by arrangement, but are monthly or quarterly. Once TRS makes payment to
the co-brand partner, as described above, the partner is solely liable with
respect to providing rewards to the Cardmember under the co-brand partner's
own loyalty program.
Affinity programs are generally designed as joint marketing arrangements
whereby TRS and the affinity partner create a program with joint branding and
offers designed to appeal to people with a relationship or affinity to a
particular partner-entity or association. In general, in an affinity
arrangement, TRS makes payments to the affinity partners that are primarily
based on
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the number of accounts acquired and retained through the affinity arrangement
and the amount of annual Cardmember spending on such cards. The lengths of such
arrangements generally range from 5 to 7 years.
The Company also issues Cards under arrangements with banks, primarily
outside the United States. Such bank distribution agreements involve the
offering of a standard Company 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, the Company makes 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 length of such arrangements generally range from 5 to 7 years. New
distribution agreements during 2002 were signed with Societe Generale in
France, Ban Regio in Mexico, Erste Bank in Austria and Joseph Leopold Bank in
the UK.
In addition to the payments to co-brand, affinity and bank partners
referred to above, the arrangements with such entities may contain other terms
unique to the arrangement with the partner, including an obligation on the part
of TRS to make payments under certain circumstances.
Many TRS Cardmembers, particularly Charge Card holders, are charged an
annual fee which 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. Many revolving credit cards are offered with no
annual fee. Each Cardmember must meet standards and criteria for
creditworthiness that are applied through a variety of means both at the time of
initial solicitation or application and on an ongoing basis during the Card
relationship. The Company uses sophisticated credit models and techniques in its
risk management operations.
Several products launched or renewed by TRS in the United States in the
last few years continued to make significant contributions to its results in
2002. In one major move, TRS enhanced its classic charge card lineup by
introducing the American Express Rewards Green and American Express Rewards Gold
cards for U.S. consumers. These cards offer automatic enrollment in the
MEMBERSHIP REWARDS'r' program and double points for everyday purchases at
supermarkets, gas stations, drugstores, home improvement stores and other
locations. Rewards-based products not only drive higher spending, they also have
very favorable economics in terms of Cardmember attrition, credit and payment
performance. Following their launch, the new American Express Rewards Green and
American Express Rewards Gold Charge Cards and the American Express Cash
Rebate Card had good early performance, together attracting almost 500,000 new
cards in 2002, with most coming in the fourth quarter. In addition to improving
TRS' U.S. consumer Charge Card offerings, these new cards provide Cardmembers
with enhanced opportunities to earn rewards and support TRS' efforts to drive
spending at everyday locations. TRS also launched the American Express Cash
Rebate Card for U.S. consumers. This card carries no annual fee and offers up to
five percent cash back, based on a Cardmember's annual spending and payment
activity.
In addition to these new product launches, TRS continued to grow its
existing rewards-based lending products in the U.S., such as its
co-brand portfolios with Delta Air Lines and Costco.
TRS also focused on expanding its MEMBERSHIP REWARDS program -- the largest
program of its kind, with more than nine million Cardmembers enrolled worldwide.
TRS continued to expand the array of choices in MEMBERSHIP REWARDS in 2002,
signing new partners in retail and
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entertainment categories including Banana Republic, Blockbuster, Broadway.com,
Cingular Wireless, Staples, Ticketmaster, The Home Depot and Toys "R" Us. About
1,200 redemption partners now participate in the MEMBERSHIP REWARDS program.
TRS' MEMBERSHIP REWARDS loyalty program continues to be a strong driver of
Cardmember retention and profitability.
TRS makes payments to merchants pursuant to contractual arrangements when
Cardmembers redeem their MEMBERSHIP REWARDS points and establishes reserves in
connection with estimated future redemptions. Due to higher charge volumes and
overall reward redemption costs, the expense of MEMBERSHIP REWARDS has increased
over the past several years and continues to grow. During 2002, TRS worked to
reduce program-related costs. Cardmembers can now handle online many
program-related activities, such as enrollment and point redemption. By offering
a broader range of redemption choices, TRS has improved customer satisfaction of
the MEMBERSHIP REWARDS program and lowered the average cost per point that is
redeemed. TRS will continue to seek ways to contain the overall cost of the
program and make changes to enhance its value to Cardmembers.
As in the United States, the MEMBERSHIP REWARDS program is a powerful
driver of Cardmember loyalty in the international consumer business. TRS now
offers MEMBERSHIP REWARDS in 30 countries. In 2002, TRS enhanced its rewards
programs in several markets, offering richer and more flexible choices that
enable Cardmembers to earn points more quickly. In addition to using the
Internet to support MEMBERSHIP REWARDS, TRS continued to deliver other online
tools to help its customers effectively manage their relationships with the
Company.
Throughout the world, Cardmembers have access to a variety of free and
fee-based special services and programs, depending on the type of Card they have
and their country of residence. These 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, Private Payments'r',
Assured Reservations and Online Fraud Protection Guarantee. Certain Cards
provide Cardmembers with access to additional services, such as a Year-End
Summary of Charges Report. The Platinum Card, offered to certain Cardmembers in
the United States and in virtually all other countries in which TRS issues
Cards, provides access to additional and enhanced travel, financial, insurance,
personal assistance and other services. The Centurion Card, which is offered in
the U.S. and six other countries, is an ultra-premium charge card providing
highly personalized customer service and an array of travel, lifestyle and
financial benefits. Personal, Gold, Platinum Card and Centurion Cardmembers
receive the Customer Relationship Statement, which is used to communicate
special offers for products and services of both merchants and the Company. It
is now offered in the U.S. as well as in several international markets.
Examples of additional services offered for a fee to Cardmembers include
travel, accident and credit insurance products, a card registry and replacement
service, credit bureau monitoring and telecommunication services. Additional
services include a subscription service for magazines, a pre-paid legal service
and various merchandise-related offerings.
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Over the past ten years, TRS has significantly expanded the roster of
merchants who accept TRS' card products as well as the kinds of businesses that
accept the Card. As discussed above, in recent years, TRS has focused its
efforts on increasing the use of its Cards for everyday spending at such places
as supermarkets, gas stations and retailers, as well as for telecommunications
services. Consumers increasingly want to use cards for everyday purchases and
tend to maintain their level of spending in these areas, in contrast to spending
for certain kinds of travel and entertainment, even during periods of economic
weakness. In 1990, 65 percent of all of TRS' U.S. billings came from the travel
and entertainment sectors and 35 percent came from retail and other sectors. By
2002, that proportion was essentially reversed, with everyday spending
accounting for over 60 percent of the business billed 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 TRS' focus on
expanding Card acceptance to exploit these opportunities. In 2002, this shift
was important because of a decrease in spending in travel and entertainment
resulting from the overall economic and political environment.
As part of the Company-wide effort in 2002 to further reduce certain risks
to its balance sheet, TRS continued to maintain strong reserve coverage to
address credit quality in its charge card and lending portfolio. In this regard
TRS increased its reserve coverage of past due balances, which remained in
excess of 100 percent.
TRS is concerned about fraud throughout its Card operations. The Company
continues to take measures to address fraud issues, including investing in new
technologies and educating Cardmembers through fraud protection initiatives. The
Company had success in reducing known fraud in 2002.
TRS continues to make significant investments, both in the U.S. and
internationally, in its card processing system and infrastructure to allow
faster introduction and greater customization of products. TRS also is using
technology to develop and improve its service capabilities. For example, TRS
maintains a service delivery platform that its 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 customer satisfaction issues. In
international markets, TRS is building flexibility and enhancing its global
platforms and capabilities in revolving credit, its full service banking
platform and consumer payment options. See "Corporate and Other" for a
description of the Company's arrangement to outsource many of its technology
operations to IBM.
TRS is also a leading provider of financial and travel services to small
businesses (i.e., generally less than 100 employees and/or sales of $10 million
or less), a key growth area in the United States. In 2002, TRS took steps to
strengthen its competitive position in this customer segment by introducing a
new set of products, services, customer communications and partnerships, as well
as increasing the use of the Internet to meet the servicing needs of small
business owners in the United States. As part of this initiative, TRS' Small
Business Services Group created a new sub-brand and adopted a new name, OPEN:
The Small Business Network From American Express'sm' ("OSBN"). This network
provides a robust new set of products, services, online account management tools
and partnerships that offer everyday savings to small
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businesses. A nationwide advertising campaign supported this effort, reinforcing
American Express' commitment to serving small business owners.
New card products launched for small business owners in 2002 included the
Business Purchase Account'r' (charge), the Business Management Account'r'
(credit), and the Platinum Delta SkyMiles Business Credit Card. TRS also added
several new merchants to the EVERYDAY SAVINGS program for small business
cardmembers, including Cingular Wireless, Kinko's, Nextel and Staples.
TRS encounters substantial and increasingly intense competition with
respect to the Card issuing business. As a card issuer, TRS competes in the U.S.
with financial institutions (such as Citibank, Bank One/First USA, MBNA, JP
Morgan Chase and Capital One Financial) that are members of VISA and/or
MasterCard and that issue general purpose cards, primarily under revolving
credit plans, on one or both of those systems, and the Morgan Stanley affiliate
that issues the Discover Card on the Discover Business Services network. TRS
also encounters some very 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
TRS' Cards because of their limited acceptance. As a result of 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 and other reward or rebate
programs, "teaser" promotional interest rates for both card acquisition and
balance transfers, and co-branded arrangements with partners that offer benefits
to cardholders. Target customers are segmented based on factors such as
financial needs and preferences, brand loyalty, interest in rewards programs and
creditworthiness, and specific products are tailored to specific customer
segments.
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 many financial institutions have replaced
ATM cards with general purpose debit cards bearing either the VISA or MasterCard
logo and accepted wherever those branded credit cards are accepted. As a result,
the volume of transactions made with debit cards in the U.S. has continued to
increase significantly. 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, they are not generally substitutes for credit or
charge cards. TRS does not currently offer point-of-sale debit card products
in any significant way.
The principal competitive factors that affect the Card-issuing business are
(i) the features and the quality of the services and products, including rewards
programs provided to Cardmembers; (ii) the number, spending characteristics and
credit performance of Cardmembers; (iii) the quantity and quality of the
establishments that accept a card; (iv) the cost of cards to
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Cardmembers; (v) the terms of payment available to Cardmembers; (vi) the number
and quality of other payment instruments available to Cardmembers; (vii) the
nature and quality of expense management data capture and reporting capability;
(viii) the success of targeted marketing and promotional campaigns; (ix)
reputation and brand recognition; (x) the ability of issuers to implement
operational and cost efficiencies; and (xi) the quality of customer service.
American Express Credit Corporation, a wholly owned subsidiary of TRS,
along with its subsidiaries ("Credco"), purchases most Charge Card receivables
arising from the use of cards issued in the United States and in designated
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 finances its revolving credit
receivables through the sale of short- and medium-term notes and certificates of
deposit. TRS and Centurion Bank also fund receivables through asset
securitization programs, which comprises part of its financing strategy. The
Company utilizes the income from its securitization activities to help fund
certain marketing and promotion activities. The cost of funding Cardmember
receivables and loans is a major expense of Card operations. For a further
discussion of TRS' and Centurion Bank's securitization and other financing
activities, see pages 32-33, pages 36-37 and pages 41-42 under the caption
"Financial Review," and Note 4 on pages 66-67 of the Company's 2002 Annual
Report to Shareholders, which portions of such report are incorporated herein by
reference.
Centurion Bank's deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC") for up to $100,000 per depositor. Centurion Bank is a
Utah-chartered industrial loan company regulated, supervised and regularly
examined by the Utah Department of Financial Institutions and the FDIC. Among
the activities of Centurion Bank that are regulated at the federal level are its
anti-money laundering compliance activities. The Company has taken steps to
maintain a compliance program consistent with applicable standards. For further
discussion of the anti-money laundering initiatives affecting the Company, see
page 58 hereof under the heading "Corporate and Other."
The Charge Card, ATM and consumer lending businesses are subject to
extensive regulation in the United States under 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 page 57). Federal
legislation also regulates abusive debt collection practices. In addition, a
number of states and foreign countries have similar consumer credit protection,
disclosure and privacy-related laws. The application of federal and state
bankruptcy and debtor relief laws
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affect the Company 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 the USA PATRIOT Act (see page 58 for a discussion of
this legislation and its effect on the Company's business). Centurion Bank is
subject to a variety of state and federal laws and regulations applicable to
FDIC-insured, state-chartered financial institutions. Changes in such laws and
regulations or in the regulatory application or judicial interpretation thereof
could impact the manner in which Centurion Bank conducts its business. The
Company regularly reviews and, as appropriate, refines its business practices in
light of existing and anticipated developments in laws, regulations and industry
trends so that it can continue to manage its 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 federal entities
that regulate banks and other financial institutions, issued in final form its
guidance 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 bank regulators' identifying in
recent examinations of other credit card lenders practices deemed by them to be
inappropriate, particularly, but not exclusively, with regard to subprime
lending programs. The Company does not have any lending programs that target the
subprime market. The Company does not believe that the Guidance will have any
material impact on the Company's businesses or practices, nor will the Guidance
mandate any changes to the Company's practices.
The American Express Consumer Travel business provides travel services to
consumers through: American Express-owned travel service offices; American
Express Representatives, which are travel offices independently owned by third
parties; and American Express Call Centers, which offer travel services to
Platinum Card'r', Centurion'r' Card and other Cardmembers. Through these
facilities, Cardmembers are able to receive service in person, by phone or by
fax, in addition to the Company's online servicing. The Consumer Travel business
also operates a wholesale travel business selling travel packages to other
retail travel agents. Since a large number of the Company's consumer and small
business Cardmembers are also active leisure travelers, TRS seeks to use its
consumer travel network to better serve its customers and grow the business
despite extremely challenging competitive pressures. See page 16 for a
discussion of competition in the travel industry.
TRS' 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. TRS continually evaluates this structure to determine the
best way to leverage the strength of the travel network. At the same time, TRS
is developing ways to better serve the travel consumer, including 1-800 type
services and Internet-based products and services.
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GLOBAL CORPORATE SERVICES
TRS' Global Corporate Services Group ("GCSG") provides Corporate Card,
Corporate Travel, Corporate Purchasing Card ("CPC") and consulting services to
businesses around the world. In addition to being a leading provider of such
services to large-market businesses, GCSG has a strong presence among middle-
market companies (those in the U.S. with annual revenues of $10 million to
$1 billion and annual travel and entertainment expenditures between $100,000
and $10 million). The corporate middle market is a rapidly expanding segment
that offers great opportunity for growth. In 2002, GCSG invested heavily in the
middle market, expanding marketing efforts and adding sales staff in 13
countries. It also launched the Savings at Work'sm' program, which provides U.S.
mid-sized firms with significant discounts on everyday products and services
such as office supplies and a range of business services, and it enhanced the
Company's product offerings to mid-sized firms in other parts of the world.
Companies are offered services through the American Express'r' Corporate
Card, which is a charge card issued to individuals through a corporate
account established by their employer for business purposes.
The CPC assists large- and middle-market companies in managing indirect
spending, including traditional purchasing administration expenses. The CPC is
used by corporations to buy everyday goods and services, such as office supplies
and industrial supplies and equipment, in 23 markets around the world. This type
of spending by corporations is less susceptible to downturns in difficult
economic times than is traditional travel and entertainment spending, and is
thereby helping to diversify the Company's spending mix. During 2002, TRS added
or expanded Corporate Card and Corporate Purchasing Card relationships around
the world including those with Accenture, Halliburton, Hilton Hotels, PepsiCo,
Procter & Gamble, Seagate Technology and Unisys Corporation.
Competition in the commercial card (Corporate Card and CPC) business is
increasingly intense at both the card network and card issuer levels. At the
network level, Diners Club remains a significant global competitor. In addition,
both VISA and MasterCard have stepped-up efforts to support card issuers such as
U.S. Bank, JP Morgan Chase, GE Financial Services and Citibank (in the U.S. 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 GCSG and Diners Club
for the business of multinational companies. The key competitive factors in the
commercial card business are (i) the ability to capture and deliver detailed
transaction data and expense management reports; (ii) the number and types of
businesses that accept the cards; (iii) pricing; (iv) the range and
innovativeness of products and services to suit business needs; (v) quality of
customer services; and (vi) global presence. For a discussion of competition
relating to the Card issuing business, see pages 4 and 12.
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GCSG offers integrated commercial card and business travel services in the
United States and certain foreign countries to compete for the business traveler
and to provide client companies with a customized approach to managing their
travel and entertainment budgets. Clients are provided an information package to
plan, account for and control travel and entertainment expenses. CPC solutions
can also be packaged as complimentary expense management and reporting tools.
GCSG provides a wide variety of travel services to customers traveling for
business and is one of the leading business travel providers worldwide. For
corporate travel accounts, GCSG provides corporate travel policy consultation,
management information systems and group and incentive travel services in 37
markets worldwide, of which 31 are proprietary operations and six are managed
through joint ventures.
GCSG faces vigorous competition in the United States and abroad from
numerous other traditional and online travel management companies, as well as
from direct sales by airlines and other travel suppliers. Competition among
travel agencies is mainly based on price, service, convenience and proximity to
the customer. In addition, competition comes from corporate customers themselves
as many companies have become accredited as in-house corporate travel agents.
In 2001, five of the largest U.S. carriers launched Orbitz, an online
travel agency from which travelers are able to access information regarding a
large selection of airfares from many airlines, including web-only fares,
which may in some cases be lower than fares that can be obtained through
traditional travel agencies. The website also provides offers on car rentals
and other travel. In addition, Orbitz provides access to rates on hotel rooms
in both independent hotels and hotels in certain major national chains, which
may be lower than rates that could be obtained through traditional travel
agencies. While Orbitz is targeted primarily toward the leisure traveler,
business travelers are increasingly using Orbitz and other airline-owned
websites to gain access to web-only fares. Other online agencies, formerly
specializing in targeted sales to leisure travelers, such as Expedia and
Travelocity, have begun to pursue corporate travel customers, initially in the
small and mid-sized markets.
In 2002, GCSG expanded its presence in Asia by opening joint venture
operations through CITS (China International Travel Services) American Express
Travel Services Limited, launching business travel centers in Beijing and
Shanghai. This venture serves multinational, pan-regional and local corporations
traveling to and from the People's Republic of China. The CITS
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American Express partnership is the first corporate travel joint venture fully
licensed to sell both domestic and international airline tickets in China.
Airlines have continued efforts to reduce their distribution expenses. For
example, in March 2002, all of the major U.S. airlines and some international
carriers announced that they would no longer pay any "base" commissions to
travel agents for tickets sold in the U.S. and Canada for all domestic and
international travel. In addition, in 2002, airlines continued efforts to move
corporate customers to their own proprietary direct billing and payment
products, such as UATP, and made attempts to limit the use of credit and charge
cards for web-only corporate fares. In addition, airlines continue to maintain
and expand alliances for marketing, code share and other service delivery
purposes. Those actions and the impact of the economic slowdown have caused some
independent travel agencies to go out of business and, as referenced above,
forced others to seek consolidation opportunities. Consolidation of travel
agencies is expected to continue as agencies seek to better serve national and
multinational business travel clients and negotiate more effectively with the
airlines. It is also expected that travel agencies will continue to look for
expense reduction opportunities such as focusing on electronic ticketing and
interactive travel fulfillment solutions.
GCSG has historically received commissions and fees for ticketing and
reservations from airlines and other travel suppliers, and management and
transaction fees from certain corporate travel accounts. The ongoing trend of
airline alliances, airline websites permitting travelers to book business
directly and airline commission rate reductions continues to result in decreased
business travel revenue for travel companies and price increases for travelers,
fewer opportunities for data aggregation for corporations and greater pressure
on the GCSG travel business. Throughout 2002, GCSG, similar to other travel
management companies, tested and utilized on behalf of its customers multiple
technology tools to assure access to inventory and all airfares, formerly
classified as "web-only" fares. Late in 2002, GCSG announced its TravelBahn'sm'
Distribution Solution, a proprietary network alternative, which will provide
access to all American Airlines inventory and fares for American Express
corporate travel customers.
GCSG continues to modify its business model and invest in new technologies
to address these ongoing industry challenges. For example, GCSG has been
successful in its efforts to rely less on commission revenues from suppliers,
such as airlines or hotels, and now relies more on customers to pay transaction
fees for its travel services. In 2002, only 28 percent of U.S. corporate travel
revenues came from airlines, hotels, rental car companies and other suppliers,
and 72 percent came from customers. A few years ago, the mix was approximately
the reverse.
These changes to GCSG's sources of revenue enabled Corporate Travel to
successfully manage its business in one of the toughest years in recent history
for the business travel industry. The travel industry continues to be impacted
by world events and challenging economic conditions. Threat of war, terrorism
and a general economic downturn have depressed both business and leisure travel
and may continue to do so. In 2002, both United Airlines and USAir filed for
Chapter 11 bankruptcy protection in the U.S., while both airlines continue to
operate with reduced capacity in attempts to lower their cost base. 2002 also
saw the significant rise in popularity and profitability for the low-cost
carrier segment in the U.S., Europe and Asia. In the
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past, this segment had primarily focused on leisure travelers, while 2002 saw a
dramatic rise in the number and percentage of business travelers using these
low-cost airlines.
GCSG took advantage of the downturn in travel to step up sales efforts. It
was awarded the corporate travel business of companies including Monsanto
Company; Nestle USA; Nokia, Inc.; Panasonic; and The Shell Company of Australia
Limited.
As in other areas of the Company, GCSG has moved many of its business
processes and customer servicing online to reduce costs, improve processes and
enhance the quality of customer service. By year-end 2002, 16% of all corporate
travel transactions in the U.S. were conducted online. This online delivery
optimizes savings for corporate customers and enhances GCSG profitability
through lower-cost servicing. Expanding on the momentum from U.S. corporations
migration to booking their company travel online, GCSG opened two new
E-Fulfillment Centers in Europe -- in Stockholm and Nice -- to complement the
North American E-Fulfillment Center in Miami Lakes, Florida, which has been
operational since 2001. By shifting travel reservations from the telephone
onto a website, GCSG is able to improve substantially employee productivity and
drive down costs. Employees at online fulfillment centers process almost 7,000
transactions per year compared to approximately 1,400 for offline servicing.
Similarly, GCSG's Internet application for the corporate card segment,
Amex@Work, gives clients a faster, simpler way to work with the Company. During
2002, GCSG offered American Express @ Work'r' Expense Reporting and Purchase
Reconciliation, an online tool which helps companies and their employees track
and file expense reports and reconcile everyday purchases. TRS also enhanced
American Express @ Work by adding a searchable database that corporate travel
managers can access to keep track of employees' travel reservations. Over 11,000
corporate account administrators now go online to perform most of their account
maintenance, rather than contacting the Company by phone, fax or mail. Since its
launch in 1999, the percentage of corporate card maintenance transactions
completed online through Amex@Work has grown significantly and this channel now
handles 63 percent of such transactions.
GCSG has also developed relationships with a number of e-commerce firms to
provide a faster, more efficient way for customers to purchase office supplies
and related products using the CPC. In March 2002, GCSG announced that it has
entered into an agreement with IBM to jointly develop a web-based expense
reporting and reconciliation tool designed to reduce the cost of managing
everyday business expenses. Under the Agreement, GCSG plans to market the
application as part of its American Express @ Work suite of online expense
management tools.
GCSG, through its Consumer Travel International and Foreign Exchange
Services Group ("CTI & FES"), provides travel services, currency exchange and
Cardmember services through a retail network of American Express-owned and
franchised offices. CTI & FES expanded its global retail presence in Australia
and Southeast Asia, and extended its partnerships in India, Thailand, Turkey and
the United States. TRS further expanded its retail network through aggressive
growth at international airport locations; Paris' Charles de Gaulle airport and
London's Heathrow airport being notable recent additions to the network. CTI &
FES also provides electronic funds transfers through an international payments
service. Offered in the U.S., Australia and the UK, this service offers small
businesses and banking customers an Internet-based source to make payments to
foreign suppliers.
GLOBAL TRAVELERS CHEQUE AND PREPAID SERVICES
The Company, through its Global Travelers Cheque and Prepaid Services Group
("TCPS"), is a leading issuer of travelers checks. The Company also issues Money
Order and
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Official Check products in the United States, and the TravelFunds Direct'r'
product, which provides direct delivery of foreign bank notes and Travelers
Cheques in selected markets.
The American Express'r' Travelers Cheque ("Travelers Cheque" or "Cheque")
is sold as a safe and convenient alternative to currency. The Travelers Cheque
is a negotiable instrument, 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. In 2002, TCPS launched enhanced services for
Travelers Cheque customers, including passport and credit replacement
assistance. Gift Cheques, a type of Travelers Cheque, are used for gift-giving
purposes.
Travelers Cheques are issued in eight currencies, including a
Euro-denominated Travelers Cheque, both directly by the Company and through
joint venture companies in which the Company generally holds an equity interest.
Gift Cheques are issued in two currencies, U.S. dollars and Canadian dollars. As
a result of the final conversion in early 2002 of certain European currencies to
the Euro, the Company ceased selling the French franc, German mark and Dutch
guilder Travelers Cheques as of the end of 2001. However, the Company will
continue to honor, redeem, and refund Cheques in these currencies for Euros,
since they do not expire.
American Express Travelers Cheques are sold through a broad network of
selling outlets worldwide, including travel offices of the Company, its
affiliates and representatives; travel agents; commercial banks; savings banks;
savings and loan associations; credit unions; and other financial, travel and
commercial businesses. The Company sometimes compensates selling outlets for
their sale of Travelers Cheques. In 2002, the Company's sale of Travelers
Cheques and Gift Cheques over the Internet continued to grow strongly. During
the year, overall Travelers Cheque sales decreased 6.2 percent globally, and
consumer Gift Cheque sales increased approximately 14 percent. While Gift Cheque
growth can be attributed to new advertising and marketing programs, it is
believed that the lag in Travelers Cheque sales was driven by the continuing
global economic slowdown and the reduction in both business and personal travel.
Partnerships with sellers continue to be critical to the Travelers Cheque
Group as TRS expands its sales distribution network. In 2002, TCPS lost the
account of the American Automobile Association, a major seller in the United
States, but gained a number of new sellers, including Abbey National in the UK;
Saudi American Bank; STA Travel in Germany; and Tokyo Credit Service.
The proceeds from sales of Travelers Cheques issued by the Company are
invested predominantly in highly-rated debt securities consisting primarily of
intermediate- and long-term state and municipal obligations.
Issuers of travelers checks and money orders are regulated under most
states' "money transmitter" laws. These laws require travelers check 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 Travelers Cheque and Money Order
licensees annually. In addition, Travelers Cheque and Money Order issuers are
required to
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comply with state and foreign unclaimed and abandoned property laws. The state
laws require issuers to pay to states the face amount of any Travelers Cheque or
Money Order that is uncashed or unredeemed after a specified period of years.
Outside the U.S., there are varying requirements, including some countries with
requirements similar to those in the U.S. On December 31, 2001, new federal
anti-money laundering regulations became effective. These regulations required,
among other things, the registration of traveler check and money order issuers
as "Money Service Businesses" and compliance with anti-money laundering
recording and reporting requirements by issuers and selling outlets. For a
discussion of other anti-money laundering legislative initiatives affecting the
Travelers Cheque Group, see page 58 under the heading "Corporate and Other."
Travelers Cheques compete with a wide variety of financial payment
products. Consumers may choose to use their credit or charge cards when they
travel instead of carrying Travelers Cheques, although a Travelers Cheque would
not typically be an acceptable substitute for most transactions made with credit
or charge cards. Other payment mechanisms that might substitute for Travelers
Cheques include cash, checks, other brands of travelers checks, debit cards and
cards accepted at national and international automated teller machine networks.
The principal competitive factors affecting the travelers check industry are (i)
the availability to the consumer of other forms of payment; (ii) the amount of
the fee charged to the consumer; (iii) the availability and acceptability of
travelers checks throughout the world; (iv) the compensation paid to, and
frequency of settlement by, selling outlets; (v) the accessibility of travelers
check sales and refunds; (vi) the success of marketing and promotional
campaigns; and (vii) the ability to service the check purchaser satisfactorily
if the checks are lost or stolen.
TCPS has also grown its Prepaid Card business. In 2002, the Group launched
a general retail gifting product, the American Express Gift Card, and continued
to offer the Be My Guest'r' Card, a Prepaid Card product used to give the gift
of restaurant dining. TCPS is continually looking into additional prepaid
products both individually and through partnerships with others.
OTHER PRODUCTS AND SERVICES
Interactive Services and New Businesses ("IS&NB") leverages interactive
technologies to develop new businesses and enhance existing businesses. IS&NB
leads and coordinates the deployment of the Company's enterprise-wide
interactive strategy with a focus on providing Internet and interactive
capabilities to meet customer needs.
The Company continued to leverage the Internet to lower costs and improve
service quality. During 2002, it expanded the number of services and
capabilities available to customers online and increased their utilization. For
example, within the U.S., approximately 80 percent of the Company's card
servicing transactions are now available online. The Company now has more online
interactions with customers than it does by telephone or in person.
At year-end, approximately nine million Cards were enrolled in "Manage Your
Card Account Service." This service enables Cardmembers to review and pay their
American Express bills electronically, view their Membership Rewards'r' accounts
and conduct various other
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functions quickly and securely online. The Company now has an online presence in
over 50 markets.
American Express Tax and Business Services Inc. ("TBS") is a tax,
accounting, consulting and business advisory firm focused primarily on small and
middle-market companies. TBS provides a wide range of services for a fee,
including tax planning and accounting, litigation support, business
reorganization, business advisory, business technology and other consulting
services. In addition, TBS has expertise in a variety of industries, including
health care, real estate, manufacturing and distribution, among others. TBS
employs CPAs but is not a licensed CPA firm. Attestation services for its
clients are available from licensed public accounting firms with whom TBS has
continuing professional services relationships. TBS has more than 50 offices in
17 states with approximately 2,700 employees.
TRS, through American Express Publishing, also publishes 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 Fortune Small Business magazine; a variety of general interest, cooking,
travel, wine, financial and time management books; branded membership services;
as well as directly sold and licensed products. In 2002, American Express
Publishing introduced a Spanish language version of Travel + Leisure, the Blue
from American Express Appointment Book and SkyGuide GO, a supplement to SkyGuide
geared to business travelers. TRS also has a custom publishing group and is
expanding service-driven websites such as: travelandleisure.com,
foodandwine.com, departures.com, tlgolf.com, tlfamily.com and skyguide.net.
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AMERICAN EXPRESS FINANCIAL ADVISORS
OVERVIEW
The Company, through its American Express Financial Advisors business unit
("AEFA"), makes available a variety of financial products and services to help
individuals, businesses and institutions establish and achieve their financial
goals. This business unit principally includes American Express Financial
Corporation ("AEFC") and its subsidiaries and affiliates described below. At
December 31, 2002, AEFA maintained a nationwide field sales force of over 11,600
financial advisors, which represents a slight increase over 2001 and which
provided products and services to more than two million clients throughout the
U.S.
The core of AEFA's business is financial planning and advice. AEFA's
financial advisors work with retail clients to develop strong relationships
and long-term financial strategies. To fulfill the needs of its retail
clients, AEFA also develops and offers a broad array of financial products and
services, including annuities; a variety of insurance products, including life
insurance, disability income insurance and property and casualty insurance; a
variety of investment products, including investment certificates and mutual
funds; investment services, including wrap programs; 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, including online
direct brokerage services.
AEFA believes that its ability to provide broad-based products and
services on a relationship basis is a competitive advantage. Due to
significant volatility and an overall decline in the equity markets,
investment flow from AEFA's retail investors has slowed and many competitors
have also suffered significant declines. To compete, major brokerage firms are
attempting to move away from their historical transaction orientation and move
toward financial planning and advice, AEFA's historical focus and longstanding
strength. Unlike many of AEFA's competitors, whose field forces typically
comprise brokers who focus on completing transactions, many of AEFA's advisors
are Certified Financial Planner'r''pp'1 practitioners who also work closely
with clients to develop long-term financial plans. As a result, AEFA has a
client retention rate of 94 percent, and in 2002, the redemption rates in its
proprietary mutual fund product continued to compare favorably with industry
levels, even in light of the difficult environment AEFA faced during the year.
AEFA continues to invest considerably in the development of tools and
training for its advisors to further strengthen their ability to offer sound
advice and financial plans. During 2002, nearly 47 percent of new retail clients
had a financial plan developed for them by an AEFA advisor, up three percent
from 2001. As has been the case historically, clients with plans tend to buy
more products. In 2002, product sales generated through financial planning and
advice services were 73 percent of total advisor sales, up one percent from last
year.
- ----------
(1) Registered trademark of Certified Financial Planner Board of Standards,
Inc.
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AEFA also offers products and services directly to institutions, such as
asset management, institutional trust and custody, workplace-based financial
education and financial planning, and employee benefit plan administration. AEFA
also markets fixed and variable annuity and variable universal life insurance
products through third-party financial institutions.
In recent years, AEFA has increased its sale of non-proprietary products,
particularly mutual funds, to meet the demands of clients for a broader choice
of investment products. The sales of non-proprietary products on a stand-alone
basis generally are less profitable than proprietary sales. A significant
portion of AEFA's non-proprietary mutual fund sales are made in connection with
wrap programs where clients pay AEFA a fee that is typically a percentage of
assets under management, and which are more profitable than the sale of
non-proprietary products alone. In 2002, overall mutual fund sales by AEFA
decreased relative to the sale of fixed and variable annuities, which have a
lower return on equity.
In 2002, AEFA took various steps to support continued growth of its
business:
o It further refined the organizational structure for its field sales
force to reduce costs and improve focus and productivity.
o It took various actions to improve its asset management capability and
investment performance to increase the competitiveness of its
proprietary products, including:
- Launching 34 new products across its asset management, insurance
and annuity businesses, including four new equity and fixed
income internally managed mutual funds and four new sub-advised
equity mutual funds in the international, mid- and small-cap
categories by partnering with fund managers with proven track
records of strong performance;
- Increasing the strength and depth of its own investment talent,
including the hiring of a new Senior Vice President of Fixed
Income and several other experienced investment professionals and
the acquisition of a quantitative investment analysis firm. In
addition, in early 2003, AEFA reorganized its fixed income
investment management staff into teams responsible for research,
trading and portfolio management in specific fixed income
sectors; and
- Restructuring its U.S. equity investment operation by
establishing or expanding satellite offices in Boston, Cambridge,
New York and San Diego. Each of the satellite offices, in
addition to the Minneapolis office, is responsible for managing
several equity investment portfolios. Minneapolis continues to be
a center for both portfolio management and research.
In 2002, depressed equity market levels significantly impacted AEFA's
business. Among other areas, assets under management declined, as well as
management fees related to such assets, both due to depreciation in asset
values, as well as fund outflows, particularly those invested in growth-oriented
mutual funds. In 2002, other market-based events also impacted
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AEFA's business including the continuation of relatively high default rates in
the corporate debt markets. See "Impact of recent market volatility on Results
of Operations" on page 46 of the Annual Report to Shareholders, which is
incorporated by reference herein.
DISTRIBUTION OF PRODUCTS AND SERVICES
AEFA has three primary financial service distribution channels: retail,
which is comprised of financial advisors and direct access (online, telephone
and mail), institutional and third party.
RETAIL DISTRIBUTION
AEFA's largest distribution channel is its sales force of financial
advisors. Through this channel, AEFA offers financial planning and investment
advisory services (for which it charges a fee) to individuals and business
owners that may address six basic areas of financial planning: financial
position, protection, investment, income tax, retirement and estate planning.
AEFA's financial advisors provide clients with recommendations from a broad
array of proprietary and non-proprietary products and services.
AEFA's organizational structure provides advisors choices in how they
affiliate with the organization, with various levels of service, compensation
and branding. Advisors are able to choose an employee advisor platform, with
compensation being paid as a draw against commissions, a high level of support
and a lower payout rate; a branded independent advisor platform, structured as a
franchise system, in which advisors get a higher payout rate and can purchase
the support services they prefer; or an affiliated but unbranded broker-dealer
platform with a yet higher payout. The unbranded platform is Securities America,
Inc., a broker-dealer owned by AEFC. Securities America is a distributor of
mutual funds, annuities and insurance products, as well as individual securities
and wrap products. Securities America provided service to 1,434 advisors in
2002.
Approximately 24 percent of AEFA's 11,600 financial advisors are American
Express employees; about 64 percent are American Express-branded franchisees;
and about 12 percent are in the unbranded platform. AEFA believes it is the only
U.S. company to offer all three of these different career tracks for advisors,
which it considers a strategic advantage. During 2002, AEFA tightened the hiring
criteria for employee advisors so it could more effectively select applicants
who would have the greatest opportunity for success. At the same time, AEFA
focused on client acquisition and reducing costs in its system. AEFA further
improved the service and tools provided to franchisee advisors and further
aligned metrics and compensation.
AEFA believes it needs to continue its efforts to increase the size of its
dedicated field force to further enhance its ability to attract and serve new
clients and to compete effectively with the large sales forces of a few
competitors. In attracting and retaining members of the field force, AEFA
competes with financial planning firms, insurance companies, securities
broker-dealers and other financial institutions.
Consistent with the Company's goal of leveraging business development
across all of its units, AEFA continues to increase its sales to customers from
other American Express
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businesses. AEFA's Financial Education and Planning Services (FEPS) group
provides workplace financial education programs and an opportunity for advisor
referrals between the advisor channel and the 401(k) client base of American
Express Retirement Services and American Express Trust Company. With
institutional client approval, advisors present educational seminars in the
workplace to employee participants enrolled in the institutional client's
program. In 2002, AEFA enhanced these educational and referral activities with
401(k) clients representing 250 companies and over one million participants.
AEFA also has financial education relationships with 75 additional major U.S.
corporations and 500 smaller companies, also representing over one million
employees. Seventeen percent of AEFA's new retail clients in 2002 came from the
combination of these institutional relationships.
In 2002, AEFA also began to leverage other American Express relationships
with major companies to create alliances that help generate new financial
services clients. The first test of this strategy was a marketing alliance with
Costco, one of the largest merchants in the American Express network. The
AEFA/Costco Wholesale Program generates new advisor clients from the Costco
member base at a lower acquisition cost than traditional channels, while
providing Costco customers an array of member benefits. As a result of the
initial launch of the Costco alliance in 2002, five percent of AEFA's new
clients came from this relationship and 94 percent of advisor clients obtained
through the Costco relationship completed a financial plan.
AEFA also has taken steps to integrate its direct retail distribution
channel with the advisor channel. AEFA's online brokerage business, American
Express Brokerage, allows clients to purchase and sell securities online, obtain
research and information about a wide variety of securities, use asset
allocation and financial planning tools, contact an advisor, as well as have
access to more than 3,000 proprietary and non-proprietary mutual funds, among
other services.
The Internet also continues to be an important and cost effective tool for
acquiring new customers. The number of advisor leads generated via the Internet
increased significantly in 2002, at a substantially reduced cost versus
alternative channels. Additionally, the Internet has emerged as a significant
channel for service on the institutional and retail sides of the business.
In 2002, AEFA launched the American Express One'sm' Financial Account, an
integrated financial management account that combines clients' 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'r' Gold Card, online bill payments, ATM access and a high-yield savings
account. By offering clients the benefits of "one-stop shopping," the American
Express One Financial Account enables AEFA to attract a larger share of its
clients' assets.
AEFA also introduced American Express Platinum Financial Services'r' in
2002 to better serve the company's most affluent clients. Clients eligible for
this offering have access to certain specialized products and services, and are
served by specially trained advisors, most of whom hold advanced planning
certifications. In 2002, AEFA trained over 750 top advisors to participate in
the program and existing clients who participated in the Platinum Financial
Services program committed an average of $150,000 in new money as a result.
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The Company also engages in the brokerage business in the United Kingdom
through American Express Financial Services Europe Ltd. ("AEFSE"). This business
has transformed into a more extensive provider of direct investment services,
and now offers, through a multi-currency account, customer trading in 11 stock
markets, tax wrappers and over 800 funds. AEFSE is part of the Company's Global
Brokerage and Membership B@nking'r' ("GBMB") unit, which also includes the
Company's U.S. brokerage services offered through AEFA and Membership B@nking
offered through Centurion Bank. GBMB is helping to coordinate the expansion of
the Company's financial services business in the U.S. and select international
markets by working closely with AEFA and TRS.
In 2002, AEFA announced a strategic alliance with Mitsui Mutual Life
Insurance Company (MMLIC) to license AEFA's financial planning business model in
Japan and transfer AEFA's Japanese direct mutual fund sales business. The AEFA
advice-based business model has been tailored for Japan and includes advisor and
leader training, marketing support and financial planning software. MMLIC
launched its financial planning Personal Money Management (PMM) service in
November 2002. MMLIC has exclusive use of the model through 2004. With this
strategic alliance, AEFA expects to gain experience in exporting advice
capabilities. As a result of this transaction, AEFA closed its retail operations
in Japan.
INSTITUTIONAL
American Express Asset Management Group Inc. ("AEAMG"), a subsidiary of
AEFC and an SEC registered investment adviser, directly or through operating
divisions or subsidiaries, provides investment management services to:
o Pension, profit-sharing, employee savings and endowment funds of
large- and medium-sized businesses, governmental units and other large
institutional clients;
o Smaller accounts of wealthy individuals and small institutional
clients, either directly to such clients or indirectly through wrap
programs sponsored by various affiliated and unaffiliated entities;
o Various special purpose vehicles that issue their own securities and
which are backed by high-yield bonds and bank loans (collateralized
debt obligations and secured loan trusts); and
o Various hedge funds structured as limited liability entities and
offshore corporations.
For its investment services, AEAMG generally receives fees which are
assessed on the basis of a percentage of the market value of assets under
management. Clients may also pay fees to AEAMG based on the performance of their
portfolio.
AEAMG owns a 50.1 percent interest in Kenwood Capital Management LLC
("Kenwood"), which provides investment management services to investment
companies, corporations, trusts, estates, charitable organizations and tax
qualified pension and profit sharing plans. Kenwood employs an active investment
strategy that is based on a disciplined approach to stock selection and
portfolio risk management, and seeks to achieve consistent excess returns
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relative to passive index benchmarks for the small-cap segment of the United
States' equity market. AEAMG also owns a 50.1 percent interest in Northwinds
Marketing Group LLC ("Northwinds"), a registered broker-dealer, which markets
investment management services of AEAMG and its affiliated investment advisers,
as well as certain non-affiliated investment advisers, to large institutions,
primarily union and public pension funds.
AEAMG also provides investment management services to hedge funds
structured as limited liability entities and offshore corporations. AEAMG's
direct or indirect subsidiaries serve as general manager and investment manager
of such entities. These subsidiaries also serve as commodity pool operators for
hedge funds that trade in futures and, accordingly, are registered with the
Commodity Futures Trading Commission ("CFTC") and the National Futures
Association ("NFA"). Other entities affiliated with AEAMG, which are also
subsidiaries of AEFC, jointly provide investment management and advisory
services to European equity hedge funds. AEAMG receives an investment management
fee, and may also receive a performance fee, for the services it provides to the
hedge funds. Portfolio managers and analysts for the hedge funds may, from time
to time, invest their own assets in the funds they manage. Investors in the
hedge funds include institutions, corporations, pension plans, and high net
worth individuals. Investors may be affiliates of AEFC. The hedge fund business
faced significant challenges in 2002 and, in the aggregate, the asset levels in
these funds declined. The business focused on repositioning for future growth.
In 2002, eight new funds (four strategies) were launched and four funds (two
strategies) were closed. Personnel changes were made, resulting in a net
increase in personnel dedicated to the hedge fund business.
AEAMG provides investment management services as collateral manager to
various special purpose vehicles that issue securities collateralized by a
pool of assets, i.e., collateralized debt obligations ("CDOs"). AEAMG also
provides investment management services to secured loan trusts ("SLTs"). AEAMG
is assessing the impact of FASB Interpretation No. 46, which addresses
potential consolidation of certain entities, including CDOs and SLTs. AEAMG or
one or more of its affiliated companies has invested its own money in such
vehicles, including in residual equity interests, which are illiquid and the
most subordinated (and accordingly, riskiest and most volatile) interests in
such vehicles. As of December 31, 2002, the carrying values of the CDO
residual tranches and SLT notes were $28 million and $684 million,
respectively. The return on such investments correlates to the performance of
portfolios of high-yield bonds and bank loans. Generally, the SLTs are
structured such that the principal amount of the loans in the reference
portfolio to which the SLTs correlate may be up to five times that of the par
amount of the notes held by AEFA. Deterioration in the value of high-yield
bonds or bank loans would likely result in deterioration of investment return
on the relevant CDO or SLT, as the case may be. In the event of significant
deterioration of a portfolio, the relevant CDO or SLT may be subject to early
liquidation, which could result in further deterioration of the investment
return, or in severe cases, loss of the carrying amount. Deterioration of a
portfolio would likely have a negative impact on collateral management fees.
During 2001, AEFA placed a majority of its rated CDO securities and
related accrued interest, as well as a relatively minor amount of other liquid
securities, having an aggregate book value of $905 million, into a
securitization trust. In return, the Company received $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, 2002, the retained interests had a carrying value of
$754 million, of which $520 million is considered investment grade. The company
has no obligations, contingent or otherwise, to such unaffiliated investors.
At December 31, 2002, AEAMG managed securities portfolios in the U.S.
totaling $14.8 billion compared to $18.4 billion at December 31, 2001.
International investment management services are offered to domestic and
international institutional clients and mutual funds by other subsidiaries of
AEFC which have offices in
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London, Singapore and Tokyo. At December 31, 2002, these entities in the
aggregate managed $4.5 billion, of which $2.7 billion represents mutual fund
assets.
The institutional investment management business is highly competitive and
2002 was a challenging year in which there was an overall reduction in assets
under management. AEAMG and its affiliates must compete against a substantial
number of larger firms in seeking to acquire and maintain assets under
management. Competitive factors in this business include fees, investment
performance, including the quality and "track record" of portfolio managers,
global capabilities, range of portfolios offered and client service.
American Express Retirement Services ("AERS"), a business unit of American
Express Financial Advisors Inc., and American Express Trust Company ("AETC"),
together provide retirement plan-related services to mid- to large-size private
employers, governmental entities and unions. Together, AERS and AETC bundle a
variety of service offerings for clients, including a wide array of investment
options, participant education offerings, and both phone and Internet-based plan
servicing. The primary market is for retirement plans with at least $10 million
in assets. As noted in greater detail above, the FEPS group, which is a part of
the AERS business unit, provides workplace financial education programs and an
opportunity for advisor referrals between the advisor channel and the
institutional channel, which includes the client base of AERS and AETC.
AETC is a Minnesota chartered, limited service trust company which
primarily provides trustee, custodial, record keeping, investment management,
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. Based upon recently published
industry figures, we believe that the Company, through AERS and AETC, is a
leading employer-sponsored retirement plan service provider in the United
States.
At December 31, 2002, AETC acted as directed trustee or custodian of 341
benefit plans which represent approximately $26.8 billion in assets managed or
administered, and approximately 1.1 million participants. This includes
approximately $5.3 billion invested in proprietary mutual funds, $4.0 billion
invested in non-proprietary mutual funds, $11.5 billion actively managed by
AETC through both separate investment accounts and collective investment
funds, $5.9 billion of assets administered by AETC, $69.1 million invested
through participant directed brokerage accounts, and $29.9 million invested in
annuities.
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 fees to AETC based on the
performance of their portfolio. AEFA, through AERS, will also receive revenues
based upon servicing agreements from both the proprietary and non-proprietary
mutual funds that are generally based upon a percentage of the market value of
assets invested in the mutual funds, and, in limited circumstances, may also
include revenues on a per participant basis. While AETC and AERS may also
receive fees which are assessed as a flat fee or on a per participant basis,
revenues are principally based upon the value of assets managed or administered,
which may fluctuate due to many factors, most notably due to net inflows or
outflows of assets and fluctuations within the equity and fixed-income markets.
Through its
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trustee and custodial services, AETC may enter into agreements to provide
services to qualified employer-sponsored retirement plans holding employer
stock.
The business climate for AERS and AETC is highly competitive. As with
AEAMG, AERS and AETC experienced a challenging year in 2002, reflecting an
overall decline in assets both managed and administered. AETC must compete
against a substantial number of larger firms in seeking to acquire and maintain
assets under management. Competitive factors in this business include fees,
record keeping and technological capabilities, investment performance and client
servicing.
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. Because
AETC is a service provider to retirement plans, AETC is also subject to
oversight by the U.S. Department of Labor and the U.S. Department of Treasury,
particularly with respect to the Employee Retirement Income Security Act of 1974
("ERISA").
AETC also provides institutional asset custodial services to AEFC and the
AEFA affiliates providing mutual funds, investment certificates, asset
management and life insurance. At December 31, 2002, AETC's institutional assets
under custody are approximately $102.2 billion. AETC custody revenues are
principally based upon the value of assets in custody, which may fluctuate due
to many factors, most notably due to net inflows or outflows of assets and
fluctuations within the equity and fixed-income markets.
THIRD-PARTY DISTRIBUTION
In addition to the retail and institutional distribution channels, AEFA
continues to expand distribution by delivering proprietary insurance and annuity
products through non-affiliated representatives and agents of third-party
distributors. These products are offered through American Enterprise Life
Insurance Company ("American Enterprise Life") and its affiliate American
Centurion Life Assurance Company ("American Centurion Life"), both subsidiaries
of IDS Life Insurance Company ("IDS Life"). American Enterprise Life provides
financial institution clients with American Express-branded financial products
and services to support their retail insurance and annuity operations. It
distributes variable life insurance and 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 and New
Hampshire. American Centurion Life markets fixed and variable annuities in New
York.
During the year, AEFA continued to expand its network of third-party
distributors through American Enterprise Life and American Centurion Life and
its range of variable annuity products offered through them, resulting in
strong third-party sales efforts. (American Centurion Life also offers annuities
directly to consumers, generally persons holding an American Express'r' Card.)
American Enterprise Life improved its competitive position during the year,
increasing market share, substantially adding to its client base, and further
broadening its variable annuity product lineup. American Enterprise Life also
expanded and strengthened its distribution and technology capability. American
Enterprise Life competes directly with several other insurers in the third-party
distribution channel.
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ADDITIONAL CAPABILITIES
In 2002, AEFA continued to expand its securities brokerage services.
American Enterprise Investment Services Inc. ("AEIS"), a wholly owned subsidiary
of AEFC, provides securities execution and clearance services for approximately
963,000 retail and institutional clients of AEFA. AEIS holds over $42 billion in
assets for clients. AEIS is registered as a broker-dealer with the SEC, is a
member of the National Association of Securities Dealers, Inc. ("NASD") and the
Chicago Stock Exchange and is registered with appropriate states.
American Express Financial Advisors Inc. ("AEFAI"), AEFC's principal
marketing subsidiary, does business as a broker-dealer and investment advisor in
all 50 states, the District of Columbia and Puerto Rico. AEFAI is registered as
a broker-dealer and investment advisor regulated by the SEC and is a member of
the NASD. AEFA's financial advisors must obtain all required state and NASD
licenses.
AEFA also acts as custodian and 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, 2002, these tax-qualified
assets equaled $63.6 billion, which is in excess of 25% of all institutional and
retail assets owned, managed and administered by AEFA.
To increase its servicing flexibility, several AEFA processes were migrated
under the Global Infrastructure Optimization ("GIO") initiative and are serviced
by three separate vendors located in the Philippines and India. These service
centers provide front-end AEFA Mutual Fund and Brokerage call center services
and a variety of back office services including case management and pay by
phone. AEFA continues to maintain adequate staffing levels within the United
States to meet global uncertainties and volume fluctuations.
REGULATION
AEFA has experienced, and believes it will continue to be subject to,
increased regulatory oversight of the securities and commodities industries at
all levels. In 2002, the SEC and NASD heightened applicable requirements by
adopting several new regulations, including new books and records rules, new
anti-money laundering rules and new business continuity requirements. As a
provider of products and services to tax-qualified retirement plans and IRAs,
certain aspects of AEFA's business fall within the compliance oversight of the
U.S. Department of Labor ("DOL") and the U.S. Department of Treasury
("Treasury"), particularly with respect to 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 advisor and its officers or employees. Individual investors also can
bring complaints against AEFA. Moreover, AEFA believes it is one of the first
financial
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institutions to structure itself as a franchise system. As such, AEFA is subject
to Federal Trade Commission and state franchise requirements.
COMPETITIVE ENVIRONMENT
Competition in the financial services industry focuses primarily on cost,
investment performance, yield, convenience, service, reliability, safety,
innovation, distribution systems, reputation and brand recognition. 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 are
more global than AEFA, and the continuing trend toward consolidation and
globalization in the financial services industry may increase the number of
these stronger competitors. Many of these financial institutions also have
products and services that increasingly cross over the traditional lines that
previously differentiated 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. Reflecting the overall
competitive environment, certain financial institutions have continued to seek
to hire AEFA's financial advisors.
AEFA's business does not, as a whole, experience significant seasonal
fluctuations.
INSURANCE AND ANNUITIES
Life insurance and annuities are important AEFA products. AEFA sells these
products primarily through IDS Life. A wholly owned subsidiary of AEFC, IDS Life
is a stock life insurance company organized under Minnesota law.
IDS Life serves residents of all states except New York and distributes its
products exclusively through AEFA's retail distribution channel. IDS Life also
has four wholly owned subsidiaries that distribute their products through the
various AEFA distribution channels. IDS Life Insurance Company of New York ("IDS
Life of New York") serves New York residents and distributes its products
exclusively through the retail channel. American Enterprise Life, an Indiana
corporation, and American Centurion Life, a New York corporation, distribute
their products through the third-party distribution channel as discussed above.
American Partners Life Insurance Company ("American Partners Life"), an Arizona
corporation, distributes its products through the direct access channel outside
of New York. American Centurion Life also distributes through the direct access
channel in New York. IDS Life and its four insurance company subsidiaries are
referred to in this section as the "IDS Life Companies."
Business sold through AEFA's retail distribution channel for IDS Life and
IDS Life of New York represents the majority of the insurance and annuity
business for the IDS Life Companies. Business sold through third party
distribution for American Enterprise Life and American Centurion Life ranks
second. Business sold through the direct channel for American Partners Life
and American Centurion Life ranks a distant third.
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REGULATION
IDS Life, American Enterprise Life and American Partners Life are subject
to comprehensive regulation by the Minnesota Department of Commerce (Insurance
Division), the Indiana Department of Insurance, and the Arizona Department of
Insurance, respectively. American Centurion Life and IDS Life of New York are
regulated by the New York State Department of Insurance. The laws of the other
states in which these companies do business 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.
Regulatory scrutiny of market conduct practices of insurance companies,
including sales, marketing and replacements of life insurance and annuities and
"bonus" annuities, has increased significantly in recent years and is affecting
the manner in which companies approach various operational issues, including
compliance. The number of private lawsuits alleging violations of laws in
connection with insurance and annuity market conduct has increased. (See "Legal
Proceedings" below.) Virtually all states mandate participation in insurance
guaranty associations, which assess insurance companies in order to fund claims
of contract owners of insolvent insurance companies.
On 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 contract. New federal
regulation in any of these areas could potentially have an adverse effect upon
the IDS Life Companies. More specifically, recent federal legislative proposals
aimed at promoting tax-advantaged savings through Lifetime Savings Accounts and
Retirement Savings Account and the dividend exclusion proposal may adversely
impact IDS Life Companies' sales of annuity and life insurance products if
enacted.
RATINGS
The IDS Life Companies had consolidated assets at December 31, 2002 of
approximately $60 billion, based on generally accepted accounting principles,
and had total statutory capital and surplus as of December 31, 2002 of $2.4
billion.
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 from the contracts. As such, the
ratings relate to the IDS Life Companies' general accounts and not to the
variable accounts. This information generally does not relate to the management
or performance of the variable subaccounts of the contracts.
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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 2002, 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. In light of the
Company's desire to maintain these ratings, IDS Life's parent contributed $400
million of capital to IDS Life in 2002.
The foregoing ratings reflect each rating agency's opinion of the IDS Life
Companies' financial strength, operating performance and ability to meet its
obligations to contract owners. Such factors are of primary concern to contract
owners, agents and intermediaries, but also may be of interest to investors.
RISK BASED CAPITAL
The National Association of Insurance Commissioners ("NAIC") adopted 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, 2002, IDS Life had total adjusted capital of approximately $2.6 billion.
As defined by the NAIC, total adjusted capital includes certain asset valuation
reserves excluded from the $2.4 billion of statutory capital and surplus
referred to above. The Minnesota Department of Commerce, IDS Life's 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,
authorized control level capital was $435 million at December 31, 2002.
In addition, insurance companies are expected to maintain higher capital
at a level above that which would require a company to file an action plan with
the Department. This is referred to as the "company action level." For IDS Life,
company action level capital was $870 million at December 31, 2002.
As described above, IDS Life maintains levels of RBC far in excess of the
authorized control and company action levels required by the Minnesota
Department of Commerce. The level of capital maintained in IDS Life is thought
to be appropriate by management and is more commensurate with standards
necessary to maintain IDS Life's ratings with the various credit and
claims-paying rating agencies.
THE GENERAL ACCOUNT
Assets supporting contract values associated with fixed account life
insurance and annuity products, as well as those associated with fixed account
options under variable insurance and annuity products (collectively, the
"fixed accounts"), are part of an insurer's "general account." Under fixed
accounts, the insurer bears the investment risk. In investing their general
account assets, IDS Life Companies seek to maintain a dependable and targeted
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difference or "spread" between the interest rate earned on general account
assets and the interest rate the insurer credits to contract owners' fixed
accounts. This spread is a major driver of net income for the IDS Life
Companies.
The general account assets also include funds accumulated through insurance
premiums and cost of insurance charges. These premiums and charges are major
sources of revenue for IDS Life and IDS Life of New York.
In the general account, the IDS Life Companies primarily invest in fixed
income securities over a broad range of maturities for the purpose of providing
a targeted rate of return on their investments while controlling risk. The
majority of these fixed income securities are interest bearing investments such
as government obligations, mortgage backed obligations and various corporate
debt instruments. The IDS Life Companies do not invest in securities to generate
trading profits.
Each of the IDS Life Companies has an investment committee that meets
periodically to review models projecting different interest rate scenarios,
risk/return measures, and their effect on profitability. The committee also
reviews the distribution of assets in the portfolio by type and credit risk
sector. The objective of the committee is to structure the investment security
portfolio based upon the type and expected behavior of products in the
liability portfolio so as to meet contractual obligations and achieve targeted
levels of profitability within defined risk parameters.
The IDS Life Companies have the discretion to set the rate of interest
credited to contract owners' accounts. However, this discretion is limited by
the contract's guaranteed minimum interest rate. This rate varies among fixed
accounts and is as low as 3% and as high as 5%. (Approximately ten states have
adopted regulations providing for a guaranteed minimum interest rate that is
less than 3%. In some states it is as low as 1.5%; in other states it is tied
to an index. The NAIC recently adopted a model regulation providing for an
indexed guaranteed minimum interest rate, and it is anticipated that a number
of states will follow this model.) The interest rates credited to contract
owners' fixed accounts are generally reset at shorter intervals than the
maturity of underlying investments. Therefore, margins may be negatively
impacted by increases in the general level of interest rates. Part of the
investment committee's strategy includes the use of derivatives, such as
interest rate caps, swaps and floors, for risk management purposes. These
derivatives help protect margins by increasing investment returns if there is
a sudden and severe rise in interest rates, thereby mitigating the impact of
an increase in rates credited to contract owners' fixed accounts. Conversely,
in a low interest rate environment, such as that experienced recently, margins
may be negatively impacted as the interest rates available on the IDS Life
Companies' invested assets approach guaranteed minimum interest rates on the
insurance or annuity contracts. This negative impact may be compounded by the
fact that many of these interest bearing investments are callable or
prepayable by the issuer and calls and prepayments are more likely to occur in
a low interest rate environment.
The IDS Life Companies sold approximately $10.5 billion of their invested
assets during the year, on a consolidated basis. In addition, approximately $3
billion in assets were redeemed during the year. The cash generated by these
sales and redemptions has been or will be invested.
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THE VARIABLE ACCOUNTS
Variable insurance and annuity products offer variable account investment
options in addition to the fixed account options described above. Under variable
accounts, contract owners bear the investment risk. The variable accounts are
registered as unit investment trusts under the Investment Company Act of 1940.
Generally, the variable accounts consist of a number of subaccounts, each of
which invests in shares of a particular fund.
Contract owners can allocate their payments among variable subaccounts that
invest in underlying funds. The underlying funds are managed both by internal
and third-party money managers. Internally managed funds for the IDS Life
Companies' variable annuities include the 19 AXP'r' Variable Portfolio Funds.
Internally managed funds for the variable life business include the AXP Variable
Portfolio Funds and the seven IDS Life Series Fund portfolios. The IDS Life
Companies' variable life insurance and annuities also offer funds managed by
third-party money managers. For example, the investment advisers under the
American Express Retirement Advisor Advantage'r' Variable Annuity and the
American Express'r' Variable Universal Life IV/Variable Universal Life IV -
Estate Series include AIM Advisors Inc., Alliance Capital Management, L.P.,
American Century Investment Management, Inc., Calvert Asset Management Company,
Inc., Evergreen Investment Management Company, LLC., Fidelity Management &
Research Company, Franklin Mutual Advisers, LLC, Franklin Advisers, Inc.,
Franklin Advisory Services, LLC, Goldman Sachs Asset Management, L.P., INVESCO
Funds Group, Inc., Janus Capital, Lazard Asset Management, LLC, MFS Investment
Management, Pioneer Investment Management, Inc., Putnam Investment Management,
LLC, Strong Capital Management, Inc., Liberty Wanger Asset Management, L.P. and
Wells Fargo Funds Management, LLC. These funds invest in portfolios containing a
variety of securities including common stocks, bonds, managed assets and/or
short-term securities. The value of these subaccounts fluctuates with the
investment return of the funds in which the subaccounts invest. The IDS Life
Companies' major source of revenue from the variable products is the fees it
receives. These fees may include management and other fees from underlying
internally managed funds, revenues from underlying outside-managed funds and
mortality and expense risk fees from variable subaccounts.
Variable life insurance and annuities are "separate account" rather than
general account products. This means that state insurance law prohibits charging
variable accounts with liabilities of the general business. Under the
subaccounts of each variable account, the IDS Life Companies credit or charge
income, capital gains and capital losses only to that subaccount.
INSURANCE: PRODUCT FEATURES AND RISKS
The IDS Life Companies issue a wide range of insurance products including
variable life insurance, universal life insurance, traditional whole life and
term life insurance products, long-
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term care insurance and disability income insurance. The IDS Life Companies have
no short-duration life insurance liabilities. The companies issue only
non-participating contracts. IDS Property Casualty Insurance Company and AMEX
Assurance Company (collectively, "IDS Property Casualty") offer personal auto
and homeowner's insurance.
VARIABLE LIFE INSURANCE. IDS Life's and IDS Life of New York's biggest
selling life insurance products are variable life insurance policies. Retail
advisors of AEFA sell primarily IDS Life's and IDS Life of New York's variable
life insurance. Variable life insurance provides life insurance coverage along
with investment returns linked to the underlying investments the policyholder
chooses. These products also offer a fixed account with a guaranteed minimum
interest rate of 4% or 4.5%. IDS Life ranked fourth in variable life insurance
sales in 2002. Beginning in 1999 and 2000, respectively, IDS Life and IDS Life
of New York reinsured 80% of the mortality risk attributable to new sales of
individual flexible premium variable life insurance. This means that on these
more recent product sales, IDS Life and IDS Life of New York are at risk for
only 20% of each policy's death benefit from the first dollar of coverage. In
contrast and prior to this arrangement, IDS Life and IDS Life of New York
generally retained risk up to $750,000 on each insured life and reinsured only
amounts in excess of $750,000. Generally, the prior arrangement left IDS Life
and IDS Life of New York with more of the risk for the death benefit than the
more recent practice. Beginning in late 2002, IDS Life began reinsuring 90%
of the mortality risk on new sales of individual flexible premium variable life
and fixed universal life.
IDS Life's variable life insurance products include American Express'r'
Variable Universal Life IV/Variable Universal Life IV - Estate Series which are
individual flexible premium policies. The Estate Series policy is available to
policyholders with initial specified amounts of $1 million or more. These
policies were introduced in December 2002. IDS Life also issues American Express
Succession Select, a flexible premium survivorship policy that insures two
lives. Succession Select is often used for estate planning purposes. Finally,
IDS Life issues American Express'r' Single Premium Variable Life, an individual
single premium variable life insurance policy.
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 according to
the terms of the policy at the discretion of the issuing company. Policies
issued by IDS Life and IDS Life of New York also provide a guaranteed minimum
interest rate, generally 4% or 4.5%, and a few as high as 5%.
IDS Life's universal life insurance products include Life Protection Plus,
Life Protection - Select and Life Protection Select'sm' - Estate Series. The
Estate Series policy is available to policyholders with initial specified
amounts of $1 million or more.
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
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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. 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 at the time of issue. During the
chosen term, the company cannot raise premium rates even if claims experience
were to deteriorate. Beginning in 2001 and 2002, respectively, IDS Life and IDS
Life of New York have reinsured 90% of the mortality risk attributable to new
term insurance sales. This means that on these more recent product sales, IDS
Life and IDS Life of New York are at risk for only 10% of each policy's
death benefit from the first dollar of coverage. In contrast and prior to this
arrangement, IDS Life and IDS Life of New York generally retained risk up to
$750,000 on each insured life and reinsured only amounts in excess of $750,000.
Generally, the prior arrangement left IDS Life and IDS Life of New York with
more of the risk for the death benefit than the more recent practice.
LONG-TERM CARE INSURANCE. IDS Life and IDS Life of New York entered the
individual long-term care insurance ("LTC") market in 1989 and believe they have
a significant presence in this market. IDS Life's and IDS Life of New York's
long-term care insurance products provide benefits for documented nursing home,
assisted living or home or health care expenses. These products were sold on a
guaranteed renewable basis, whereby the owners retain the right to renew the
policies each year as long as premiums are paid, but the companies have the
right to increase premium rates on a going forward basis.
In recent years, IDS Life and IDS Life of New York have experienced greater
than expected claims and lower than expected lapse rates with respect to its LTC
block. To respond to this trend, the companies have pursued and are pursuing
many courses of action. As of December 31, 2002, IDS Life and IDS Life of New
York have discontinued underwriting LTC insurance. Retail advisors of AEFA will
now sell only non-proprietary LTC products offered by General Electric Capital
Assurance Company ("GECA"). IDS Life and IDS Life of New York are also expecting
to outsource claims administration in May 2003 to GECA.
DISABILITY INCOME. 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 benefits with Social Security or similar benefit
plans and to help them protect their DI benefits from the risk of inflation. IDS
Life believes it has a significant presence in the DI market.
PROPERTY CASUALTY INSURANCE. IDS Property Casualty and its wholly owned
subsidiary, AMEX Assurance Company, provide personal auto and homeowner's
coverage to clients in 37 states and the District of Columbia. IDS Property
Casualty is regulated by the Commissioner of Insurance for Wisconsin. AMEX
Assurance Company, which also provides certain American Express Card related
insurance products, is regulated by the Commissioner of Insurance for Illinois.
IDS Property Casualty markets through alliances with financial institutions and
direct to American Express Cardmembers. IDS Property Casualty has a major
distribution agreement
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with Costco's affiliated insurance agency. As of December 31, 2002, this
arrangement offered IDS Property Casualty's auto insurance in 30 states and
homeowner's insurance in 29 states to Costco members.
INSURANCE RISKS. IDS Life's sales of individual life insurance in 2002, as
measured by scheduled annual premiums and excluding lump sum premiums, consisted
of 82% variable life, 8% universal life and 10% term life.
The insurance business is highly competitive, and competitors consist of
both stock and mutual insurance companies. Competitive factors applicable to the
insurance business include product features, the interest rates credited to
products, the charges deducted from the cash values of such products, investment
performance, the financial strength of the organization, distribution and
management expenses, claims paying ratings and the services provided to
policyholders.
For long-term profitability, it is crucial to ensure adequate pricing to
cover insurance risks and to accumulate adequate reserves. Reserves are a
measure of the assets that the IDS Life Companies estimate are needed now to
adequately provide for future benefits and expenses.
ANNUITIES: PRODUCT FEATURES AND RISKS
IDS Life and its subsidiaries offer variable and fixed annuities, immediate
and deferred, to a broad range of consumers through multiple distribution
channels. Retail advisors of AEFA can offer only IDS Life or IDS Life of New
York variable and fixed annuities and, in certain circumstances, variable and
fixed annuities offered by American Enterprise Life. Retail advisors do not
offer annuity products of AEFA's competitors. Annuities 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 only.
IDS Life is one of the largest issuers of annuities in the United States.
In 2002, IDS Life, on a consolidated basis, ranked eleventh among the top
annuity writers. The IDS Life Companies posted annuity sales in 2002 of over
$7.3 billion, an increase of 60% across all distribution channels.
VARIABLE ANNUITIES. Like variable life insurance, variable annuities
provide contract owners with investment returns linked to the underlying
investments the contract owner chooses. These products also offer a fixed
account with a guaranteed minimum interest rate of 3% to 4%. One of IDS Life's
variable annuities, the American Express Retirement Advisor Advantage'r'
Variable Annuity was the fourth largest-selling annuity in the country in 2002.
FIXED ANNUITIES. The IDS Life Companies' fixed annuities provide cash value
that increases by a fixed interest rate. The rate is periodically reset
according to the terms of the contract at the discretion of the issuer. The
contracts provide a guaranteed minimum interest rate, generally 3% to 4%.
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ANNUITY RISKS. The relative proportion between fixed and variable annuities
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. In addition, investment
management performance is critical to the profitability of an annuity business.
In past years, innovative features for annuity products have been
continually evolving. These features include minimum death benefit guarantees
that protect beneficiaries from a drop in death benefits due to performance of
the related underlying investments. IDS Life and its subsidiaries issue annuity
contracts with a variety of guaranteed minimum death benefit features. These
guarantees are supported by general account assets. The IDS Life Companies'
exposure to risk from these guarantees will generally increase when equity
markets decline.
The standard guaranteed minimum death benefit in the current "flagship"
annuity offered by IDS Life and IDS Life of New York, American Express
Retirement Advisor Advantage Variable Annuity, provides that if the contract
owner and annuitant are age 80 or younger on the date of death, the beneficiary
will receive the greatest of (i) the contract value, (ii) purchase payments
minus adjusted partial surrenders, or (iii) the contract value as of the most
recent sixth contract anniversary, plus purchase payments and minus adjusted
partial surrenders since that anniversary.
For additional protection, IDS Life and IDS Life of New York contract
owners may purchase a maximum anniversary value death benefit. IDS Life contract
owners also may purchase an enhanced earnings death benefit and an enhanced
earnings plus death benefit. These are optional benefits available for an
additional charge. The maximum anniversary value death benefit guarantees that
the death benefit will not be less than the highest contract value achieved on a
contract anniversary before the contract holder reaches the age of 81, adjusted
for partial withdrawals. The enhanced earnings death benefit riders are intended
to provide additional benefits to a beneficiary to offset expenses after the
contract owner's death. IDS Life and IDS Life of New York bear the risk that
protracted under-performance of the financial markets could result in guaranteed
minimum death benefits being higher than what accumulated contract owner account
balances would support. There can be no assurance that ultimate actual
experience will not differ from IDS Life's and IDS Life of New York's estimates.
American Enterprise Life and other subsidiaries of IDS Life also offer
variable annuities with a variety of guaranteed minimum death benefit features
and certain optional benefits.
To the extent that the guaranteed minimum death benefit is higher than the
current account value at the time of death, a cost is incurred by the issuer of
the policy. Current accounting literature does not prescribe advance recognition
of the projected future net costs associated with these guarantees, and
accordingly, IDS Life and its subsidiaries currently do not record a liability
corresponding to these future obligations for death benefits in excess of
annuity account value. At present, the amount paid in excess of contract value
is expensed when payable. Amounts expensed in 2002 and 2001 were $37 million and
$16 million, respectively. A proposed AICPA Statement of Position, "Accounting
and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts" (the "Proposed SOP"), would require the
recording of a liability for the expected net
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costs associated with these guarantees under certain circumstances, if adopted
as proposed. The impact of the Proposed SOP is currently being evaluated.
INSURANCE AND ANNUITIES: LIABILITIES AND RESERVES
INSURANCE LIABILITIES AND RESERVES. The liabilities for reported and unpaid
life insurance claims are equal to the death benefits payable under the
policies. For DI and LTC claims, unpaid claim liabilities are equal to benefit
amounts due and accrued. For life, DI, and LTC, liabilities for incurred but not
reported claims are estimated based on periodic analysis of the actual reported
historical claim lag. Where applicable, amounts recoverable from reinsurers
(i.e., other insurers who share in the risk of the products the IDS Life
Companies' offer) are separately recorded as receivables.
The claim adjustment expense reserves for DI and LTC are based on the claim
reserves. These reserves represent the expense of reviewing claims and making
benefit payment determinations. For life insurance, no claim adjustment expense
reserve is held.
Policy liabilities for fixed and variable universal life insurance are
accumulation values, i.e., the aggregate of the values contract holders have
on account.
Policy reserves for future benefits on term and whole life insurance are
based on the net level premium method, using anticipated mortality rates (the
likelihood of an insured's death), policy persistency rates and interest rates
earned on the assets supporting reserves. Anticipated mortality rates are based
on established industry mortality tables, with modifications based on the IDS
Life Companies' experience. Anticipated policy persistency rates vary by policy
form, issue age and policy duration. IDS Life and IDS Life of New York generally
anticipate persistency rates on level term and cash value plans to be better
than persistency on yearly renewable term insurance plans. Anticipated interest
rates on assets held to support reserves range from 4% to 10%, depending on
policy form, issue year and policy duration.
Liabilities for future DI and LTC policy benefits include both policy
reserves and claim reserves. IDS Life and IDS Life of New York base policy
reserves on the net level premium method, using anticipated morbidity rates
(meaning, claim frequency and severity), mortality rates (the likelihood of an
insured's death, which means no DI or LTC benefits will become payable), policy
persistency rates, and interest rates earned on the assets supporting reserves.
They base anticipated morbidity and mortality rates on established industry
morbidity and mortality tables. Anticipated policy persistency rates vary by
policy form, issue age, policy duration and, for DI policies, occupation class.
Anticipated interest rates on assets held to support DI and LTC policy reserves
are 3% to 9.5% at policy issue and level off at ultimate rates of 5% to 7% over
5 to 10 years.
IDS Life and IDS Life of New York calculate claim reserves for DI and LTC
based on claim continuance tables and anticipated interest rates earned on
assets supporting these reserves. They base anticipated
Page 40
<Page>
claim continuance rates on established industry tables. Anticipated interest
rates on assets held to support claim reserves for both DI and LTC range from 5%
to 8%.
ANNUITY LIABILITIES. Liabilities for fixed and variable deferred annuities
are accumulation values, i.e., the aggregate of the values contract owners have
on account.
Liabilities for fixed annuities in a benefit or "payout" status are based
on established industry mortality tables and interest rates established in the
year of issue or commencement of payout. The latter range from 5% to 9.5%, with
an average rate of approximately 6.5%.
DEFERRED ACQUISITION COSTS ("DAC")
The IDS Life Insurance Companies defer the costs of acquiring new business
on the sale of insurance and annuity contracts, including for example, direct
sales commissions, related sales incentive bonuses and awards, and underwriting
costs, policy issue costs and other related costs. The DAC for universal life
and variable universal life insurance and certain installment annuities are
amortized as a percentage of the estimated gross profits expected to be realized
on the policies. DAC for other annuities are amortized using the interest
method. For traditional life, disability income and long-term care insurance
policies, the costs are amortized in proportion to premium revenue.
Amortization of DAC requires the use of certain assumptions including
interest margins, mortality rates, persistency rates, maintenance expense levels
and customer asset value growth rates for variable products. The customer asset
value growth rate is the rate at which contract values are assumed to appreciate
in the future. This rate is net of asset fees, and anticipates a blend of equity
and fixed income investments. Management routinely monitors a wide variety of
trends in the business, including comparisons of actual and assumed experience.
Management reviews and, where appropriate, adjusts its assumptions with respect
to customer asset value growth rates on a quarterly basis.
Management monitors other principal DAC assumptions, such as persistency
rates, mortality rates, interest margins and maintenance expense levels, each
quarter. Unless management identifies a material deviation over the course of
the quarterly monitoring, management reviews and updates these DAC assumptions
annually in the third quarter of each year. When assumptions are changed, the
percentage of estimated gross profits or portion of interest margins used to
amortize DAC may also change. A change in the required amortization percentage
is applied retrospectively; an increase in amortization percentage will result
in an acceleration of DAC amortization while a decrease in amortization
percentage will result in a deceleration of DAC amortization. The impact on
results of operations of changing assumptions with respect to the amortization
of DAC can be either positive or negative in any particular period and is
reflected in the period that such changes are made.
During the third quarter of 2002, AEFA completed a comprehensive review of
its DAC-related practices that resulted in a net $44 million increase in
expenses for the quarter, of which $37 million related to the IDS Life Insurance
Companies. For a further discussion of DAC and the Company's review of its
DAC-related practices, see pages 45 through 46 under the caption
Page 41
<Page>
"Financial Review" and Note 1 on pages 60 through 61 of the Company's 2002
Annual Report to Shareholders, which portions of such report are incorporated
herein by reference.
The DAC balances as of December 31, 2002 and 2001 for the various
insurance, annuity and other products sold by AEFA are set forth below (in
millions):
<TABLE>
<CAPTION>
December 31,
---------------
2002 2001
------ ------
<S> <C> <C>
Life and health insurance $1,654 $1,571
Annuities 1,656 1,536
Other 473 545
------ ------
TOTAL $3,783 $3,652
</TABLE>
INVESTMENT CERTIFICATES
American Express Certificate Company ("AECC"), a wholly owned subsidiary of
AEFC, issues face-amount investment certificates. AECC is registered as an
investment company under the Investment Company Act of 1940. AECC currently
issues 10 types of face-amount certificates. Owners of AECC certificates are
entitled to receive, at maturity, a stated amount of money equal to the
aggregate investments in the certificate plus interest at rates declared from
time to time by AECC. In addition, persons owning three types of certificates
may have their interest calculated in whole or in part based on any upward
movement in a broad-based stock market index up to a variable maximum return.
The certificates issued by AECC are not insured by any government agency. AEFC
acts as investment manager for AECC. Certificates are sold by AEFA's field
force. American Express Bank also distributes certificates.
AECC believes it is the largest issuer of face-amount certificates in the
United States. At December 31, 2002, it had approximately $5.2 billion in
assets. AECC's certificates compete with many other 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.
MUTUAL FUNDS
AEFA offers a variety of proprietary mutual funds, for which AEFAI acts as
principal underwriter (distributor of shares). AEFC acts as investment manager
and performs various administrative services. The American Express'r' Funds
consist of 58 retail mutual funds, with varied investment objectives and
include, for example, money market, taxable and tax-exempt bond and stock funds.
The American Express Funds, with combined assets at December 31, 2002 of $64
billion, was the 29th largest mutual fund family in the United States and,
excluding money market funds, was the 13th largest.
AEFC earns management fees for managing the assets of the proprietary
mutual funds based on the underlying asset values. Most of the proprietary
mutual funds have a performance incentive adjustment ("PIA"). This PIA adjusts
the level of management fees received, both upward and downward, based on the
specific fund's relative performance as measured against a designated
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<Page>
external index. AEFA earns fees primarily for distributing the proprietary
mutual funds, point-of-sale fees (i.e., sales charges) and distribution fees
(12b-1 fees) based on a percentage of assets.
American Express Funds are sold in six classes. For most funds, shares are
sold in four classes - A, B, C and Y. Index Fund shares are sold in two classes
- - D and E. Class A shares are sold at net asset value plus any applicable sales
charge. The maximum sales charge is 5.75% for equity funds and 4.75% for income
funds, with reduced sales charges for larger purchases. The sales charge may be
waived for certain purchases, including those made through an investment product
sponsored by AEFAI or another authorized financial intermediary. Class B shares
are sold with a contingent deferred sales charge or back-end load. The maximum
deferred sales charge is 5%, declining to no charge for shares held more than
six years. Class C shares do not have a front-end sales charge. A 1% contingent
deferred sales charge may apply to shares redeemed less than one year after
purchase. Class Y shares are primarily sold to institutional clients with no
load. There are two index funds, which are sold in two no-load classes. Class D
shares are sold with a 0.25% fee for distribution services, but without a sales
charge, through an investment product sponsored by AEFA or another authorized
financial institution. Class E shares are sold without a sales or distribution
fee through American Express brokerage accounts and qualifying institutional
accounts.
Fifteen of the American Express Funds are structured as feeder funds
investing in the Preferred Master Trust Group, a group of 15 master funds,
advised by AEFC. This feeder structure provides for potential development of
additional channels of distribution.
In addition to full-commission and discount brokerage firms, competitors
include other financial institutions, such as banks and insurance companies.
Trends in the market over the last decade, including the increased demand for
mutual funds by retail investors, expanded the number of competitors in the
industry. Some competitors are larger, more diversified and offer a greater
number of products, and may have an advantage in their ability to attract and
retain customers on the basis of one-stop shopping. The competitive factors
affecting the sale of mutual funds include sales charges ("loads") paid,
administrative expenses, services received, the ability to attract and retain a
network of third-party distributors, investment performance, fund ratings issued
by third-parties such as Morningstar, the variety of products and services
offered, the convenience to the investor, advertising and promotion campaigns,
and general market conditions. The funds compete with other investment products,
including funds that have no sales charge ("no-load" funds) and funds
distributed through independent brokerage firms, and exchange traded funds.
OTHER PRODUCTS AND SERVICES
AEFAI sponsors two wrap programs marketed through financial advisors,
marketing employees and third-party referrals. American Express'r' Wealth
Management Service is a professionally managed discretionary wrap account based
on model portfolios of individual securities. American Express'r' Strategic
Portfolio Service Advantage is a non-discretionary mutual fund and individual
security wrap program built around asset-allocation strategies. At December 31,
2002, assets in both wrap programs offered by AEFAI totaled $17.5 billion for
approximately 246,576 accounts.
Page 43
<Page>
American Express Personal Trust Services, FSB ("AEPTS") is a federal
savings bank regulated and supervised by the Office of Thrift Supervision (the
"OTS"). AEPTS is a wholly owned subsidiary of AEFC and provides personal trust,
custodial, agency and investment management services to individual clients.
AEPTS is also registered with the SEC as an Investment Adviser. AEPTS is
authorized to transact business in all 50 states and the District of Columbia,
and utilizes AEFA as its primary distribution channel. AEPTS is based in
Minnesota and is regulated and supervised by the OTS, FDIC and SEC.
AEFA sells real estate investment trusts sponsored by other companies. In
2001, AEFA ceased selling managed futures limited partnerships in which an AEFC
subsidiary is a co-general partner but will continue servicing such limited
partnerships, which subjects AEFA and its affiliated co-general partner to
regulation by the CFTC.
AEFA and American Express Bank Ltd. operate a jointly owned subsidiary,
American Express International Deposit Company ("AEIDC"), in the Cayman Islands
to accept deposits from foreign clients of American Express Bank Ltd. AEIDC is
not regulated as a bank in the Cayman Islands but its activities are subject to
the review and supervision by the global consolidated supervisor of American
Express Bank Ltd., the New York State Banking Department.
AEFA continues to develop new products and modify existing products for
distribution through various distribution channels.
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<Page>
AMERICAN EXPRESS BANK
The Company's American Express Bank business unit ("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 principally through American Express Bank Ltd., a wholly owned
indirect subsidiary of the Company, and its subsidiaries. AEB does not directly
or indirectly do business in the United States except as an incident to its
activities outside the United States. Accordingly, the following discussion
relating to AEB generally does not distinguish between United States and
non-United States based activities.
AEB's three primary business lines are Personal Financial Services ("PFS"),
The Private Bank and the Financial Institutions Group ("FIG"). PFS 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 wealthy individuals by providing such
customers 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, derivatives and interest
rate risk management products.
In 2002, AEB continued to shift its business focus from corporate clients
to individuals and financial institutions. This change aligns AEB's businesses
more closely with the rest of the Company and positions it to play a more
important role in the delivery of financial services on a global basis. Due in
part to this change in emphasis, AEB reduced its corporate banking and other
loans by $483 million at December 31, 2002 (as compared with $926 million at
December 31, 2001), increased its consumer and private banking loans by $544
million, and increased its FIG loans by $231 million. Loans outstanding
worldwide were approximately $5.6 billion at December 31, 2002 and $5.3 billion
at December 31, 2001. In 2002, AEB acquired the Latin American private banking
business of Schroder & Co. Trust Bank, Miami, to help AEB expand its Latin
American private banking franchise. During 2002, The Private Bank client
holdings rose 12 percent to a total of $13.9 billion, client volumes in PFS
increased 10 percent and FIG-related non-credit fee revenue increased by 10
percent.
AEB continued to broaden its offering of offshore mutual funds, hedge funds
and other managed products in 2002. AEB's fund products are sold by The Private
Bank and PFS business lines to individual customers and by FIG through
distributors in several foreign markets. AEB continued to expand the number of
third-party relationships in Europe and Asia. During 2002, AEB signed more than
50 distribution agreements in Europe and Asia for the sale of its own American
Express-branded products. AEB's assets under management in its fund products and
related managed accounts totaled approximately $3.1 billion at year-end.
Page 45
<Page>
AEB also added a number of investment portfolios in 2002 to its existing
Luxembourg investment company umbrella fund and introduced new hedge fund
investment portfolios. In addition, AEB created a new Luxembourg umbrella fund
of funds, the American Express BestSelect Funds registered in Germany for sale
to German investors. AEB's affiliate, AEFA, provides investment management
services to many of the Luxembourg umbrella fund portfolios and to the hedge
funds.
AEB also continued to work closely with other parts of the Company 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 its 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, Hong Kong,
India, Singapore, Taiwan and the United Kingdom. AEB also markets a wide range
of investment and savings products to TRS Cardmembers and select non-cardmembers
in Germany, Greece, Hong Kong, India, Indonesia, Singapore and Taiwan. In
addition, AEFAI has contracted with AEB to act as subadvisor to most of AEB's
American Express Funds and the American Express Offshore Alternative Investment
Fund. As stated earlier, AEB has contracted with AECC to market AECC's
investment certificates, and operates a joint venture (AEIDC) with AEFC in the
Cayman Islands to accept deposits.
AEB has a global network with offices in 42 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.
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 the Company and its other
subsidiaries, which constitute only a few of AEB's many customers.
AEB's total assets were $13.2 billion at December 31, 2002 and $11.9
billion at December 31, 2001. Liquid assets, consisting of cash and deposits
with banks, trading account assets and investments, were $5.8 billion at
December 31, 2002 and $5.3 billion at December 31, 2001.
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<Page>
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, 2002 (dollars in
millions):
<TABLE>
<CAPTION>
2002 2001 2000
------- ------- -------
<S> <C> <C> <C>
Net financial revenues $ 745 $ 649 $ 591
Non-interest expenses 624 663 558
Net income (loss) (a) 80 (13) 29
- --------------------------------------------------------------------------
Cash and deposits with banks 2,420 2,215 2,165
Investments 3,169 3,044 2,517
Loans, net 5,466 5,157 5,206
Total assets 13,234 11,878 11,413
- --------------------------------------------------------------------------
Customers' deposits 9,501 8,411 7,952
Shareholder's equity 947 761 754
- --------------------------------------------------------------------------
Return on average assets (b) .67% (.11)% .26%
Return on average common equity (b) 11.5% (2.0)% 4.40%
- --------------------------------------------------------------------------
Reserve for loan losses/total loans 2.70% 2.42% 2.56%
30+ days past due PFS loans as a % of total
PFS loans 5.4% 4.5% 6.0%
Total loans/deposits from customers 59.12% 62.83% 67.19%
Average common equity/average assets (b) 5.80% 5.51% 5.82%
Risk-based capital ratios (c):
Tier 1 10.9% 11.1% 10.1%
Total 11.4% 12.2% 11.4%
Leverage ratio (c) 5.3% 5.3% 5.9%
- --------------------------------------------------------------------------
Average interest rates earned: (d)
Loans (e) 6.41% 7.32% 8.05%
Investments (f) 5.88% 6.49% 6.98%
Deposits with banks 2.15% 4.04% 5.79%
- --------------------------------------------------------------------------
Total interest-earning assets (f) 5.44% 6.35% 7.29%
- --------------------------------------------------------------------------
Average interest rates paid: (d)
Deposits from customers 2.38% 4.15% 5.65%
Borrowed funds, including long-term debt 3.46% 5.63% 6.64%
- --------------------------------------------------------------------------
Total interest-bearing liabilities 2.55% 4.35% 5.78%
- --------------------------------------------------------------------------
Net interest income/total average interest-
earning assets (f) 3.23% 2.75% 2.49%
- --------------------------------------------------------------------------
</TABLE>
(a) Included in 2002 net income is a net restructuring reserve reversal of $3
million ($2 million after-tax). Included in the 2001 net loss are
restructuring charges of $96 million ($65 million after-tax).
(b) Calculated excluding the effect of SFAS No. 115 and SFAS No. 133. The
Company adopted SFAS No. 133 on January 1, 2001.
(c) Based on the legal entity financial statements of American Express Bank
Ltd.
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<Page>
(d) Based upon 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 on non-performing status.
(f) On a tax equivalent basis.
Page 48
<Page>
The following tables set forth the composition of AEB's loan portfolio at
year end for each of the five years in the period ended December 31, 2002
(millions):
<TABLE>
<CAPTION>
BY GEOGRAPHIC REGION (a) 2002 2001 2000 1999 1998
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Asia/Pacific $2,117 $2,052 $1,791 $1,698 $2,143
Europe 1,553 1,370 1,500 1,414 1,021
Indian Subcontinent 439 440 442 449 517
Latin America 801 871 856 824 1,107
North America 533 273 352 255 210
Middle East 94 197 302 346 544
Africa 80 82 100 111 77
- ---------------------------------------------------------------------
TOTAL $5,617 $5,285 $5,343 $5,097 $5,619
=====================================================================
</TABLE>
<TABLE>
<CAPTION>
2002
----------------------------
Due After Due
Due 1 Year After 5
Within Through 5 Years
BY TYPE AND MATURITY 1 Year Years (b) (b) 2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consumer and private
banking loans:
Loans secured by real
estate $ 2 $ 1 $394 $ 397 $ 486 $ 361 $ 255 $ 213
Installment, revolving
credit and other 2,857 481 0 3,338 2,705 1,839 1,637 1,429
------ ---- ---- ------ ------ ------ ------ ------
2,859 482 394 3,735 3,191 2,200 1,892 1,642
------ ---- ---- ------ ------ ------ ------ ------
Commercial loans:
Loans secured by real 51 10 0 61 139 157 141 302
estate
Loans to businesses (c) 129 97 81 307 732 1,397 1,508 1,997
Loans to banks and other
financial institutions 1,306 93 0 1,399 1,168 1,519 1,475 1,595
Loans to governments and
official institutions 23 6 0 29 28 34 37 46
------ ---- ---- ------ ------ ------ ------ ------
1,509 206 81 1,796 2,067 3,107 3,161 3,940
------ ---- ---- ------ ------ ------ ------ ------
All other loans (d) 82 4 0 86 27 36 44 37
------ ---- ---- ------ ------ ------ ------ ------
- -----------------------------------------------------------------------------------------------------
Total $4,450 $692 $475 $5,617 $5,285 $5,343 $5,097 $5,619
=====================================================================================================
</TABLE>
(a) Based primarily on the domicile of the borrower.
(b) Loans due after 1 year at fixed (predetermined) interest rates totaled $252
million, while those at floating (adjustable) interest rates totaled $915
million.
(c) Business loans, which accounted for approximately 5 percent of the
portfolio as of December 31, 2002, were distributed over 26 commercial and
industrial categories.
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<Page>
(d) Included in 2002 is $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.
Page 50
<Page>
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 (i.e., non-performing loans). 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. As stated above, for this portfolio of loans, 30+ day
past due rates were 5.4% at December 31, 2002, as compared with 4.5% at December
31, 2001.
<TABLE>
<CAPTION>
(in millions: December 31,) 2002 2001 2000 1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consumer loans $ -- $ -- $ -- $ -- $ 1
Real estate loans-commercial -- -- -- 7 9
Loans to businesses 103 116 135 149 151
Loans to financial institutions and other 16 7 2 12 19
- ----------------------------------------------------------------------------
TOTAL $119 $123 $137 $168 $180
============================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------
(in millions) 2002 2001
---- ----
<S> <C> <C>
Recorded investment in impaired loans not requiring an allowance (a) $ 4 $ 2
Recorded investment in impaired loans requiring an allowance 115 121
---- ----
Total recorded investment in impaired loans $119 $123
==== ====
Credit reserves for impaired loans $ 73 $ 72
==== ====
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------
(in millions) 2002 2001 2000
---- ---- ----
<S> <C> <C> <C>
Average recorded investment in impaired loans $121 $152 $166
Interest income recognized on a cash basis 1 -- 1
</TABLE>
(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 $15
million, $22 million, and $24 million at December 31, 2002, 2001 and 2000,
respectively. The 2002, 2001 and 2000 balances primarily consist of contingent
liabilities and matured foreign exchange and derivative contracts.
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<Page>
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, 2002 (dollars
in millions):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Reserve for credit losses -
January 1, $148 $153 $189 $259 $137
Provision for credit losses (a) 147 91 28 29 238
Translation and other 10 (2) (4) 1 (4)
---- ---- ---- ---- ----
Subtotal 305 242 213 289 371
---- ---- ---- ---- ----
Write-offs:
Consumer loans (b) 115 38 19 25 19
Real estate loans-commercial -- -- -- 1 3
Loans to businesses (b) 39 72 43 50 72
Loans to banks and other financial
institutions 7 -- 2 14 2
Foreign exchange and derivative
contracts (c) -- 1 6 20 28
Recoveries:
Consumer loans (5) (6) (6) (7) -
Loans to businesses (8) (10) (3) (3) (5)
Loans to banks and other financial
institutions (1) (1) (1) -- --
All other loans -- -- -- -- (7)
---- ---- ---- ---- ----
Net write-offs (recoveries) 147 94 60 100 112
---- ---- ---- ---- ----
Reserve for credit losses $158 $148 $153 $189 $259
December 31, (d) ==== ==== ==== ==== ====
</TABLE>
(a) The increases in 2002 and 2001 were due to credit loss provisions related
to 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. The increase in 1998 was mainly
due to first quarter credit loss provision related to business in the
Asia/Pacific region, particularly Indonesia.
(b) The increases in 2002, 2001 and 1998 were primarily due to write-offs in
the Asia/Pacific region, primarily Hong Kong and Indonesia.
(c) The increase in 1998 was due to write-offs of Indonesian foreign exchange
and derivative contracts.
(d) Allocation:
<TABLE>
<CAPTION>
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Loans $151 $128 $137 $169 $214
Other assets, primarily derivatives 6 4 14 16 43
Other contingent liabilities 1 16 2 4 2
---- ---- ---- ---- ----
Total reserve for credit losses $158 $148 $153 $189 $259
==== ==== ==== ==== ====
</TABLE>
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<Page>
Interest income is recognized on an accrual basis. Loans other than certain
consumer loans are placed on non-performing status when payments of principal or
interest are 90 days past due or if, in management's opinion, the borrower is
unlikely to meet its contractual obligations. When loans are placed on
non-performing status, all previously accrued but unpaid interest is reversed
against current interest income. Cash receipts of interest on non-performing
loans are recognized 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.
Credit card receivables, 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 particular industries and geographic regions are not unusual. At
December 31, 2002, 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 banks and other financial institutions and various commercial and
industrial enterprises operating geographically within the Asia/Pacific region,
Europe, North America, Latin America and the Indian Subcontinent. AEB
continually monitors and actively manages its credit concentrations to reduce
the associated risk.
Page 53
<Page>
In December 2001 and January 2002, the Argentine government mandated the
conversion of U.S. dollar denominated assets into Argentine pesos and
simultaneously devalued the peso. AEB's credit exposures to Argentina at
December 31, 2002 and 2001 were $28 million and $56 million, respectively, which
include loans of $17 million and $25 million, respectively.
During late 2001 and 2002, the Hong Kong market experienced a significant
increase in bankruptcy filings due to an economic slowdown and changes in Hong
Kong law regarding personal bankruptcy. Accordingly, during 2002 AEB
substantially increased its provision for consumer loan losses to reflect the
expectation of higher bankruptcy related write-offs. In addition, AEB took
certain actions to minimize the impact to its consumer loan portfolio, including
suspending all new loan originations in Hong Kong beginning in the first quarter
of 2002. Recent trends show that losses in this portfolio have begun to
stabilize. AEB continues to closely monitor this portfolio.
In an ongoing effort to mitigate the effects of AEB's credit risks, as well
as its decision to shift its business focus from corporations to individuals,
AEB continued to reduce its wholesale credit exposure in 2002, particularly with
respect to its Asia/Pacific commercial loan portfolio. AEB continues to
carefully monitor its credit exposures.
AEB's earnings are sensitive to fluctuations in interest rates, as it is
not always possible to match precisely the maturities of interest-related assets
and liabilities. However, strict earnings at risk limits are established at both
the country and overall bank level to limit AEB's exposure to interest rate
fluctuations. On occasion, AEB may decide to mismatch in anticipation of a
change in future interest rates in accordance with these guidelines. Term loans
extended by AEB include both floating and fixed interest rate loans.
Because AEB conducts significant business in emerging market countries and
in countries that are less politically and economically stable than those in the
United States or Western Europe, its Private Banking, PFS and correspondent
banking activities may be subject to greater credit and compliance risks than
are found in more well-developed jurisdictions. AEB continuously 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.
For a discussion relating to AEB's use of derivative financial instruments,
see page 51 under the caption "Risk Management," and Note 9 on pages 70 through
72 of the Company's 2002 Annual Report to Shareholders, which portions of such
report are incorporated herein by reference.
COMPETITION
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 the Company) and, in certain cases, governmental agencies.
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REGULATION
American Express Bank Ltd. ("AEBL") is a wholly owned direct subsidiary of
American Express Banking Corp. ("AEBC"). 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 the Company. AEBC, AEBL and AEBL's global network of
offices and subsidiaries are subject to the 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 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 AEBL does not do business in the United States, except as an incident
to its activities outside the United States, the Company's affiliation with AEBL
neither causes the Company to be subject to the provisions of the Bank Holding
Company Act of 1956, as amended, nor requires it to register as a bank holding
company under the Federal Reserve Board's Regulation Y. AEBL is not a member of
the Federal Reserve System, is not subject to supervision by the FDIC, and is
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. AEBL is not a
financial holding company under the Gramm-Leach-Bliley Act.
AEBL is required to comply with the Federal Reserve Board's risk-based
capital guidelines and complementary leverage constraint 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 six percent, a total
risk-based capital ratio of at least 10.0 percent, and a leverage ratio of at
least five percent. Based on AEBL's total risk-based capital and leverage
ratios, which are set forth on page 47, AEBL is considered to be well
capitalized at December 31, 2002.
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 U.S., the Secretary of the
Treasury has issued regulations pursuant to the USA PATRIOT Act that
specifically impact certain money laundering prevention activities of entities
involved, as AEBL is, in correspondent and private banking activities. AEBL has
taken steps as necessary to comply with these regulations, and increased its
compliance efforts to combat money laundering generally. AEBL may increase these
efforts to address further regulations expected under the
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USA PATRIOT Act as well as other evolving supervisory standards and requirements
in jurisdictions in which AEBL does business.
In January 2002 the Basel Committee on Banking Supervision (the "Basel
Committee") released a proposal for a new risk-based bank capital accord to
replace a prior accord that has been in effect since 1988. The Basel Committee
is comprised of representatives of central banks and certain bank supervisors
from the "Group of Ten" countries and establishes guidelines and recommendations
governing the prudential supervision of banking institutions. The proposal would
refine the current capital requirements for credit risk and market risk and
would add capital requirements for operational risk. Operational risk means the
risk of direct or indirect loss resulting from inadequate or failed internal
processes, people and systems or from external events. Member countries are
expected to implement the new accord by 2006, although the ultimate timing for a
new accord and specific capital requirements are uncertain. AEBL believes that
implementation of and compliance efforts required by the new accord, to the
extent applicable to AEBL, could increase minimum risk-based capital
requirements applicable to AEBL and result in certain changes to certain of
AEBL's information systems, processes and employee training.
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CORPORATE AND OTHER
The American Express brand and its attributes - trust, security, integrity,
quality and customer service - are key assets of the Company. The Company
continues to focus on the brand by educating employees about its attributes and
by further incorporating these attributes into its programs, products and
services.
During the year, the Company continued its strategy to obtain patents for
its businesses. In 2002, the Company filed more than 100 U.S. and foreign patent
applications.
The Company has devoted substantial resources to its global technology
platforms and undertaken significant efforts to protect and manage its
proprietary systems and the data collected and stored on such systems. In this
vein, the Company has continued to focus on ways to secure such systems from
"hackers" and other unauthorized users.
The Company uses information about its 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 concomitant concerns about the
rapid and widespread dissemination and use of information. Federal regulations
implementing 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 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 and
municipalities have adopted such legislation. The Company will continue its
efforts to safeguard the data entrusted to it in accordance with applicable law
and its internal data protection policies, including taking steps to reduce the
potential for identity theft, while seeking to properly collect and use data to
achieve its business objectives.
In addition, provisions of the Fair Credit Reporting Act that preempt
states from enacting legislation regarding the sharing of customer information
among affiliates and regarding certain uses of consumer report information
expire on January 1, 2004. Without further Congressional action, states would be
permitted to enact laws that place greater restrictions on how customer data may
be shared among Company affiliates and greater restrictions on the Company's use
of consumer report data. If such laws were enacted, complying with varying state
requirements might adversely affect the Company's ability to provide effectively
personalized services to its customers.
Federal privacy rules promulgated under the Health Insurance Portability
and Accountability Act of 1996 ("HIPAA") will become effective on April 14,
2003. The rules address the privacy rights of health care customers and the
obligation of the Company when obtaining and using protected health information.
In addition, both HIPPA and GLBA regulations require the adoption of security
standards to safeguard the integrity, confidentiality and access of health and
financial customer data.
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In 2002, the Company outsourced most of its technology operations work to
IBM. This arrangement, which has a seven-year term with options to extend, will
enable the Company to benefit from IBM's expertise while lowering its
information technology costs. IBM has taken on responsibility for managing most
of the Company's day-to-day technology operations functions, including
mainframe, midrange and desktop systems; web hosting; database administration;
help desk services; and data center operations. The Company's Technologies
organization continues to retain its core technology competencies, including
information technology strategy, managing strategic relationships with
technologies' partners, developing and maintaining applications and databases,
and managing the technologies' portfolios of its businesses.
In the U.S., the USA PATRIOT Act (the "Patriot Act") was enacted in October
2001 in the wake of the September 11th terrorist attacks. The Patriot Act
contains a wide variety of provisions aimed at fighting terrorism, including
provisions aimed at attacking terrorists' ability to access and move funds used
in support of terrorist activities. Among other things, the Patriot Act directs
federal regulators, led by the Secretary of the Treasury, to promulgate
regulations 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 the Company has long maintained money laundering prevention programs in
its businesses, the Secretary of the Treasury has issued regulations under the
Patriot Act applicable to certain of the Company's business activities conducted
within AEB, TRS, AEFA and their subsidiaries, prescribing minimum standards for
such anti-money laundering programs, and it is anticipated that further
regulations applicable to these and to certain of the Company's other businesses
will be issued in the future. 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 transactions from merchants on their
networks, in order to help prevent these networks from being used for money
laundering and financing terrorist activities. The Company has initiated such a
program for its Global Network Services business. Treasury will also be issuing
regulations regarding customer identification requirements applicable to many of
the Company's businesses. The Company intends to take steps to comply with any
regulations that are ultimately promulgated. In addition, the Company will take
steps to comply with anti-money laundering initiatives adopted in other
jurisdictions in which it conducts business.
FOREIGN OPERATIONS
The Company derives a significant portion of its revenues from the use of
the Card, Travelers Cheques, travel and other financial products and services
in countries outside the United States and continues to broaden the use of
these products and services outside the United States. (For a discussion of
the Company's revenue by geographic region, see Note 18 to the Company's
Consolidated Financial Statement, which can be found on pages 80 through 82 of
the Company's Annual Report to Shareholders.) 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) can have an effect on
the Company's revenues. Substantial and sudden devaluation of local
Cardmembers' currency can also affect their ability to make payments to the
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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 its foreign operations, the Company is 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 lesser than the United States dollar amounts at
which they are currently recorded in the Company's 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 the Company's
operations.
The Company's 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 used to manage exposures
is the spot and forward purchase or sale of foreign currencies as a hedge of net
exposures in those currencies as, for example, in the case of the Cardmember and
Travelers Cheque transactions described above. Additionally, Cardmembers may be
charged in United States dollars for their spending outside their local country.
The Company's investments in foreign operations are hedged by forward exchange
contracts or by identifiable transactions, where appropriate.
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
Various forward-looking statements have been made in this Form 10-K Annual
Report. Forward-looking statements may also be made in the Company's other
reports filed with the SEC, in its press releases and in other documents. In
addition, from time to time, the Company through its 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," "should,"
"could," "likely" and similar expressions are intended to identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date on which they
are made. The Company undertakes no obligation to update publicly or revise any
forward-looking statements. Factors that could cause actual results to differ
materially from the Company's forward-looking statements include, but are not
limited to, the following:
The Company's ability to:
o successfully implement a business model that allows for significant
earnings growth based on revenue growth that is lower than historical
levels, including
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the ability to improve its operating expense to revenue ratio both in
the short-term and over time, which will depend in part on the
effectiveness of reengineering and other cost control initiatives, as
well as factors impacting the Company's revenues;
o grow its business and meet or exceed its 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 the Company's ability to manage
its capital needs and the effect of business mix, acquisitions and
rating agency requirements;
o increase investment spending, which will depend in part on the equity
markets, other factors affecting revenues and the success of
reengineering programs, and capitalize on such investments to improve
business metrics;
o extend the value of the American Express brand, which historically has
been associated with the card and travel businesses (e.g., perception
of trust, security and quality service), to a broad range of financial
products and services in the financial services industry;
o manage credit risk related to consumer debt, business loans, merchant
bankruptcies and other credit exposures, both in the United States and
abroad, including unseasoned balances in TRS' lending portfolios;
o accurately estimate the provision for credit losses in the Company's
outstanding portfolio of loans and receivables;
o accurately estimate the fair value of the assets in the Company's
investment portfolio, and, in particular, those investments that are
not readily marketable;
o successfully achieve in a timely manner significant cost savings and
other benefits from the reengineering efforts being implemented or
considered by the Company, 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, the scale-back of corporate lending in certain
regions, and planned staff reductions relating to certain of such
reengineering actions;
o successfully expand its online and offline distribution channels and
cross-selling for financial, travel, card and other products and
services to its customer base, both in the U.S. and internationally;
o participate in payment and other systems material to its businesses on
a fair and competitive basis;
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o control and manage operating, infrastructure, advertising and
promotion and other expenses as business expands or changes, including
balancing the need for longer term investment spending;
o accurately estimate the provision for the cost of the Company's
MEMBERSHIP REWARDS'r' program;
o 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 systems;
o recover under its insurance policies for losses resulting from the
September 11th terrorist attacks;
o recognize evolutionary technology developments by competitors or
others which could hasten business model obsolescence or, because of
patent rights held by such competitors or others, limit or restrict
the Company's use of desired business technology or processes;
o develop and implement successfully enterprise-wide interactive
strategies;
o improve online customer satisfaction, website performance and online
availability for its customers and clients;
o effectively leverage its assets, such as its brand, customers and
international presence, in the Internet environment; and
o attract and retain qualified employees in all its businesses.
TRS' ability to:
o increase consumer and business spending and borrowing on its credit
and charge Cards and travel related services products, gain market
share and develop and issue new or enhanced products that capture
greater share of customers' total spending on Cards issued on its
network both in the United States and in its international operations;
o 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 card and other means, and further globalizing business
capabilities;
o manage credit risk and exposure in a challenging economic environment;
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o cost effectively manage and expand Cardmember benefits, including
MEMBERSHIP REWARDS;
o expand the Global Network Services business;
o 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;
o retain Cardmembers in consumer lending products after low introductory
rate periods have expired; and
o sustain premium discount rates, 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.
AEFA's ability to:
o sell certain high-yield investments at expected values and within
anticipated timeframes and to maintain its high-yield portfolio at
certain levels in the future;
o improve investment performance in AEFA's businesses, including
attracting and retaining high-quality personnel;
o develop and roll out new and attractive products to clients in a
timely manner and effectively manage the economics in selling a
growing volume of non-proprietary products to clients;
o 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;
o resolve the potential conflicts inherent in its growing multi-channel
delivery systems;
o obtain critical mass and operating efficiencies in the Global
Brokerage and Membership B@nking Unit and diversify sources of
revenue;
o make accurate assumptions used to determine the amount of amortization
of deferred acquisition costs ("DAC") with respect to sale of annuity,
insurance and certain mutual fund products;
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o 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, AEFA's ability to recover DAC as well as the timing of
that DAC amortization, and the level of guaranteed minimum death
benefits paid to clients;
o respond effectively to changes to or elimination of federal tax
benefits for AEFA's products and other changes in laws and regulations
(including those relating to the federal estate tax and retirement
savings laws) which could adversely affect sales of insurance and
annuity products;
o 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;
In general:
o the impact on the Company's businesses and uncertainty created by the
September 11th terrorist attacks, and the potential negative effect on
the Company's businesses and infrastructure, including information
technology systems, of terrorist attacks or disasters in the future;
o the impact on the Company's businesses resulting from the war in Iraq
and its aftermath and other geopolitical uncertainty;
o relationships with third-party providers of various computer systems
and other services integral to the operations of the Company's
businesses;
o the triggering of obligations to make payments to certain co-brand
partners, merchants, vendors and customers under contractual
arrangements with such parties under certain circumstances;
o potential deterioration in the high-yield sector and other investment
areas, which could result in further losses in AEFA's investment
portfolio;
o credit trends and the rate of bankruptcies, which can affect spending
on card products, debt payments by individual and corporate customers
and businesses that accept the Company's card products, and returns on
the Company's investment portfolios;
o fluctuations in foreign currency exchange rates;
o a downturn in the Company's businesses and/or negative changes in the
Company's and its subsidiaries' credit ratings, which could result in
contingent payments under contracts, decreased liquidity and higher
borrowing costs;
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o the effect of fluctuating interest rates, which could affect AEFA's
spreads in the investment and insurance businesses and benefits
credited to clients' accounts, TRS' borrowing costs and TRS' and AEB's
return on lending products;
o changes in laws or government regulations, including tax laws
affecting the Company's businesses or that may impact the sales of the
products and services that it offers, and regulatory activity in the
areas of customer privacy, consumer protection, business continuity
and data protection;
o 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;
o the costs and integration of acquisitions;
o competitive pressures in all of the Company's major businesses;
o the adoption of recently issued accounting rules related to the
consolidation of special-purpose entities, including those involving
collateralized debt obligations, secured loan trusts, mutual funds,
hedge funds and limited partnerships that the Company manages and/or
invests in, which could affect both the Company's balance sheet and
results of operations; and
o outcomes and costs associated with litigation and compliance and
regulatory matters.
SEGMENT INFORMATION AND CLASSES OF SIMILAR SERVICES
Information with respect to the Company's operating segments, geographic
operations and classes of similar services is set forth in Note 18 to the
Consolidated Financial Statements of the Company, which appears on pages 80
through 82 of the Company's 2002 Annual Report to Shareholders, which Note is
incorporated herein by reference.
EXECUTIVE OFFICERS OF THE COMPANY
All of the executive officers of the Company as of March 24, 2003, none of
whom has any family relationship with any other and none of whom became an
officer pursuant to any arrangement or understanding with any other person, are
listed below. Each of such officers was elected to serve until the next annual
election of officers or until his or her successor is elected
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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 (51) has been Chairman of the Company since April 2001 and
Chief Executive Officer of the Company since January 2001. Prior thereto he had
been President and Chief Operating Officer of the Company since February 1997.
Prior to February 1997 he had been Vice Chairman of the Company since January
1995. 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 (59) has been Vice Chairman of the Company since August 1993.
JAMES M. CRACCHIOLO - Group President, Global Financial Services;
President and Chief Executive Officer, AEFC;
Chairman and Chief Executive Officer, AEFA;
Chairman, AEB; President and CEO, TRS International
Mr. Cracchiolo (44) has been Group President, Global Financial Services of
the Company since June 2000, President and Chief Executive Officer of AEFC since
November, 2000, Chairman and Chief Executive Officer of AEFA since March 2001,
and President and Chief Executive Officer of TRS International since May 1998.
Prior thereto he had been President and CEO of AEFA since June, 2000. Prior
thereto he had been President, Global Network Services, TRS since February 1997.
GARY L. CRITTENDEN - Executive Vice President and Chief Financial Officer
Mr. Crittenden (49) has been Executive Vice President and Chief Financial
Officer of the Company since June 2000. Prior thereto he had been Senior Vice
President and Chief Financial Officer of Monsanto since September 1998. Prior
thereto he had been Chief Financial Officer at Sears Roebuck & Co.
URSULA F. FAIRBAIRN - Executive Vice President, Human Resources and Quality
Mrs. Fairbairn (60) has been Executive Vice President, Human Resources and
Quality of the Company since December 1996.
EDWARD P. GILLIGAN - Group President, Global Corporate Services, TRS
Mr. Gilligan (43) has been Group President, Global Corporate Services, TRS
since June 2000. Prior thereto he had been President, Corporate Services, TRS
since February 1996.
JOHN D. HAYES - Executive Vice President, Global Advertising
and Brand Management
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Mr. Hayes (48) has been Executive Vice President, Global Advertising and
Brand Management of the Company since May 1995.
DAVID C. HOUSE - Group President, Global Network and Establishment
Services and Travelers Cheque and Prepaid
Services Group, TRS
Mr. House (53) 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 (44) 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. Prior thereto he had been Executive
Vice President and General Manager of Consumer Marketing, TRS since February
1997.
LOUISE M. PARENT - Executive Vice President and General Counsel
Ms. Parent (52) has been Executive Vice President and General Counsel of
the Company since May 1993.
GLEN SALOW - Executive Vice President and Chief Information Officer
Mr. Salow (46) has been Executive Vice President and Chief Information
Officer of the Company since March 2000. Prior thereto he had been Senior Vice
President, E-Commerce, United States Card and Travel Services, TRS since
December 1999. Prior thereto he had been Senior Vice President, Information
Technology Strategy and Global Platform Development, TRS since April 1999. Prior
thereto he had been Senior Vice President, Technology Operations, TRS since
November 1997.
THOMAS SCHICK - Executive Vice President, Corporate Affairs and
Communications
Mr. Schick (56) has been Executive Vice President, Corporate Affairs and
Communications of the Company since March 1993.
EMPLOYEES
The Company had approximately 75,500 employees on December 31, 2002.
ITEM 2. PROPERTIES
The Company's headquarters is 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
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office buildings in a complex known as the World Financial Center. The Company
has a 48% ownership interest in the building. In 2002, an affiliate of
Brookfield Financial Properties acquired the 52 percent interest in the
building, which had previously been owned by Lehman Brothers Holdings Inc.
Due to its proximity to the World Trade Center, the Company's headquarters
was damaged as a result of the terrorist attacks of September 11th, 2001. As a
result of these events, the Company had to temporarily relocate its headquarters
and the Company 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 the Company's headquarters was completed on schedule during 2002 and the
Company relocated back into the Company headquarters. The Company has commenced
efforts to sublease portions of the additional space in the tri-state area. The
Company further relocated back to the World Financial Center employees at its
Jersey City facility who had been permanently based at such location prior to
September 11th. The Company has commenced to sublease this space as well.
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, all of which are owned by the Company or its
subsidiaries. In November, 2000, a 99-year lease was entered into with the State
of Arizona for land in Phoenix; the Company completed construction in 2002 of
two office buildings with a total of 371,000 square feet at this site.
AEFA's three principal locations are its headquarters, the American Express
Financial Center, which the company leases, the Operations Center, which the
company owns, and the Client Service Center, which the company also owns; all
three locations are in Minneapolis, Minnesota. 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, owns its corporate
headquarters in Green Bay, Wisconsin.
Generally, the Company and its subsidiaries lease the premises they occupy
in other locations. Facilities owned or occupied by the Company and its
subsidiaries are believed to be adequate for the purposes for which they are
used and are well maintained.
In February 2000, the Company entered into a 10-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.
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
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of their respective business activities. The Company believes it has meritorious
defenses to each of these actions and intends to defend them vigorously. The
Company believes that it is not a party to, nor are any of its properties the
subject of, any pending legal or arbitration proceedings that would have a
material adverse effect on the Company's consolidated financial condition,
results of operations or liquidity. However, it is possible that the outcome of
any such proceedings could have a material impact on results of operations in
any particular reporting period as the proceedings are resolved. Certain legal
proceedings involving the Company are set forth below.
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 time frame. 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 October 2, 2002, a shareholder derivative suit was filed in the Supreme
Court of New York against certain former and present officers and directors of
the company. The company was also named as a nominal defendant. The matter is
captioned: LUKOWSKI V. AKERSON ET AL. The complaint alleges that the officers
and directors failed to exercise their duties and obligations in connection with
the Company's investments in high yield bonds and the subsequent write downs in
the 2000-2001 time frame. The action seeks damages against the officers and
directors on behalf of the Company.
On August 15, 2000, Roger M. Lindmark ("Lindmark") filed a putative class
action lawsuit against American Express Company, American Express Travel Related
Services Company, Inc. and American Express Centurion Bank ("AECB") in the
United States District Court for the Central District of California. The
complaint principally alleges that class members improperly were charged daily
compounded interest on the Optima line of credit cards and that AECB improperly
applied credits for returned merchandise against Optima balance transfer
balances. Lindmark asserts various claims including violation of the federal
Truth In Lending Act, breach of contract, fraud and unfair and deceptive
practices and violations of the California Consumer Legal Remedies Act. The
action seeks statutory and actual damages, restitution and injunctive relief.
Although the company believes it has meritorious defenses to this action, in
light of the inherent uncertainties and the burden and expense of lengthy
litigation, the Company reached an agreement to settle the lawsuit. On November
4, 2002 the court preliminarily approved the proposed settlement filed by the
parties. The proposed settlement provides for certification of two classes. The
first class, defined as the "finance charge" class, includes all customers who
incurred finance charges between August 1994 and September 2002. The proposed
settlement of the first class consists of a settlement fund in the amount of
$15,950,000 that will be distributed on a pro rata basis to those class members
who are entitled to a refund. The second class, defined as the "delayed notice"
class, includes all customers who did not receive change in terms notices and
who, as a result, incurred increased charges between
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September 2001 and September 2002. These class members will receive a refund of
charges affected by the terms changes that were incurred during the class
period. The Court is expected to hold a hearing to consider final approval of
the proposed settlement in April 2003. The Company has made appropriate reserves
for the settlement amounts.
In June 2002, British Airways filed an action in the United States District
Court for the Southern District of New York captioned BRITISH AIRWAYS PLC V.
AMERICAN EXPRESS TRAVEL RELATED SERVICES COMPANY, INC. The action arose over
British Airways' decision not to accept any credit or charge cards (including
the American Express card) in the United Kingdom for payment of "corporate net
fares", which are privately negotiated fares with corporations. British Airways'
decision has the effect of requiring corporate customers who wish to use credit
or charge cards for U.K. corporate net fares to purchase tickets through travel
agents and pay a surcharge. The Company believes that British Airways' action is
a material breach of its Merchant Agreement with the Company. British Airways'
complaint asks the court for a declaration of whether its conduct is proper.
British Airways' complaint also seeks unspecified monetary damages, interest,
costs and attorney's fees. British Airways has also amended its original
complaint to add various claims alleging breaches by the Company of various
contracts with the Company. American Express has filed an Answer and
Counterclaim to the British Airways' complaint, and amended complaint, seeking
unspecified monetary damages, interest, punitive damages, costs, attorney's
fees, and injunctive relief.
On December 13, 1996, an action captioned LESA BENACQUISTO AND DANIEL
BENACQUISTO V. IDS LIFE INSURANCE COMPANY ("IDS LIFE") AND AMERICAN EXPRESS
FINANCIAL CORPORATION (the "Benacquisto Action") was commenced in Minnesota
state court. The action was brought by individuals who replaced an existing IDS
Life insurance policy with a new IDS Life policy. The plaintiffs purported to
represent a class consisting of all persons who replaced existing IDS Life
policies with new IDS Life policies from and after January 1, 1985. The
complaint put at issue various alleged sales practices and misrepresentations,
alleging breaches of fiduciary duties and alleged violations of consumer fraud
statutes.
A second action, captioned ARNOLD MORK, ISABELLA MORK, RONALD MELCHERT AND
SUSAN MELCHERT V. IDS LIFE INSURANCE COMPANY AND AMERICAN EXPRESS FINANCIAL
CORPORATION was commenced in the same court on March 21, 1997. A third action,
captioned, RICHARD W. AND ELIZABETH J. THORESEN V. AMERICAN EXPRESS FINANCIAL
CORPORATION, AMERICAN CENTURION LIFE ASSURANCE COMPANY, AMERICAN ENTERPRISE LIFE
INSURANCE COMPANY, AMERICAN PARTNERS LIFE INSURANCE COMPANY, IDS LIFE INSURANCE
COMPANY AND IDS LIFE INSURANCE COMPANY OF NEW YORK was commenced in Minnesota
state court on October 13, 1998. Such actions made allegations similar to those
made in the Benacquisto action, but with respect to certain annuity products as
opposed to life insurance policies.
In January 2000, AEFC reached an agreement in principle to settle the three
purported class actions described above. It is expected the settlement will
provide for $215 million of benefits to more than two million participants and
for release by class members of all insurance and annuity market conduct claims
dating back to 1985.
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In connection with the procedural disposition of the three purported class
actions, in August, 2000, an action captioned LESA BENACQUISTO, DANIEL
BENACQUISTO, RICHARD THORESEN, ELIZABETH THORESEN, ARNOLD MORK, ISABELLA MORK,
RONALD MELCHERT AND SUSAN MELCHERT V. AMERICAN EXPRESS FINANCIAL CORPORATION,
AMERICAN EXPRESS FINANCIAL ADVISORS, AMERICAN CENTURION LIFE ASSURANCE COMPANY,
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY, AMERICAN PARTNERS LIFE INSURANCE
COMPANY, IDS LIFE INSURANCE COMPANY AND IDS LIFE INSURANCE COMPANY OF NEW YORK
was commenced in the United States District Court for the District of Minnesota.
On September 18, 2000 the Minnesota state court and the United States
District Court for the District of Minnesota entered an order conditionally
certifying a class for settlement purposes and preliminarily approving the class
settlement described above for each of the state actions and the federal action.
The settlement was finally approved by the state and federal courts on May,
2001. The settlement benefits have been substantially administered to the class.
Numerous individuals opted out of the settlement described above and
therefore did not release their claims against AEFC and its subsidiaries. Some
of these class members who opted out were represented by counsel and presented
separate claims to AEFC and the Company. The majority of these opt out claims
were resolved in 2002.
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 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 during an undefined class period. Plaintiffs allege
that the sale of the plans violate the Investment Advisers Act of 1940. The suit
seeks an unspecified amount of damages, rescission and injunctive relief. The
Company believes that it has meritorious defenses to this suit and intends to
defend this case vigorously.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the last quarter of its fiscal year ended December 31, 2002.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The principal market for the Company's Common Shares is The New York Stock
Exchange under the trading symbol AXP. Its Common Shares are also listed in the
U.S. on the Chicago and Pacific Stock Exchanges. The Company had 51,601 common
shareholders of record at December 31, 2002. For price and dividend information
with respect to such Common Shares, see Note 22 to the Consolidated Financial
Statements on page 84 of the Company's 2002 Annual Report to Shareholders, which
Note is incorporated herein by reference.
In August 1999 and March 2000, the company entered into agreements under
which a financial institution purchased an aggregate 29.5 million shares of
the Company's common stock at an average purchase price of $50.41 per share.
Each of the agreements terminates after five years, at which time the Company
is required to deliver an amount equal to the original purchase price for the
shares. The Company may elect to settle this amount at any time (i)
physically, by paying cash against delivery of the shares held by the
financial institution or (ii) on a net cash or net share basis. During the
term of these agreements, the Company, on a monthly basis, either issues
shares to or receives shares from the financial institution so that the value
of the remaining shares held by the financial institution is equal to the
original aggregate purchase price for the shares. The Company may prepay
outstanding amounts at any time prior to the end of the five-year term. In the
first quarter of 2001, the Company elected to prepay $350 million of the
aggregate outstanding amount. In October and December 2002, the Company
elected to prepay an additional $200 million and $400 million, respectively,
of the aggregate outstanding amount.
In connection with these agreements, the Company issued, during the first
quarter of 2002, 805,335 common shares on February 5, 2002. In addition, during
the first quarter of 2002, an aggregate 4,744,705 shares were returned to the
Company, resulting in a net return to the Company of 3,939,370 common shares
during the first quarter.
In connection with these agreements, the Company issued, during the second
quarter of 2002, 43,753 common shares on May 3, 2002 and 4,258,030 common shares
on July 3, 2002. In addition, in May 2002, 1,211,953 shares were returned to the
Company, resulting in a net issuance of 3,089,830 common shares during the
second quarter.
In connection with these agreements, the Company issued, during the third
quarter of 2002, 1,971,689 shares common shares on August 5, 2002. Additionally,
5,474,399 common shares were issued on October 3, 2002. In addition, in
September 2002, 1,447,789 shares were returned to the Company, resulting in a
net issuance of 5,998,299 common shares during the second quarter.
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<PAGE>
In connection with these agreements, on January 6, 2003, the Company issued
an aggregate 1,640,196 common shares in respect of the monthly settlement for
December 2002. In addition, during the fourth quarter of 2002, an aggregate
23,074,578 shares were returned to the Company (inclusive of the October and
December prepayments) in connection with these agreements, resulting in a net
return to the Company of 21,434,382 shares during the fourth quarter.
On March 26, 2003, the Company prepaid an additional $200 million of the
aggregate outstanding amount, which resulted in the return to the Company of an
aggregate 5,969,258 shares.
The issuances of common shares described above were exempt from
registration under the Securities Act of 1933 pursuant to Section 4(2) thereof,
as a transaction not involving a public offering.
ITEM 6. SELECTED FINANCIAL DATA
The "Consolidated Five-Year Summary of Selected Financial Data" appearing
on page 87 of the Company's 2002 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 through 53 of the Company's 2002 Annual Report to Shareholders is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information set forth under the heading "Risk Management" appearing
on pages 33 through 34, pages 42 through 43, pages 48 through 49, page 51 and
Note 9 to the Consolidated Financial Statements on pages 70 through 72 of the
Company's 2002 Annual Report to Shareholders is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The "Consolidated Financial Statements," the "Notes to Consolidated
Financial Statements" and the "Report of Ernst & Young LLP Independent Auditors"
appearing on pages 54 through 84 and 86 of the Company's 2002 Annual Report to
Shareholders are incorporated herein by reference.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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
The Company filed with the SEC, within 120 days after the close of its
last fiscal year, a definitive proxy statement dated March 11, 2003, pursuant
to Regulation 14A, which involves the election of directors. The following
portions of such proxy statement are incorporated herein by reference: page 4
paragraph 3, sentence 1 -- material included under the heading "Corporate
Governance," page 6 -- material included under the heading "Corporate
Governance -- Audit Committee," pages 7 through 8 -- material included under
the heading "Compensation of Directors," pages 9 through 10 -- material
included under the heading "Ownership of Our Common Shares," pages 10 through
12 -- material included under the heading "Item 1 -- Election of Directors"
and pages 21 through 30 (excluding the portions titled "Performance Graph" on
page 25 and "Directors and Officers Liability Insurance" on page 30). In
addition, the Company has provided, under the caption "Executive Officers of
the Company" at pages 64 through 66 hereof, the information regarding
executive officers called for by Item 401(b) of Regulation S-K.
ITEM 14. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, the Company
carried out an evaluation under the supervision and with the participation of
the Company's management, including the Chief Executive Officer ("CEO") and
Chief Financial Officer ("CFO"), of the effectiveness of its disclosure controls
and procedures. Based on that evaluation, the CEO and CFO have concluded that
the Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in SEC
rules and forms. Subsequent to the date of the CEO's and CFO's evaluation, there
were no significant changes in the Company's internal controls or in other
factors that could significantly affect the internal controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
See Index to Financial Statements on page F-1 hereof.
2. Financial Statement Schedules:
See Index to Financial Statements on page F-1 hereof.
3. Exhibits:
See Exhibit Index on pages E-1 through E-6 hereof.
(b) Reports on Form 8-K:
Form 8-K, dated October 28, 2002, Items 5 and 7, reporting the Company's
earnings for the quarter ended September 30, 2002, and including a Third
Quarter Earnings Supplement.
Form 8-K, dated November 7, 2002, Item 9, reporting on the presentation
delivered at the Forrester Research Executive Strategy Forum by Kenneth I.
Chenault, Chairman and Chief Executive Officer of the Company.
Form 8-K, dated November 19, 2002, Item 5, reporting on the Company's
authorization of the repurchase of additional shares as part of its share
repurchase program and declaration of its regular quarterly dividend.
Form 8-K, dated December 5, 2002, Item 9, adjusting certain data contained
in the Company's Form 8-K dated November 7, 2002 (relating to card enrollment in
the Company's online account service).
Form 8-K, dated December 16, 2002, Item 5, adjusting certain statistical
data contained in the Company's third quarter 2002 Form 10-Q filed on November
13, 2002 and Form 8-K filed on October 28, 2002 (relating to write-off rates).
Form 8-K, dated January 27, 2003, Items 5 and 7, reporting the Company's
2002 fourth quarter and full year earnings and including a 2002 Fourth
Quarter/Full Year Earnings Supplement.
Form 8-K, dated February 5, 2003, Item 9, reporting on a presentation
delivered to the financial analyst community by (i) Kenneth I. Chenault,
Chairman and Chief Executive Officer of the Company, (ii) James M. Cracchiolo,
Group President, Global Financial Services and Chairman and Chief Executive
Officer of American Express Financial Advisors ("AEFA"), (iii) Barry Murphy,
Executive Vice President -- U.S. Retail at AEFA, (iv) Barbara Fraser, Executive
Vice President -- Products and Corporate Marketing at AEFA, and (v) Ted
Truscott, Chief Information Officer at AEFA.
Form 8-K, dated March 6, 2003, Item 9, reporting on the posting on the
Company's website of the Company's 2002 Annual Report to Shareholders.
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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 24, 2003 /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/ F. Ross Johnson
- ---------------------- -------------------
Gary L. Crittenden F. Ross Johnson
Executive Vice President and Director
Chief Financial Officer
/s/ Tom A. Iseghohi /s/ Vernon E. Jordan, Jr.
- ------------------- -------------------------
Tom A. Iseghohi Vernon E. Jordan, Jr.
Senior Vice President and Comptroller Director
/s/ Daniel F. Akerson /s/ Jan Leschly
- --------------------- ---------------
Daniel F. Akerson Jan Leschly
Director Director
/s/ Edwin L. Artzt /s/ Richard A. McGinn
- ------------------ ---------------------
Edwin L. Artzt Richard A. McGinn
Director Director
/s/ Charlene Barshefsky /s/ Frank P. Popoff
- ----------------------- -------------------
Charlene Barshefsky Frank P. Popoff
Director Director
/s/ William G. Bowen /s/ Robert D. Walter
- -------------------- --------------------
William G. Bowen Robert D. Walter
Director Director
March 24, 2003
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CERTIFICATION
I, Kenneth I. Chenault, certify that:
1. I have reviewed this annual report on Form 10-K of American Express
Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 26, 2003
/s/ Kenneth I. Chenault
--------------------------------
Kenneth I. Chenault
Chief Executive Officer
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<Page>
CERTIFICATION
I, Gary L. Crittenden, certify that:
1. I have reviewed this annual report on Form 10-K of American Express
Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 26, 2003
/s/ Gary L. Crittenden
--------------------------------
Gary L. Crittenden
Chief Financial Officer
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AMERICAN EXPRESS COMPANY
INDEX TO FINANCIAL STATEMENTS
COVERED BY REPORT OF INDEPENDENT AUDITORS
(ITEM 14(a))
<TABLE>
<CAPTION>
ANNUAL
REPORT TO
SHAREHOLDERS
FORM 10-K (PAGE)
--------- ------------
<S> <C> <C>
American Express Company and Subsidiaries:
Data incorporated by reference from attached 2002 Annual Report to
Shareholders:
Report of independent auditors....................................... 86
Consolidated statements of income for the three
years ended December 31, 2002.................................... 54
Consolidated balance sheets at December 31, 2002
and 2001......................................................... 55
Consolidated statements of cash flows for the
three years ended December 31, 2002.............................. 56
Consolidated statements of shareholders' equity for the
three years ended December 31, 2002.............................. 57
Notes to consolidated financial statements........................... 58-84
Consent of independent auditors......................................... F-2
Schedules:
I - Condensed financial information of the Company................... F-3 - F-6
II - Valuation and qualifying accounts for the three years ended
December 31, 2002............................................ F-7
</TABLE>
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 auditors) listed in the above index, which
are included in the Annual Report to Shareholders for the year ended December
31, 2002, 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 2002 Annual Report to Shareholders is
not to be deemed filed as part of this report.
F-1
<Page>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report on Form
10-K of American Express Company of our report dated January 27, 2003
(hereinafter referred to as our Report), included in the 2002 Annual Report to
Shareholders of American Express Company.
Our audits 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, 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 and No. 333-51828) and in the related Prospectuses of
our Report with respect to the consolidated financial statements and schedules
of American Express Company included and incorporated by reference in this
Annual Report on Form 10-K for the year ended December 31, 2002.
/s/ Ernst & Young LLP
New York, New York
March 24, 2003
F-2
<Page>
AMERICAN EXPRESS COMPANY AND CONSOLIDATED SUBSIDIARIES
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF THE COMPANY
CONDENSED STATEMENTS OF INCOME
(PARENT COMPANY ONLY)
(MILLIONS)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
2002 2001 2000
------ ------ ------
<S> <C> <C> <C>
Revenues $ 241 $ 248 $ 290
------ ------ ------
Expenses:
Interest 339 347 341
Human resources 88 64 97
Other (a) 242 261 276
------ ------ ------
Total 669 672 714
------ ------ ------
Pretax loss (428) (424) (424)
Income tax benefit (209) (199) (188)
------ ------ ------
Net loss before equity in net income of subsidiaries
and affiliates (219) (225) (236)
Equity in net income of subsidiaries and affiliates 2,890 1,536 3,046
------ ------ ------
Net income $2,671 $1,311 $2,810
====== ====== ======
</TABLE>
(a) 2001 includes restructuring charges of $14 million ($9 million after-tax).
See Notes to Condensed Financial Information of the Company on page F-6.
F-3
<Page>
AMERICAN EXPRESS COMPANY AND CONSOLIDATED SUBSIDIARIES
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF THE COMPANY
CONDENSED BALANCE SHEETS
(PARENT COMPANY ONLY)
(MILLIONS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31,
-----------------
2002 2001
------- -------
<S> <C> <C>
ASSETS
------
Cash and cash equivalents $ 9 $ 11
Equity in net assets of subsidiaries and affiliates 14,567 12,902
Accounts receivable and accrued interest, less
reserves 26 18
Land, buildings and equipment - at cost, less
accumulated depreciation: 2002, $80; 2001, $77 141 53
Due from subsidiaries 4,386 3,388
Other assets 292 256
------- -------
Total assets $19,421 $16,628
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Accounts payable and other liabilities $ 724 $ 521
Long-term debt 2,745 2,120
Due to subsidiaries 1,576 1,435
Intercompany debentures 515 515
------- -------
Total liabilities 5,560 4,591
Shareholders' equity:
Common shares, $.20 par value, authorized 3.6 billion
shares; issued and outstanding 1,305 million shares in
2002 and 1,331 million shares in 2001 261 266
Capital surplus 5,675 5,527
Retained earnings 7,606 6,421
Other comprehensive income, net of tax:
Net unrealized securities gains (losses) 1,104 334
Net unrealized derivatives losses (538) (296)
Foreign currency translation adjustments (198) (112)
Minimum pension liability (49) (103)
------- -------
Accumulated other comprehensive income 319 (177)
------- -------
Total shareholders' equity 13,861 12,037
------- -------
Total liabilities and shareholders' equity $19,421 $16,628
======= =======
</TABLE>
See Notes to Condensed Financial Information of the Company on page F-6.
F-4
<Page>
AMERICAN EXPRESS COMPANY AND CONSOLIDATED SUBSIDIARIES
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF THE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(PARENT COMPANY ONLY)
(MILLIONS)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
2002 2001 2000
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities: $ 2,671 $ 1,311 $ 2,810
Net income
Adjustments to reconcile net income to cash
provided by operating activities:
Equity in net income of subsidiaries and affiliates (2,890) (1,536) (3,046)
Dividends received from subsidiaries and affiliates 1,812 1,006 2,139
Other operating activities (705) (486) (680)
------- ------- -------
Net cash provided by operating activities 888 295 1,223
------- ------- -------
Purchase of land, building and equipment (93) (16) --
------- ------- -------
Net cash used in investing activities (93) (16) --
------- ------- -------
Cash flows from financing activities:
Issuance of American Express common shares 161 84 226
Repurchase of American Express common shares (1,153) (626) (1,377)
Dividends paid (430) (424) (421)
Net increase in debt 625 696 333
------- ------- -------
Net cash used in financing activities (797) (270) (1,239)
------- ------- -------
Net (decrease) increase in cash and cash equivalents (2) 9 (16)
Cash and cash equivalents at beginning of year 11 2 18
------- ------- -------
Cash and cash equivalents at end of year $ 9 $ 11 $ 2
======= ======= =======
</TABLE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest (net of amounts capitalized) in 2002, 2001 and 2000 was
$169 million, $116 million and $88 million, respectively. Net cash received for
income taxes in 2002, 2001 and 2000 was $231 million, $109 million and $376
million, respectively.
See Notes to Condensed Financial Information of the Company on page F-6.
F-5
<Page>
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 and, on an equity basis, its subsidiaries and
affiliates. Parent Company revenues and expenses, other than human
resources expenses, 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 the Company.
Certain amounts from prior years have been reclassified to conform to the
current presentation.
2. Long-term debt consists of (millions):
<TABLE>
<CAPTION>
December 31,
---------------
2002 2001
------ ------
<S> <C> <C>
3 3/4% Notes due November 20, 2007 $ 744 $ --
5 1/2% Notes due September 12, 2006 1,003 1,000
6 3/4% Senior Debentures due June 23, 2004 500 500
6 7/8% Notes due November 1, 2005 498 497
8 5/8% Senior Debentures due 2022 -- 123
------ ------
$2,745 $2,120
====== ======
</TABLE>
Aggregate annual maturities of long-term debt for the five years ending
December 31, 2007 are as follows (millions): 2003, $0; 2004, $500; 2005,
$498; 2006, $1,003; and 2007, $744.
3. Intercompany debentures consist solely of Junior Subordinated Debentures
issued to American Express Company Capital Trust I, a wholly owned
subsidiary of the Company. See Note 7 to the Consolidated Financial
Statements on page 69 of the Company's 2002 Annual Report to Shareholders
(which Note is incorporated herein by reference).
F-6
<Page>
AMERICAN EXPRESS COMPANY AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II --VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 2002
(MILLIONS)
<TABLE>
<CAPTION>
Reserve for credit losses, Reserve for doubtful
loans and discounts accounts receivable
--------------------------- ----------------------------
2002 2001 2000 2002 2001 2000
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period $ 993 $ 796 $ 753 $ 1,166 $ 932 $ 806
Additions:
Charges to income 1,526 1,415 924 1,334 1,554(a) 1,365(a)
Recoveries of amounts previously
written-off 68 78 150 -- -- --
Deductions:
Charges for which reserves were
provided (1,361) (1,296) (1,031) (1,542) (1,320) (1,239)
------- ------- ------- ------- ------- -------
Balance at end of period $ 1,226 $ 993 $ 796 $ 958 $ 1,166 $ 932
======= ======= ======= ======= ======= =======
</TABLE>
(a) Before recoveries on accounts previously written-off, which are
credited to income (millions): 2002 - $241, 2001 - $227 and
2000 - $214.
F-7
<Page>
EXHIBIT INDEX
The following exhibits are filed as part of this Annual Report or, where
indicated, were already filed and are hereby incorporated by reference (*
indicates exhibits electronically filed herewith). Exhibits numbered 10.1
through 10.21, 10.28 through 10.37, 10.40 and 10.42 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 November 26, 2001 (incorporated
by reference to Exhibit 99.2B of the Company's Current Report on Form
8-K (Commission File No. 1-7657) dated November 26, 2001).
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 Amendment 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).
10.3 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.
10.4 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).
10.5 American Express Company Deferred Compensation Plan for Directors, as
amended effective July 28, 1997 (incorporated by reference to Exhibit
10.1 of the Company's
E-1
<Page>
Quarterly Report on Form 10-Q (Commission File No. 1-7657) for the
quarter ended June 30, 1997).
10.6 Description of American Express Company Pay for Performance Deferral
Program (incorporated by reference to Exhibit 10.8 of the Company's
Quarterly Report on Form 10-Q (Commission File No. l-7657) for the
quarter ended March 31, 2000).
10.7 Amendment to American Express Company Pay for Performance Deferral
Program (incorporated by reference to Exhibit 10.9 of the Company's
Quarterly Report on Form 10-Q (Commission File No. l-7657) for the
quarter ended March 31, 2000).
10.8 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).
10.9 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).
10.10 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).
10.11 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).
10.12 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).
10.13 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).
10.14 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).
10.15 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).
10.16 Description of separate pension arrangement and loan agreement between
the Company and Harvey Golub (incorporated by reference to Exhibit
10.17 of the Company's Annual
E-2
<Page>
Report on Form 10-K (Commission File No. 1-7657) for the fiscal year
ended December 31, 1988).
10.17 Shearson Lehman Brothers Capital Partners I Amended and Restated
Agreement of Limited Partnership (incorporated by reference to Exhibit
10.18 of the Company's Annual Report on Form 10-K (Commission File No.
1-7657) for the fiscal year ended December 31, 1988).
10.18 Shearson Lehman Hutton Capital Partners II, L.P. Amended and Restated
Agreement of Limited Partnership (incorporated by reference to Exhibit
10.19 of the Company's Annual Report on Form 10-K (Commission File No.
1-7657) for the fiscal year ended December 31, 1988).
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 Restated and Amended Agreement of Tenants-In-Common, dated May 27,
1994, by and among the Company, American Express Bank Ltd., American
Express Travel Related Services Company, Inc., Lehman Brothers Inc.,
Lehman Government Securities, Inc. and Lehman Commercial Paper
Incorporated (incorporated by reference to Exhibit 10.1 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 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).
10.24 Intercompany Agreement, dated May 27, 1994, between the Company and
Lehman Brothers Holdings Inc. (incorporated by reference to Exhibit
10.3 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).
10.25 Purchase and Exchange Agreement, dated April 28, 1994, between Lehman
Brothers Holdings Inc. and the Company (incorporated by reference to
Exhibit 10.29 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).
E-3
<Page>
10.26 Registration Rights Agreement, dated as of May 27, 1994, between the
Company and Lehman Brothers Holdings Inc. (incorporated by reference
to Exhibit 10.30 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).
10.27 Letter Agreement, dated January 30, 1998, between the Company and
Nippon Life Insurance Company (incorporated by reference to Exhibit
10.24 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 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).
10.29 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).
10.30 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).
10.31 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).
10.32 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).
10.33 IDS Current Service Deferred Compensation Plan (incorporated by
reference to Exhibit 10.42 of the Company's Annual Report on Form 10-K
(Commission File No. 1-7657) for the fiscal year ended December 31,
1994).
10.34 Action to Amend IDS Current Service Deferred Compensation Plan
(incorporated by reference to Exhibit 10.7 of the Company's Quarterly
Report on Form 10-Q (Commission File No. 1-7657) for the quarter ended
March 31, 2000).
E-4
<Page>
10.35 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).
10.36 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).
10.37 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)).
10.38 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).
10.39 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).
10.40 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).
10.41 Letter agreement dated April 12, 1999 with Harvey Golub, the Company's
former Chairman and Chief Executive Officer (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 June 30, 1999).
10.42 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).
10.43 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).
10.44 Description of new hire payment to Gary L. Crittenden (incorporated by
reference to Exhibit 10.44 of the Company's Annual Report on Form 10-K
(Commission File No. 1-7657) for the year ended December 31, 2001).
E-5
<Page>
*12 Computation in Support of Ratio of Earnings to Fixed Charges.
*13 Portions of the Company's 2002 Annual Report to Shareholders that are
incorporated herein by reference.
*21 Subsidiaries of the Company.
*23 Consent of Ernst & Young LLP (contained on page F-2 of this Annual
Report on Form 10-K).
*99.1 Certification of Kenneth I. Chenault, Chief Executive Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
*99.2 Certification of 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.
E-6
<PAGE>
STATEMENT OF DIFFERENCES
The registered trademark symbol shall be expressed as........................'r'
The service mark symbol shall be expressed as...............................'sm'
Characters normally expressed as superscript shall be preceded by...........'pp'
<Page>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002 Commission File No. 1-7657
----------
American Express Company
(Exact name of Company as specified in charter)
E X H I B I T S
================================================================================
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12
<SEQUENCE>3
<FILENAME>ex121.txt
<DESCRIPTION>EXHIBIT 12
<TEXT>
EXHIBIT 12
AMERICAN EXPRESS COMPANY
COMPUTATION IN SUPPORT OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Earnings:
Pretax income from continuing operations $3,727 $1,596 $3,908 $3,438 $2,925
Interest expense 1,846 2,888 2,952 2,178 2,224
Other adjustments 174 175 163 151 124
------ ------ ------ ------ ------
Total earnings (a) $5,747 $4,659 $7,023 $5,767 $5,273
------ ------ ------ ------ ------
Fixed charges:
Interest expense $1,846 $2,888 $2,952 $2,178 $2,224
Other adjustments 151 170 165 152 129
------ ------ ------ ------ ------
Total fixed charges (b) $1,997 $3,058 $3,117 $2,330 $2,353
------ ------ ------ ------ ------
Ratio of earnings to fixed charges (a/b) 2.88 1.52 2.25 2.48 2.24
</TABLE>
Included in interest expense in the above computation is interest expense
related to the international banking operations of American Express Company (the
"Company") and Travel Related Services' Cardmember lending activities, which is
netted against interest and dividends and Cardmember lending net finance charge
revenue, respectively, in the Consolidated Statements of Income.
For purposes of the "earnings" computation, other adjustments include adding the
amortization of capitalized interest, the net loss of affiliates accounted for
at equity whose debt is not guaranteed by the Company, the minority interest in
the earnings of majority-owned subsidiaries with fixed charges, and the interest
component of rental expense and subtracting undistributed net income of
affiliates accounted for at equity.
For purposes of the "fixed charges" computation, other adjustments include
capitalized interest costs and the interest component of rental expense.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>4
<FILENAME>ex21.txt
<DESCRIPTION>EXHIBIT 21
<TEXT>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
Unless otherwise indicated, all of the voting securities of these
subsidiaries are directly or indirectly owned by the registrant. Where the name
of the subsidiary is indented, the voting securities of such subsidiary are
owned directly by the company under which its name is indented. Certain
subsidiaries have been omitted which, if considered in the aggregate as a single
subsidiary, would not constitute a significant subsidiary as defined in Rule
1-02(w) of Regulation S-X.
<TABLE>
<CAPTION>
Jurisdiction
of
Name of Subsidiary Incorporation
<S> <C>
I. American Express Travel Related Services Company, Inc.
and its Subsidiaries
American Express Travel Related Services Company, Inc. New York
Amex Canada Inc. Canada
1001675 Ontario Inc. Canada
1001674 Ontario Inc. Canada
Rexport, Inc. Canada
Amex Bank of Canada Canada
Sourcing Innovation, Inc. Canada
American Express Company (Mexico) S.A. de C.V. Mexico
American Express Centurion Bank Utah
American Express Centurion Services Corporation Delaware
American Express Credit Corporation Delaware
American Express Overseas Credit Corporation Limited Jersey,
Channel Islands
AEOCC Management Company, Ltd. Jersey,
Channel Islands
American Express Overseas Credit Corporation N.V. Netherlands Antilles
Credco Receivables Corp. Delaware
Credco Finance, Inc. Delaware
American Express Receivables Financing Corporation Delaware
American Express Receivables Financing Corporation II Delaware
American Express Tax and Business Services Inc. Minnesota
American Express TBS Investment Advisors, Inc. Delaware
American Express Tax and Business Services of New York, Inc. New York
American Express do Brasil Tempo & Cia, Inc. Delaware
Amex do Brazil Empreedimentos e Participacoes Ltda. Brazil
Amex Latin America Holdings S.L. Spain
Maximo Partners Delaware
Patrice Service Brasil Ltda. Brazil
American Express do Brasil Tempo & Cia Brazil
American Express do Brasil S.A. Turismo e Corretagen
de Seguros (51% owned) Brazil
American Express Factoring Ltda. Brazil
Optimo Brazilco L.L.C. Delaware
Optimo Partners Delaware
Quickly Brasil Ltda. Brazil
Swiss Branch Switzerland
Virtual Solution Com Ltda. Brazil
</TABLE>
1
<Page>
<TABLE>
<S> <C>
American Express Limited Delaware
American Express Argentina, S.A. Argentina
American Express (Malaysia) Sdn. Bhd. Malaysia
American Express (Thai) Co. Ltd. (78% owned Thailand
TRS Card International Inc. (75% owned) Delaware
American Express de Espana, S.A. Spain
American Express Viajes, S.A. Spain
American Express International (B) SDN.BHD. (50% owned) Brunei
Amex Travel Advisors, Limited (50% owned) Hong Kong
South Pacific Credit Card Ltd. New Zealand
Centurion Finance, Ltd. New Zealand
American Express International, Inc. Delaware
American Express Hungary KFT Hungary
American Express Company A/S Norway
American Express Locazioni Finanziarie, S.r.l. Italy
Amex Broker Assicurativo S.r.l. Italy
American Express Int'l A.E.(Greece)(99% owned) Greece
American Express Int'l (Taiwan), Inc. Taiwan
American Express of Egypt, Ltd. (34% owned) Delaware
American Express Carte France, S.A. France
AllCard Service GmbH Germany
American Express Bureau de Change S.A. Greece
AE Exposure Management Limited Jersey,
Channel Islands
American Express Travel Poland Sp.Zo.O Poland
Sociedad Internacional de Servicios de Panama, S.A. Panama
American Express Services France
Havas Voyages American Express France
Amex Sumigin Service Company, Ltd. (40% owned) Japan
American Express International Services Limited Russia
American Express Card Services Limited (95% owned) Russia
Amex Marketing Japan Limited Delaware
American Express (India) Pvt. Ltd. India
P.T. American Express Travel Indonesia (80% owned) Indonesia
American Express spol. s.r.o. Czech Republic
Nippon Card Business Co., Ltd. (25% owned) Japan
Schenker Rhenus Reisen Germany
American Express Holdings AB Sweden
American Express Company A/B Sweden
American Express Reisebyra A/B Sweden
Nyman & Schultz Grupp och Konferens AB Sweden
Resespecialisterna Syd AB Sweden
BookHotel AB Sweden
Forsakringsaktiebolaget Viator Sweden
Nyman & Schultz AB Sweden
First Card AB Sweden
Profil Reiser A/S (50% owned) Denmark
Resespecialisterna Enkoping AB (26% owned) Sweden
Stockholm Central Hotel AB Sweden
Nyman & Schultz Forretningsreiser A/S Norway
Nyman & Schultz Erhvervsrejser ApS Denmark
Amex Insurance Marketing, Inc. Taiwan
American Express Publishing Corporation New York
Southwest Media Corporation Texas
Travellers Cheque Associates, Limited (54% owned) England & Wales
</TABLE>
2
<Page>
<TABLE>
<S> <C>
Bansamex S.A. (50% owned) Spain
Amex (Middle East) E.C. (50% owned) Bahrain
Amex (Saudi Arabia Ltd.) (50% owned) Bahrain
American Express Europe Limited Delaware
American Express France Holdings I LLC Delaware
American Express France Holdings II LLC Delaware
American Express Group & Incentive Services, Inc. (90% owned) Michigan
American Express Services Europe Limited England & Wales
and Delaware
American Express Insurance Services, Ltd. England & Wales
Cardmember Financial Services, Ltd. Jersey,
Channel Islands
Integrated Travel Systems, Inc. Texas
Amex General Insurance Agency Taiwan
American Express Bank (Mexico), S.A. Mexico
American Express Incentive Services, Inc. Delaware
American Express Incentive Services, LLC (50% owned) Missouri
American Express International (NZ), Inc. Delaware
American Express Realty Management Co. Delaware
Cavendish Holdings, Inc. Delaware
American Express Business Finance Corporation Utah
Business Equipment Capital Corporation Delaware
Business Equipment Financing Corporation Delaware
First Sierra Receivables III, Inc. Delaware
Heritage Credit Services, Inc. Delaware
Independent Capital Corporation New Jersey
The Republic Group, Inc. California
Servicing Solutions, Inc. Delaware
Golden Bear Travel, Inc. Delaware
Travel Impressions, Ltd. Delaware
American Express ATM Holdings, Inc. Delaware
Americash L.L.C. Delaware
Americash, Inc. Delaware
ATM One, L.L.C. Delaware
Rosper, Inc. Delaware
American Express Global Financial Services, Inc. Delaware
Sharepeople Group Limited England
Sharepeople Limited England
American Express Voyages Tourisme France
Havas Communication Voyages France
Imex France
American Express Management France
</TABLE>
3
<Page>
<TABLE>
<S> <C>
American Express Tourisme France
American Express Travel Holdings (M) Company SDN Malaysia
Mayflower American Express Travel Services SDN BHD Malaysia
MarketMile, Inc. (51.5% owned) Delaware
BBL Travel American Express Belgium
II. American Express Financial Corporation and its Subsidiaries
American Express Financial Corporation Delaware
American Express Financial Advisors Inc. Delaware
American Express Financial Advisors Japan Inc. Delaware
IDS Real Estate Services, Inc. Delaware
American Express Trust Company Minnesota
IDS Life Insurance Company Minnesota
IDS REO 1, LLC Minnesota
American Partners Life Insurance Company Arizona
IDS Life Insurance Company of New York New York
American Enterprise Life Insurance Company Indiana
American Enterprise REO 1, LLC Minnesota
American Centurion Life Assurance Company New York
American Express Corporation Delaware
AExp Affordable Housing LLC Delaware
American Express Certificate Company Delaware
Investors Syndicate Development Corp. Delaware
American Express Insurance Agency of Alabama Inc. Alabama
IDS Insurance Agency of Arkansas Inc. Arkansas
American Express Insurance Agency of Massachusetts Inc. Massachusetts
American Express Insurance Agency of New Mexico Inc. New Mexico
IDS Insurance Agency of Ohio Inc. Ohio
American Express Insurance Agency of Texas Inc. Texas
IDS Insurance Agency of Utah Inc. Utah
American Express Insurance Agency of Wyoming Inc. Wyoming
American Express Insurance Agency of Maryland Inc. Maryland
American Express Insurance Agency of Oklahoma Inc. Oklahoma
American Express Insurance Agency of Nevada Inc. Nevada
American Express Asset Management Group Inc. Minnesota
Advisory Capital Strategies Group Inc. Minnesota
Advisory Capital Income LLC Delaware
Advisory Capital Partners LLC Delaware
Advisory Select LLC Delaware
American Express Asset Management International (Japan) Ltd. Japan
IDS Capital Holdings Inc. Minnesota
American Express Asset Management International Inc. Delaware
American Express Asset Management Ltd. England
IDS Management Corporation Minnesota
IDS Partnership Services Corporation Minnesota
IDS Cable Corporation Minnesota
IDS Futures Corporation Minnesota
IDS Realty Corporation Minnesota
IDS Cable II Corporation Minnesota
IDS Property Casualty Insurance Company Wisconsin
Amex Assurance Company Illinois
American Express Property Casualty Insurance Agency Inc. California
American Enterprise Investment Services Inc. Minnesota
American Express Insurance Agency of Arizona Inc. Arizona
American Express Insurance Agency of Idaho Inc. Idaho
American Express Property Casualty Insurance
Agency of Kentucky Inc. Kentucky
American Express Client Service Corporation Minnesota
American Express Property Casualty Insurance
Agency of Maryland Inc. Maryland
</TABLE>
4
<Page>
<TABLE>
<S> <C>
American Express Property Casualty Insurance
Agency of Mississippi Inc. Mississippi
American Express Property Casualty Insurance
Agency of Pennsylvania Inc. Pennsylvania
American Express Insurance Agency of Oregon Inc. Oregon
Securities America Financial Corporation Nebraska
Realty Assets, Inc. Nebraska
Securities America Advisors, Inc. Nebraska
Securities America, Inc. Nebraska
Securities America Insurance Agency of Alabama Alabama
Securities America Insurance Agency of Massachusetts Massachusetts
Securities America Insurance Agency of New Mexico New Mexico
Securities America Insurance Agency of Ohio Ohio
Securities America Insurance Agency of Wyoming Wyoming
American Express Personal Trust Services, FSB Minnesota
Kenwood Capitol Management LLC (51.1% owned) Delaware
Northwinds Marketing Group LLC (50.1% owned) Delaware
American Express International Deposit Corp.
(50% owned and 50% owned by AEBL) Cayman Islands
American Express Asset Management (Australia) Limited Australia
III. American Express Banking Corp. and its Subsidiaries
American Express Banking Corp. New York
American Express Bank Ltd. Connecticut
Amex Holdings, Inc. Delaware
American Express Bank GmbH Germany
AEB - International Portfolios Management Company Luxembourg
Egyptian American Bank (41% owned) Egypt
Amtrade Holdings, Inc. Delaware
American Express Bank (Switzerland) S.A. Switzerland
International Trade Services Pte Ltd. Singapore
Amex International Trust (Guernsey) Limited Guernsey,
Channel Islands
Etoral Finance, Inc. Panama
Sociedad Del Desarrollo Mercantil Ltda. (50% owned) Chile
Remor and Associates Inc. Panama
American Express Bank Asset Management (Cayman) Limited Cayman Islands
American Express Bank (Luxembourg) S.A. Luxembourg
AEB WorldFolio Capital Preservation Management Co. S.A. Luxembourg
American Express Bank (Uruguay) S.A. Uruguay
Amex International Trust (Cayman) Ltd. Cayman Islands
OLP Investments Ltd. Cayman Islands
Rilanex Participations N.V. Netherlands Antilles
American Express Bank (France) S.A. France
Amex Gestion S.A. France
American Express Bank International United States
Argentamex S.A. Argentina
Amex Nominees (S) Pte Ltd. Singapore
Amex Bank Nominee Hong Kong Limited Hong Kong
First International Investment Bank Ltd. (20% owned) Pakistan
American Express (Poland) Ltd. Delaware
Inveramex Chile Ltda. Chile
Amex Immobiliaria Ltda.(99% owned) Chile
American Express Bank, S.A. Argentina
AEB Global Asset Management Inc. New York
</TABLE>
5
<Page>
<TABLE>
<S> <C>
American Express Bank (Philippines) Inc. Philippines
American Express Bank (Brazil) Brazil
AEB Global Trading Investments, Ltd. British Virgin Islands
Amex NLG Holdings, LLC Delaware
American Express International Deposit Company Cayman Islands
Bankpar Participacoes Ltda. Brazil
Banco Inter American Express S.A. Brazil
Inter American Express Arrendamento
Mercantil, S.A. (95% owned) Brazil
Inter American Express Consultoria E Servicos Ltda. Brazil
MS Representacoes E Participacoes Ltda. Brazil
MS Trading S.A. Brazil
Inter American Express Overseas Ltd. Brazil
Inter American Express Bank Ltd. Brazil
Imagra Imobiliaria E Agricola S.A. Brazil
Capital Promotora de Vendas Ltda. Brazil
The American Express Nominees Limited (98% owned) England & Wales
Amexnet Limited England
Tata Finance Ltd. (3% owned) India
Tata Finance Amex Private Limited (35% owned) India
IV. Other Subsidiaries of the Registrant
Acuma Financial Services Ltd. Delaware
Acuma Ltd. Delaware
Ainwick Corporation Texas
American Express Asset Management Holdings, Inc. Delaware
Amexco Insurance Company Vermont
Amexco Risk Financing Holding Co. Delaware
Amex Assurance Company Illinois
checks-on-line, Inc. Delaware
National Express Company, Inc. New York
The Balcor Company Holdings, Inc. Delaware
The Balcor Company Delaware
Balcor Securities Company Illinois
Balcor Management Services, Inc. Illinois
International Capital Corp. Delaware
Intercapital Comercio e Participacoes Ltda. Brazil
Conepar Compania Nordestina de Participacoes S.A. (37% owned) Brazil
Acamex Holdings, Inc. Cayman Islands
Etisa Holdings Ltd. Cayman Islands
Empresas Turisticas Integradas, S.A. de C.V. (98% owned) Mexico
Floriano Representacoes Ltda. Brazil
International Capital Corp. (Ltd.) Cayman Cayman Islands
Rexport, Inc. Delaware
Drillamex, Inc. Delaware
UMPAWAUG I Corporation Delaware
UMPAWAUG II Corporation Delaware
UMPAWAUG III Corporation Delaware
UMPAWAUG IV Corporation Delaware
</TABLE>
6
<Page>
<TABLE>
<S> <C>
Daedalus Leasing Corp. New York
Dash 200 + Ltd. (50% owned) Cayman Islands
Nora Leasing, Inc. New York
Gemini Leasing Ltd. Cayman Islands
Far East Leasing Ltd. Cayman Islands
56th Street AXP Campus LLC (AZ) Arizona
FRC West Property L.L.C. Arizona
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.1 CERT KIC
<SEQUENCE>5
<FILENAME>ex99-1.txt
<DESCRIPTION>EXHIBIT 99.1
<TEXT>
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of American Express Company
(the "Company") for the fiscal year ended December 31, 2002, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), Kenneth I.
Chenault, as Chief Executive Officer of the Company, hereby certifies, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Kenneth I. Chenault
- -------------------------------------
Name: Kenneth I. Chenault
Title: Chief Executive Officer
Date: March 26, 2003
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.2 CERT GC
<SEQUENCE>6
<FILENAME>ex99-2.txt
<DESCRIPTION>EXHIBIT 99.2
<TEXT>
EXHIBIT 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of American Express Company
(the "Company") for the fiscal year ended December 31, 2002, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), Gary L.
Crittenden, as Chief Financial Officer of the Company, hereby certifies,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Gary L. Crittenden
- -------------------------------------
Name: Gary L. Crittenden
Title: Chief Financial Officer
Date: March 26, 2003
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>7
<FILENAME>ex13.txt
<DESCRIPTION>EXHIBIT 13
<TEXT>
EXHIBIT 13
FINANCIAL REVIEW
INTRODUCTION
The financial section of the American Express Company's Annual Report consists
of this Financial Review, the Consolidated Financial Statements that follow
and the related notes. This introduction is designed to provide some
perspective regarding the information contained in the financial section.
BUSINESS OPERATIONS
American Express Company (the company) is primarily engaged in the business of
providing travel related services, financial advisory services and
international banking services throughout the world. The company generates
revenue from a variety of sources including global payments such as charge and
credit cards; travel services including airline, hotel and rental car
reservations; and a wide range of retail financial service products.
FINANCIAL REPORTING
The company follows accounting principles generally accepted in the United
States (GAAP). In addition to information provided on a GAAP basis, the
company discloses certain data on a "managed basis." These data, which should
be read only as a supplement to GAAP information, assume there have been no
securitization transactions, i.e., as if all securitized cardmember loans and
related income effects are reflected in the company's balance sheet and income
statement. See Travel Related Services' and American Express Financial
Advisors' Results of Operations sections for further discussion of and reasons
for this approach.
ORGANIZATION OF INFORMATION
o This Financial Review section (pages 26 to 53) is designed to provide
the reader of the financial statements with a narrative on the
company's financial results. It discusses the results of operations
and liquidity and capital resources on a consolidated basis and for
each segment of the business.
o The Consolidated Financial Statements (pages 54 through 57) include
the company's income and cash flow performance and its financial
position.
o The Notes to the Consolidated Financial Statements (pages 58 to 84)
contain the company's accounting policies (pages 58 through 63),
detailed information on balances within the financial statements,
certain contingencies and commitments (pages 72 and 73), and the
results of each of the company's segments (page 81).
o The Report of Management (page 85) describes management's
responsibilities regarding the company's financial statements.
o The Report of Independent Auditors (page 86) contains the opinion of
Ernst & Young LLP regarding the company's financial statements.
CONSOLIDATED RESULTS OF OPERATIONS
The company's 2002 financial results reflect solid growth in the company's
card businesses, lower expenses due to the success of ongoing reengineering
programs, strong credit quality and the benefits of lower funding costs.
The company reported 2002 net income and diluted earnings per share (EPS) of
$2.67 billion and $2.01, respectively, up significantly from $1.31 billion and
$0.98, respectively, in 2001, which were both 53 percent lower than 2000. The
2001 results included restructuring charges of $631 million ($411 million
after-tax), $98 million ($65 million after-tax) of one-time costs and waived
customer fees resulting from the September 11th terrorist attacks, and a
charge of $1.01 billion ($669 million after-tax) reflecting losses in the
high-yield portfolio at American Express Financial Advisors (AEFA).
On a trailing 12-month basis, return on average shareholders' equity was 20.6
percent.
The following discussion is presented on a basis consistent with GAAP unless
otherwise noted.
Consolidated revenues were $23.8 billion, up 5 percent from $22.6 billion in
2001 reflecting 2 percent growth at Travel Related Services (TRS), 17 percent
growth at AEFA and 15 percent growth at American Express Bank (AEB). 2001
revenues were 5 percent lower than 2000. As discussed in further detail below,
the increase in 2002 was due primarily to higher discount
1 (2002 Annual Report p. 26)
<Page>
and lending net finance charge revenue from greater spending and borrowing on
American Express cards, higher interest and dividends primarily from the
investment portfolio of AEFA, higher income from securitization activities at
TRS, as well as higher card fee revenue. These increases were partially offset
by lower management fees, weaker travel revenues and reduced other revenues.
2001 consolidated revenues declined due to lower interest and dividends on
AEFA's investment portfolio, which reflect the investment losses mentioned
earlier, weaker travel revenues and lower management and distribution fees.
Discount revenue rose 3 percent during 2002 as a result of a 4 percent
increase in billed business partially offset by a lower discount rate.
Discount revenue fell 1 percent in 2001 as a slight increase in billed
business was more than offset by a lower discount rate.
Interest and dividends increased 40 percent over 2001, which was 35 percent
lower than 2000. The increase in 2002 and the decrease in 2001 are both
primarily due to AEFA's $1.01 billion of investment losses during 2001
mentioned previously.
Management and distribution fees declined 7 percent in 2002 due to lower
average assets under management, partially offset by higher distribution fees.
The distribution fee increase is the result of lower mutual fund sales being
more than offset by other product related sales increases. In 2001, management
and distribution fees declined 13 percent due to lower average assets under
management and weaker sales, particularly in mutual fund products, reflecting
the negative impact of weak equity market conditions throughout the year.
Income from securitizations at TRS rose 35 percent in 2002 and 42 percent in
2001 primarily driven by a higher average balance of cardmember lending
securitizations as well as higher portfolio yields.
Net card fees increased slightly in 2002 and 2001, reflecting the growth in
cards-in-force in both years. The average fee per card remained at $34 in both
2002 and 2001, down from $36 in 2000, reflecting the mix shift toward lower
and no fee products.
Cardmember lending net finance charge revenue at TRS grew 4 percent during
2002 primarily due to improved spreads reflecting the benefits of improved
funding costs coupled with an overall decrease in the proportion of the
portfolio on introductory rates. In 2001, cardmember lending net finance
charge revenue at TRS rose 14 percent from higher worldwide lending balances
and wider net interest margins.
Travel commissions and fees declined 8 percent in 2002 as a result of a 10
percent contraction in travel sales reflecting the weaker corporate travel
environment throughout the year. Travel commissions and fees declined 16
percent in 2001 as a result of a 24 percent contraction in travel sales due to
the effects of the September 11th terrorist attacks and the weaker corporate
travel environment.
All other revenues decreased 4 percent in 2002, including a 10 percent
decrease at TRS, versus a 4 percent increase in 2001, including a 1 percent
decrease at TRS. The decrease in 2002 included significantly lower interest
income on investments held within card funding vehicles partially offset by
higher insurance related revenues. The 2001 increase was primarily driven by
higher insurance related revenues.
Consolidated expenses decreased 4 percent in 2002 reflecting a 5 percent
decrease at TRS, a 1 percent decrease at AEFA and a 6 percent decrease at AEB.
These declines were due to lower funding costs, a decline in human resources
expense, reduced provisions for losses and benefits and the benefits of
reengineering activities and expense control initiatives. Consolidated
expenses increased 6 percent in 2001 primarily due to larger provisions for
losses and benefits and the impact of the restructuring charges and one-time
costs and waived customer fees noted previously.
Human resources expense declined in both 2002 and 2001 primarily as a result
of a 15 percent reduction in the number of employees since the beginning of
2001 and the benefit of reengineering activities over the past two years,
including the impact of a technology outsourcing agreement which had the
effect of moving certain technology related costs from human resources expense
to professional services expense.
Total provisions for losses and benefits declined 3 percent in 2002, resulting
from a 20 percent reduction in the charge card provision at TRS due to strong
credit quality, reflected in an improved past due rate and net loss ratio, and
an 8 percent reduction in provision for losses and benefits on annuities and
investment certificates, primarily due to lower crediting rates on the
investment certificate product. These decreases were partially offset by a 14
percent increase in life insurance,
2 (2002 Annual Report p.27)
<Page>
international banking and other provisions and a 4 percent increase in
cardmember lending provisions at TRS. Total provisions for losses and benefits
in 2001 increased 20 percent primarily due to a 48 percent increase in the
cardmember lending provision at TRS, which was largely the result of portfolio
growth and maturation; a 31 percent increase in life insurance, international
banking and other provisions; and a 19 percent increase in charge card
provisions at TRS, primarily due to higher volumes and generally weaker
economic and business conditions.
Professional services expense rose 22 percent and 8 percent during 2002 and
2001, respectively. The increase in 2002 is primarily the result of the
technology outsourcing agreement discussed earlier.
Marketing and promotion expense increased 19 percent in 2002 primarily due to
an 18 percent increase at TRS relating to the launch of the new brand
advertising campaign and the introduction of new card products. In 2001,
marketing and promotion expense declined 14 percent, primarily due to a
similar 14 percent decrease at TRS, as certain marketing efforts were
rationalized in light of the weaker business environment.
Occupancy expense decreased 7 percent in 2002 primarily due to the benefits of
reengineering activities. Occupancy expense increased slightly in 2001 versus
2000.
Interest expense declined 28 percent in 2002 including a 31 percent decrease
in charge card interest expense at TRS primarily due to the benefit of a lower
effective cost of funds. Interest expense increased 11 percent in 2001
including a 20 percent increase at TRS primarily as a result of higher
borrowing rates.
Other expenses rose 16 percent in 2002 including a 20 percent increase at TRS,
while 2001 expenses were relatively unchanged from 2000 levels. The increases
in 2002 resulted primarily from higher expenses related to cardmember loyalty
programs, losses on certain strategic investments versus gains in the prior
year, and increases in deferred acquisition costs (DAC) related expenses,
including a $44 million net increase in DAC expenses in the third quarter of
2002 as a result of a comprehensive review of the company's DAC related
practices. See AEFA's Results of Operations for further discussion of DAC.
In the third and fourth quarters of 2001, the company recorded aggregate
restructuring charges of $631 million ($411 million after-tax). The aggregate
restructuring charges consisted of $369 million for severance related to the
original plans to eliminate approximately 12,900 jobs and $262 million of exit
costs primarily consisting of $138 million of charges related to consolidation
of real estate facilities, $35 million of asset impairment charges, $26
million in loss provisions, $25 million in contract termination costs and $24
million of currency translation losses.
During 2002, the company adjusted the 2001 restructuring charges by taking
back into income a net pretax amount of $31 million which is comprised of the
reversal of severance and related benefits of $62 million partially offset by
additional net exit costs related to various office facilities of $31 million.
Additionally, during 2002, the company recorded restructuring charges of $24
million, of which $19 million was recorded at TRS and $5 million was recorded
at AEB. These new charges primarily relate to certain international operations
and consist of $17 million of severance and related benefits and $7 million of
other exit costs. See Note 19 to the Consolidated Financial Statements for
further information.
The estimated savings realized from restructuring initiatives during 2002 was
approximately $0.6 billion. Further, the company expects the savings for 2003
to be approximately $0.7 billion, a portion of which will flow through to
earnings in the form of improved operating expense margins. The rest is
expected to be reinvested into business areas with high-growth potential.
In the third quarter of 2001, the company incurred $98 million ($65 million
after-tax) of one-time costs and business interruption losses related to the
September 11th terrorist attacks. These losses included provisions for credit
exposures to travel industry service establishments and insurance claims, as
well as approximately $8 million of waived finance charges and late fees.
Further, during 2002, $7 million ($4 million after-tax) of this amount was
reversed as a result of lower than anticipated insured loss claims. As of
December 31, 2002, the company incurred total expenditures of approximately
$198 million related to the terrorist attacks of September 11th, which are
expected to be substantially covered by insurance and, consequently, did not
impact results.
3 (2002 Annual Report p.28)
<Page>
Effective January 1, 2002, the company adopted Statement of Financial
Accounting Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets,"
which established new accounting and reporting standards for goodwill and
other intangible assets. Under the new rules, goodwill and other intangible
assets deemed to have indefinite lives are no longer amortized but are instead
subject to annual impairment tests. Management completed goodwill impairment
tests as of the date of initial adoption and again during 2002. Such tests did
not indicate impairment.
The following table presents the impact to net income and EPS of goodwill
amortization for the year ended December 31, 2001:
<Table>
<Caption>
(Millions, except per share amounts)
Net Income Basic EPS Diluted EPS
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reported $ 1,311 $0.99 $ 0.98
Add back: Goodwill amortization (after-tax) $ 82 $0.06 $ 0.06
- --------------------------------------------------------------------------------------------------------------
Adjusted $ 1,393 $1.05 $ 1.04
==============================================================================================================
</Table>
Looking forward in 2003, the company expects continued uncertainty in the
economy and financial markets. In addition, the prospect of war and other
geopolitical uncertainty could have a negative impact on the economy, consumer
confidence and the company's results.
CERTAIN CRITICAL ACCOUNTING POLICIES
The company's significant accounting policies are described in Note 1 to the
Consolidated Financial Statements. The following provides information about
certain critical accounting policies that are important to the Consolidated
Financial Statements and that involve estimates requiring significant
management assumptions and judgments about the effect of matters that are
uncertain. These policies relate to reserves for cardmember credit losses,
Membership Rewards costs, investment securities valuation and deferred
acquisition costs.
PROVISIONS FOR CREDIT LOSSES
Provisions for credit losses related to cardmember loans and receivables is
one of the largest operating expenses of the company. The company's reserves
for credit losses represent management's estimate of the amount necessary to
absorb future credit losses inherent in the company's outstanding portfolio of
loans and receivables. Management's evaluation process requires numerous
estimates and judgments. Reserves for these credit losses are primarily based
upon models which analyze portfolio statistics and management's judgment. The
analytic models take into account numerous factors, including average
write-off rates for various stages of receivable aging (i.e., current, 30
days, 60 days, 90 days) over a 24-month period, average bankruptcy rates and
average recovery rates. In exercising its judgment in setting reserve levels,
management considers levels derived from these models and external indicators,
such as leading economic indicators, unemployment rate, consumer confidence
index, purchasing manager's index, bankruptcy filings and the regulatory
environment. Loans are charged-off when management deems amounts to be
uncollectible, which is generally determined by the number of days the amount
is past due. To the extent historical credit experience is not indicative of
future performance or other assumptions used by management do not prevail,
loss experience could differ significantly, resulting in either higher or
lower future provisions for credit losses, as applicable.
MEMBERSHIP REWARDS COSTS
The company's Membership Rewards loyalty program allows enrolled cardmembers
to earn points that can be redeemed for a broad range of travel rewards,
retail merchandise and gourmet gifts. The company makes payments to its reward
partners when cardmembers redeem their points and establishes reserves to
cover the cost of future reward redemptions. The provision for the cost of
Membership Rewards is based upon points awarded which are ultimately expected
to be redeemed by cardmembers and the current weighted average cost per point
of redemption. The ultimate points to be redeemed are estimated based on many
factors, including a review of past behavior of cardmembers segmented by
product, year of enrollment in the program, spend level and duration in the
program. Past behavior is used to predict when current enrollees will attrite
and their ultimate redemption rate. In addition, the cumulative balance sheet
liability for unredeemed points is adjusted over time based on actual
redemption and cost experience as well as current trends with respect to
redemptions. To the extent that the estimates differ from actual experience,
the company's future Membership Rewards program cost could be higher or lower,
as applicable.
4 (2002 Annual Report p.29)
<Page>
INVESTMENT SECURITIES VALUATION
Generally, investment securities are carried at fair value on the balance
sheet with unrealized gains (losses) recorded in equity, net of income tax
provisions (benefits). Gains and losses are recognized in the results of
operations upon disposition of the securities. In addition, losses are also
recognized when management determines that a decline in value is
other-than-temporary, which requires judgment regarding the amount and timing
of recovery. Indicators of other-than-temporary impairment for debt securities
include issuer downgrade, default or bankruptcy. The company also considers
the extent to which cost exceeds fair value, the duration of time of that
decline, and management's judgment about the issuer's current and prospective
financial condition. Fair value is generally based on quoted market prices.
However, the company's investment portfolio also contains structured
investments of various asset quality, including collateralized debt
obligations (CDOs) and secured loan trusts (backed by high-yield bonds and
bank loans), which are not readily marketable. As a result, the carrying
values of these structured investments are based on cash flow projections
which require a significant degree of management judgment as to default and
recovery rates of the underlying investments and, as such, are subject to
change. If actual future cash flows are less than projected, additional losses
would be realized.
DEFERRED ACQUISITION COSTS
AEFA's 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 annuity, insurance and certain mutual fund
products. For annuity and insurance products, DAC are amortized over periods
approximating the lives of the business, generally as a percentage of premiums
or estimated gross profits or as a portion of the interest margins associated
with the products. For certain mutual fund products, DAC are generally
amortized over fixed periods on a straight-line basis.
For annuity and insurance products, the projections underlying the
amortization of DAC require the use of certain assumptions, including interest
margins, mortality rates, persistency rates, maintenance expense levels and
customer asset value growth rates for variable products. Management routinely
monitors a wide variety of trends in the business, including comparisons of
actual and assumed experience. Management reviews and, where appropriate,
adjusts its assumptions with respect to customer asset value growth rates on a
quarterly basis. Management monitors other principal DAC assumptions, such as
persistency, mortality rate, interest margin and maintenance expense level
assumptions, each quarter. Unless management identifies a material deviation
over the course of the quarterly monitoring, management reviews and updates
these DAC assumptions annually in the third quarter of each year. When
assumptions are changed, the percentage of estimated gross profits or portion
of interest margins used to amortize DAC may also change. A change in the
required amortization percentage is applied retrospectively; an increase in
amortization percentage will result in an acceleration of DAC amortization
while a decrease in amortization percentage will result in a deceleration of
DAC amortization. The impact on results of operations of changing assumptions
with respect to the amortization of DAC can be either positive or negative in
any particular period, and is reflected in the period in which such changes
are made.
CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES
The company believes allocating capital to its growing businesses with a
return on risk-adjusted equity in excess of their cost of capital will
continue to build shareholder value. The company's philosophy is to retain
earnings sufficient to enable it to meet its growth objectives, and, to the
extent capital exceeds investment opportunities, return excess capital to
shareholders. The company has indicated that, assuming it achieves its
financial objectives of 12-to-15% EPS growth, 18-to-20% return on equity
growth and 8% revenue growth, on average and over time, it will seek to return
an average of 65 percent of capital generated each year to shareholders.
Liquidity refers to the company's ability to meet its current and future cash
needs primarily by issuing debt and securitizing receivables and, to a lesser
extent, by selling investments. In addition, the company maintains committed
back-up lines of credit. The company's liquidity is managed by its Treasury
department. Additionally, the company's liquidity needs are reviewed on an
ongoing basis including analyses of severe stress scenarios.
5 (2002 Annual Report p.30)
<Page>
SHARE REPURCHASES
The company has in place a share repurchase program both to offset in whole or
in part the issuance of new shares as part of employee compensation plans and
to reduce shares outstanding. In June 2002, the company announced that it had
resumed its share repurchase program after suspending it at the end of the
second quarter of 2001 due to the negative effect on book equity of the 2001
high-yield portfolio losses at AEFA.
The company repurchases its common shares primarily by open market purchases
using several brokers at competitive commission and fee rates. In addition,
common shares may also be purchased from the company-sponsored Incentive
Savings Program (ISP) to facilitate the ISP's required disposal of shares when
employee-directed activity results in an excess common share position. Such
purchases are made at market price without commissions or other fees.
Repurchases may also be accomplished by prepayments for cash under the
company's agreements with third parties, which are described below. During
2002, the company repurchased 33 million common shares at an average price of
$35. Since the inception of the share repurchase program in September 1994,
390 million shares have been acquired under authorizations to repurchase up to
570 million shares, including purchases made under the agreements with third
parties. Included in the 2002 repurchase amount are 17 million shares
delivered to the company as part of the prepayments discussed below.
In August 1999 and March 2000, the company entered into agreements under which
a financial institution purchased an aggregate 29.5 million of the company's
common shares at an average purchase price of $50.41 per share. These
agreements were entered into to partially offset the company's exposure to the
effect on diluted earnings per share of outstanding in-the-money stock options
issued under the company's stock option program. Each of the agreements
terminates after five years, at which time the company is required to deliver
an amount equal to the original purchase price for the shares. The company may
elect to settle this amount at any time (i) physically, by paying cash against
delivery of the shares held by the financial institution or (ii) on a net cash
or net share basis. During the term of these agreements, the company, on a
monthly basis, will either receive from or issue to the financial institution
a quantity of shares so that the value of the remaining shares held by the
financial institution is equal to the original aggregate purchase price.
The contracts were initially recorded at their fair value within equity on the
company's balance sheet in accordance with Emerging Issues Task Force (EITF)
Issue 00-19, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock." Subsequent activity is
recorded in equity as long as the contracts continue to meet the requirements
of EITF Issue 00-19. Net settlements under the agreements resulted in the
company issuing 0.4 million shares and 12.3 million shares in 2002 and 2001,
respectively. The company has the right to terminate these agreements at any
time upon full settlement. The company may prepay outstanding amounts at any
time prior to the end of the five-year term, and from time to time, may make
such prepayments in lieu of, or in addition to, its share repurchase program,
which either separately or together would be expected to have the same effect
on outstanding shares as a purchase under the share repurchase program. In
2002 and 2001, the company elected to prepay $600 million and $350 million,
respectively, of the aggregate outstanding amount. At December 31, 2002, 15.3
million shares of the company's common stock continued to be held by the
financial institution in support of the remaining balance of approximately
$535 million.
To the extent that the price of the company's common stock declines to levels
substantially lower than current levels for a sustained period of time, there
could be an adverse impact on basic and diluted earnings per share. The
maximum number of company common shares that could potentially be distributed
pursuant to these agreements would not exceed 62 million shares as adjusted
for shares delivered by the company and shares delivered to the company.
6 (2002 Annual Report p.31)
<Page>
OFF-BALANCE SHEET ARRANGEMENTS AND CERTAIN CONTRACTUAL OBLIGATIONS
The company's off-balance sheet arrangements and contractual obligations
include:
RELATED TO STRUCTURED INVESTMENTS
o $17.1 billion of securitized U.S. cardmember and equipment lease
receivables described further in Note 4 of the Consolidated Financial
Statements.
o $1.5 billion of book value relating to certain structured
investments, including collateralized debt obligations and secured
loan trusts, which are both managed and partially owned by the
company, described further in Note 2 to the Consolidated Financial
Statements. These structured investments may be considered variable
interest entities under Financial Accounting Standards Board (FASB)
Interpretation No. 46, "Consolidation of Variable Interest Entities"
(FIN 46), as discussed in Note 1 of the Consolidated Financial
Statements. See also AEFA Results of Operations section.
OTHER OFF-BALANCE SHEET ITEMS AND GUARANTEES
o $126 billion of unused credit available to cardmembers, as part of
established lending product agreements. Total unused credit available
to cardmembers does not represent potential future cash requirements
as a significant portion of this unused credit may not be drawn. The
company's charge card products have no pre-set spending limit and,
therefore, are not reflected herein.
o $3.8 billion of committed payments for worldwide business
arrangements, principally related to TRS.
o $2.4 billion of minimum aggregate rental commitments under all
noncancellable operating leases (net of subleases); $0.3 billion in
less than one year, $0.6 billion in one through three years, and the
remainder thereafter.
o $1.0 billion of loan commitments and other lines of credit, nearly
all of which matures in less than one year.
o $1.4 billion of bank standby letters of credit and bank guarantees
and commercial and other letters of credit, $1.2 billion maturing in
less than one year, the remainder maturing in one to three years.
$0.9 billion is within the scope of FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" (FIN 45),
and therefore is included in Note 11 to the Consolidated Financial
Statements. At December 31, 2002, the company held $684 million and
$148 million of collateral supporting standby letters of credit and
guarantees, and commercial and other letters of credit, respectively.
o $86 billion related to TRS cardmember protection plans, as well as
other guarantees in the ordinary course of business that are within
the scope of FIN 45, and therefore included in Note 11 to the
Consolidated Financial Statements. Expenses relating to claims under
these guarantees did not exceed $60 million in 2002.
LONG-TERM DEBT
o $16.3 billion of long-term debt, $8.4 billion maturing in less than
one year, $7.1 billion maturing in one through three years, and the
remainder maturing thereafter.
In addition to the items that are listed above, the company has entered into
other contracts in the normal course of business that involve potential future
cash payments, which are either required or contingent upon the occurrence of
certain events. Management believes payments under these contracts will not
have a material adverse impact on liquidity.
FINANCING ACTIVITIES
The company's most significant borrowing and liquidity needs are associated
with TRS' card businesses. TRS pays merchants for card transactions and bills
cardmembers accordingly. TRS funds merchant payments during the period
cardmember loans and receivables are outstanding. See TRS' Liquidity and
Capital Resources section for further discussion regarding TRS' specific
financing activities, including the owned receivable portfolio. AEFA's
borrowing needs are less significant as its funds are generated through
operations, primarily by the sale of insurance, annuity, or certificate
products. AEB's principal funding source is customer deposits. It could
experience a tightening of liquidity if customer deposits were withdrawn to
the extent that loans, which are generally not readily marketable, would have
to be liquidated. Such a tightening, which is not expected to occur, could be
funded, among other means, by the sale of investment securities.
7 (2002 Annual Report p.32)
<Page>
The company's credit ratings are critical to maintaining short-term funding
sources and determining related interest costs. Rating agencies review factors
such as capital adequacy, liquidity, business volumes, asset quality and
economic market trends, among others, in assessing the company's appropriate
ratings. See Risk Management section below for a discussion of the potential
effects of a rating downgrade.
The company maintains sufficient equity capital to support its businesses.
Discretion is maintained to shift capital among business units as appropriate.
For example, the company may infuse additional capital into subsidiaries to
maintain capital at targeted levels, which include consideration of debt
ratings and regulatory requirements. These infused amounts can affect both
Parent Company capital and liquidity levels. The company maintains flexibility
to manage these effects, including the issuance of public debt or the
reduction of projected common share buybacks. Additionally, the company may
transfer short-term funds within the company to meet liquidity needs, subject
to and in compliance with various contractual and regulatory constraints.
The Parent Company generally funds shareholder dividends and other general
corporate financing needs through an intercompany dividend policy. The Board
of Directors has authorized a Parent Company commercial paper program
supported by a $1 billion multi-purpose credit facility that expires in
increments through 2007. There was no Parent Company commercial paper
outstanding during 2002 or 2001, and no borrowings have been made under this
credit facility.
Total Parent Company long-term debt outstanding was $2.7 billion and $2.1
billion at December 31, 2002 and 2001, respectively. During 2002, the Parent
Company issued $750 million of 3.75% notes due 2007, using the proceeds for
general corporate purposes. At December 31, 2002 and 2001, the Parent Company
had $2.8 billion and $3.6 billion, respectively, of debt or equity securities
available for issuance under shelf registrations filed with the Securities and
Exchange Commission (SEC).
The company maintained committed back-up lines of credit totaling $11.5
billion (including the $1.0 billion at the Parent Company mentioned earlier)
at December 31, 2002. The availability of the credit lines is subject to the
company's compliance with certain financial covenants, including the
maintenance by the company of consolidated tangible net worth of at least
$7.75 billion, the maintenance by American Express Credit Corporation
(Credco), a wholly-owned subsidiary of TRS, of a 1.25 ratio of combined
earnings and fixed charges to fixed charges, and the compliance by American
Express Centurion Bank (Centurion Bank), a wholly-owned subsidiary of TRS,
with applicable regulatory capital adequacy guidelines. At December 31, 2002,
the company's consolidated tangible net worth was approximately $12 billion,
Credco's ratio of combined earnings and fixed charges to fixed charges was
1.38 and Centurion Bank exceeded the Federal Deposit Insurance Corporation's
"well capitalized" regulatory capital adequacy guidelines.
In addition, TRS, Centurion Bank, Credco, American Express Overseas Credit
Corporation Limited, a wholly-owned subsidiary of Credco, and AEB have
established programs for the issuance, outside the United States, of debt
instruments to be listed on the Luxembourg Stock Exchange. The maximum
aggregate principal amount of debt instruments outstanding at any one time
under the program will not exceed $6.0 billion. At December 31, 2002 and 2001,
$0.5 billion and $1.3 billion of debt, respectively, was outstanding under
this program.
RISK MANAGEMENT
The company's risk management objective is to monitor and control risk
exposures to earn returns commensurate with the appropriate level of risk
assumed. Management establishes and oversees implementation of Board-approved
policies covering the company's funding, investments and the use of derivative
financial instruments. The company's Treasury department, along with various
asset and liability committees in its business segments, is responsible for
managing financial market risk exposures within the context of Board-approved
policies. See Note 9 to the Consolidated Financial Statements for a discussion
of the company's use of derivatives.
The Corporate Risk Management Committee (CRMC) supplements the risk management
capabilities resident within the business segments by routinely reviewing key
financial market, credit, operational and other risk concentrations across the
company and recommending action where appropriate. The CRMC promotes a
rigorous understanding of risks across the company and supports senior
management in making risk-return decisions.
Hedging strategies for financial market risk exposures are established,
maintained and monitored by the company's Treasury department. A variety of
strategies and instruments are employed to manage interest rate, foreign
currency and equity market
8 (2002 Annual Report p.33)
<Page>
exposures. The extent of the company's unhedged exposures varies over time
based on current foreign exchange and interest rates, equity market levels,
the macro-economic environment and the hedging impact on particular business
objectives.
Management considers the risk of liquidity and cost of funds from the
company's financing activities. Management believes a decline in the company's
long-term credit rating by two levels could result in the company having to
significantly reduce its commercial paper and other short-term borrowings and
replace them, in part, by drawing on existing credit lines. Remaining
borrowing requirements would be addressed through other means such as
additional securitizations, increased deposit taking and the sale of
investment securities. This would result in higher interest expense on the
company's commercial paper and other debt, as well as higher fees related to
unused lines of credit. The company believes a two level downgrade is unlikely
due to its capital position and growth prospects.
The company's foreign exchange exposures arise primarily from cross-currency
charges made by cardmembers, as well as from cash flow and balance sheet
exposures denominated in foreign currencies. The company primarily uses spot
and forward foreign exchange contracts to manage the cross border transaction
exposures resulting from cardmember cross border spending in which the
merchant transaction currency differs from the billing currency.
In addition, the company funds a portion of its local currency operations by
raising U.S. dollar funding and converting U.S. dollars to local currency
through foreign exchange derivative contracts. These foreign exchange
instruments are sometimes combined with interest rate swaps to achieve the
desired level of local market interest rate risk. Finally, the U.S. dollar
value of anticipated future earnings in foreign currencies is economically
managed from time to time using foreign exchange forward contracts.
The company also uses master netting agreements which allow the company to
settle multiple contracts with a single counterparty in one net receipt or
payment in the event of counterparty default.
The risk management sections for each segment include sensitivity analyses of
different types of market risk and estimate the effects of hypothetical sudden
and sustained changes in the applicable market conditions on the ensuing
year's earnings, based on year-end positions. The market changes, assumed to
occur as of year-end, are a 100 basis point increase in market interest rates,
a 10 percent strengthening of the U.S. dollar versus all other currencies, and
a 10 percent decline in the value of equity securities under management at
AEFA. Computations of the prospective effects of hypothetical interest rate,
foreign exchange rate and equity market changes are based on numerous
assumptions, including relative levels of market interest rates, foreign
exchange rates and equity prices, as well as the levels of assets and
liabilities. The hypothetical changes and assumptions will be different from
what actually occurs in the future. Furthermore, the computations do not
incorporate actions that management could take if the hypothetical market
changes actually occur. As a result, actual earnings consequences will differ
from those quantified.
SUPPLEMENTAL INFORMATION -- MANAGED NET REVENUES
The following supplemental information is presented on the basis used by
management to evaluate operations. It differs in two respects from the
accompanying financial statements, which are prepared in accordance with GAAP.
First, revenues are presented as if there had been no asset securitizations at
TRS. This format is generally termed on a managed basis, as further discussed
in the TRS section of the Financial Review. Second, revenues are considered
net of AEFA's provisions for losses and benefits for annuities, insurance and
investment certificate products, which are essentially spread businesses, as
further discussed in the AEFA section of the Financial Review. A
reconciliation of consolidated revenues from a GAAP to a net managed basis is
as follows:
<Table>
<Caption>
Years Ended December 31, (Millions) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GAAP revenues $ 23,807 $ 22,582 $ 23,675
Effect of TRS securitizations 948 743 321
Effect of AEFA provisions for losses and benefits (1,954) (1,966) (1,911)
- -----------------------------------------------------------------------------------------------------------
Managed net revenues $ 22,801 $ 21,359 $ 22,085
===========================================================================================================
</Table>
9 (2002 Annual Report p.34)
<Page>
Managed net revenues increased 7 percent in 2002 to $22.8 billion, compared
with $21.4 billion in 2001 which was 3 percent lower than 2000. Managed net
revenues rose in 2002 due to greater discount revenues, higher lending spreads
and loan balances, and higher revenues related to AEFA's investment portfolio.
These items were partially offset by lower management fees and weaker travel
revenues. 2001 net revenues declined due to lower spreads on AEFA's investment
portfolio, weaker travel revenues as well as lower management and distribution
fees. These items were partially offset by an increase in cards-in-force,
larger loan balances and greater insurance revenues.
See TRS and AEFA segments for a discussion of why a managed basis presentation
at TRS and net revenues at AEFA is used by management and is important to
investors.
<Table>
<Caption>
TRAVEL RELATED SERVICES
RESULTS OF OPERATIONS
STATEMENTS OF INCOME
Years Ended December 31, (Millions) 2002 2001 2000
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues:
Discount revenue $ 7,931 $ 7,714 $ 7,779
Net card fees 1,726 1,675 1,651
Lending:
Finance charge revenue 1,995 2,363 2,280
Interest expense 510 939 1,025
- ---------------------------------------------------------------------------------------------------
Net finance charge revenue 1,485 1,424 1,255
Travel commissions and fees 1,408 1,537 1,821
Travelers Cheque investment income 375 394 387
Securitization income 1,941 1,432 1,012
Other revenues 2,855 3,183 3,215
- --------------------------------------------------------------------------------------------------
Total net revenues 17,721 17,359 17,120
- --------------------------------------------------------------------------------------------------
Expenses:
Marketing and promotion 1,456 1,237 1,434
Provision for losses and claims:
Charge card 960 1,195 1,006
Lending 1,369 1,318 891
Other 149 164 105
- --------------------------------------------------------------------------------------------------
Total 2,478 2,677 2,002
Charge card interest expense 1,001 1,443 1,202
Net discount expense -- 96 489
Human resources 3,503 3,992 4,126
Other operating expenses 6,207 5,442 5,154
Restructuring charges (4) 414 --
Disaster recovery charge -- 79 --
- ---------------------------------------------------------------------------------------------------
Total expenses 14,641 15,380 14,407
- ---------------------------------------------------------------------------------------------------
Pretax income 3,080 1,979 2,713
Income tax provision 945 520 784
- ---------------------------------------------------------------------------------------------------
Net income $ 2,135 $ 1,459 $ 1,929
===================================================================================================
</Table>
10 (2002 Annual Report p.35)
<Page>
Travel Related Services reported net income of $2.1 billion in 2002, a 46
percent increase from $1.5 billion in 2001, which was down 24 percent from
2000. 2001 results included restructuring charges of $414 million ($267
million after-tax) and one-time costs and waived customer fees directly
related to the September 11th terrorist attacks of $87 million ($57 million
after-tax).
The following management discussion includes information on both a GAAP basis
and managed basis. The managed basis presentation assumes there have been no
securitization transactions, i.e., all securitized cardmember loans and
related income effects are reflected in the company's balance sheet and income
statement, respectively. The company presents TRS information on a managed
basis because that is the way the company's management views and manages the
business. Management believes that a full picture of trends in the company's
cardmember lending business can only be derived by evaluating the performance
of both securitized and non-securitized cardmember loans. Asset securitization
is just one of several ways for the company to fund cardmember loans. Use of a
managed basis presentation, including non-securitized and securitized
cardmember loans, presents a more accurate picture of the key dynamics of the
cardmember lending business, avoiding distortions due to the mix of funding
sources at any particular point in time. For example, irrespective of the mix,
it is important for management and investors to see metrics, such as changes
in delinquencies and write-off rates, for the entire cardmember lending
portfolio because it is more representative of the economics of the aggregate
cardmember relationships and ongoing business performance and trends over
time. It is also important for investors to see the overall growth of
cardmember loans and related revenue and changes in market share, which are
significant metrics in evaluating the company's performance and which can only
be properly assessed when all non-securitized and securitized cardmember loans
are viewed together on a managed basis.
On a GAAP basis, results reflect only net finance charge revenue on the owned
portfolio, comprised of unsecuritized cardmember and other loans. Revenues
relating to the company's retained interest in securitized loan receivables
are shown in securitization income, which includes gains on securitizations
(as discussed below), net finance charge revenue on retained interests in
securitized loans and servicing income. Securitization income increased 35
percent in 2002 and 42 percent in 2001 as a result of a higher average balance
of cardmember lending securitizations and improved spreads. Other revenue
decreased 10 percent in 2002 as a result of lower interest income on
investment and liquidity pools held within card funding vehicles. In 2001,
other revenue was flat. See Selected Statistical Information below for data
relating to TRS' owned portfolio.
TRS' results for the years ended December 31, 2002, 2001 and 2000 included net
cardmember lending securitization gains of $136 million ($88 million
after-tax), $155 million ($101 million after-tax) and $142 million ($92
million after-tax), respectively. Management views the gains from
securitizations as discretionary benefits to be used for card acquisition
expenses, which are reflected in both marketing and promotion and other
operating expenses. Consequently, the managed basis presentation for the years
ended December 31, 2002, 2001 and 2000 assumes that lending securitization
gains were offset by higher marketing and promotion expense of $81 million,
$92 million and $86 million, respectively, and other operating expense of $55
million, $63 million and $56 million, respectively. Accordingly, the
incremental expenses, as well as the gains, have been eliminated. The
following table reconciles the GAAP basis for certain TRS income statement
line items to the managed basis information, where different.
11 (2002 Annual Report p.36)
<Page>
<Table>
<Caption>
GAAP BASIS TO MANAGED BASIS RECONCILIATION -- EFFECT OF SECURITIZATIONS
Years Ended December 31, (Millions)
- ------------------------------------------------------------------------------------------------------------------------------
Effect of Securitizations
- ------------------------------------------------------------------------------------------------------------------------------
GAAP Basis Securitization Effect Managed Basis
------------------------------------------------------------------------------------------------
2002 2001 2000 2002 2001 2000 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Discount revenue $ 7,931 $ 7,714 $ 7,779
Net card fees 1,726 1,675 1,651 $ -- $ 16 $ 2 $ 1,726 $ 1,691 $ 1,653
Lending:
Finance charge revenue 1,995 2,363 2,280 2,509 2,259 1,697 4,504 4,622 3,977
Interest expense 510 939 1,025 340 545 569 850 1,484 1,594
- ------------------------------------------------------------------------------------------------------------------------------
Net finance
charge revenue 1,485 1,424 1,255 2,169 1,714 1,128 3,654 3,138 2,383
Travel commissions
and fees 1,408 1,537 1,821
Travelers Cheque
investment income 375 394 387
Securitization income 1,941 1,432 1,012 (1,941) (1,432) (1,012) -- -- --
Other revenues 2,855 3,183 3,215 720 445 203 3,575 3,628 3,418
- -----------------------------------------------------------------------------------------------------------------------------
Total net revenues 17,721 17,359 17,120 948 743 321 18,669 18,102 17,441
- -----------------------------------------------------------------------------------------------------------------------------
Expenses:
Marketing and promotion 1,456 1,237 1,434 (81) (92) (86) 1,375 1,145 1,348
Provision for losses
and claims:
Charge card 960 1,195 1,006 -- 36 151 960 1,231 1,157
Lending 1,369 1,318 891 1,098 925 595 2,467 2,243 1,486
Other 149 164 105
- -----------------------------------------------------------------------------------------------------------------------------
Total 2,478 2,677 2,002 1,098 961 746 3,576 3,638 2,748
- -----------------------------------------------------------------------------------------------------------------------------
Charge card
interest expense 1,001 1,443 1,202 (14) 33 206 987 1,476 1,408
Net discount expense -- 96 489 -- (96) (489) -- -- --
Human resources 3,503 3,992 4,126
Other operating
expenses 6,207 5,442 5,154 (55) (63) (56) 6,152 5,379 5,098
Restructuring charges (4) 414 --
Disaster recovery charge -- 79 --
- -----------------------------------------------------------------------------------------------------------------------------
Total expenses 14,641 15,380 14,407 $ 948 $ 743 $ 321 $ 15,589 $ 16,123 $ 14,728
- -----------------------------------------------------------------------------------------------------------------------------
Pretax income 3,080 1,979 2,713
Income tax provision 945 520 784
- -------------------------------------------------------------
Net income $ 2,135 $ 1,459 $ 1,929
- -------------------------------------------------------------
</Table>
The following discussion of TRS' results is presented on a managed basis.
In 2002, TRS' net revenues rose 3 percent as a result of greater net finance
charge revenue, higher cardmember spending and increased cards-in-force,
partially offset by lower travel commissions and fees, Travelers Cheque
investment income and other revenues. These increases reflect the benefits of
higher net finance charge revenue from the cardmember lending portfolio due to
higher loan balances and improved spreads and growth in worldwide billed
business. 2001 net revenues were 4 percent higher than 2000 as increased
cards-in-force, growth in cardmember loans outstanding and higher fee revenue
were partially offset by relatively flat worldwide billed business and lower
travel commissions and fees. The 2001 performance reflected overall weakness
in the economy, especially within the travel and entertainment sectors.
12 (2002 Annual Report p.37)
<Page>
Discount revenue rose 3 percent during 2002 as a result of a 4 percent
increase in billed business partially offset by a lower discount rate.
Discount revenue fell 1 percent in 2001 as billed business growth was more
than offset by a lower discount rate. The 4 percent increase in billed
business in 2002 primarily resulted from a 4 percent growth in cards-in-force
and higher spending per basic cardmember worldwide. U.S. cards-in-force rose 2
percent and 4 percent in 2002 and 2001, respectively, reflecting the impact of
more selective consumer card and small business acquisition activities during
the past year in light of weak economic conditions. International
cards-in-force increased 8 percent and 12 percent in 2002 and 2001,
respectively, due to growth in proprietary card products, as well as network
card growth. Proprietary card growth was slower during 2002, reflecting
attrition due to adverse business conditions in Argentina, Brazil and Hong
Kong. Cards-in-force growth accelerated worldwide in the second half of 2002,
including the addition of over 900,000 cards in the fourth quarter.
U.S. billed business rose 4 percent reflecting 8 percent growth within the
consumer card business (on 10 percent higher transaction volume), 4 percent
growth in small business services volume and a 3 percent decline within
Corporate Services. U.S. non-T&E related volume categories (which represented
approximately 63 percent of U.S. billed business during 2002) grew 9 percent
versus last year while U.S. T&E volumes declined 2 percent. Worldwide airline
related volume declined 6 percent on a single-digit decline in the average
airline charge and flat transaction volumes. The decline in the discount rate
in 2001 reflects the cumulative impact of stronger than average growth in the
lower rate retail and other "everyday spend" merchant categories (i.e.,
supermarkets, discounters, etc.).
Net card fees increased slightly in 2002 and 2001, reflecting the growth in
cards-in-force in both years. The average fee per card remained at $34 in both
2002 and 2001, down from $36 in 2000, reflecting the mix shift toward lower
and no fee products.
Lending net finance charge revenue rose 16 percent and 32 percent in 2002 and
2001, respectively. During 2002, average worldwide lending balances increased
7 percent. The net interest yield on the U.S. portfolio rose, as a decrease in
the proportion of the portfolio on introductory rates and the benefit of
declining funding costs throughout both years were partially offset by the
evolving mix of products toward more lower-rate offerings.
Travel commissions and fees declined 8 percent in 2002 as a result of a 10
percent contraction in travel sales reflecting the weaker corporate travel
environment throughout the year. Travel commissions and fees declined 16
percent in 2001 as a result of a 24 percent contraction in travel sales due to
the effects of the September 11th terrorist attacks and the weaker corporate
travel environment. Other revenues decreased 2 percent in 2002 due to
significantly lower interest income on investment and liquidity pools held
within card funding vehicles, which partially offset higher insurance related
revenues. The increases in other revenues in 2001 include the effect of higher
card related fee income and larger insurance premiums.
Marketing and promotion expense increased 20 percent in 2002 from the launch
of the new brand advertising campaign, the introduction of the new charge
cards with Membership Rewards built-in and the Cash Rebate card, more loyalty
marketing, and an increase in selected card acquisition activities. Marketing
and promotion expense declined 15 percent in 2001 as certain marketing efforts
were rationalized in light of the weaker business environment.
The charge card provision on card products decreased 22 percent in 2002 on
strong credit quality reflected in an improved past due rate and loss ratio.
The net loss ratio decreased to 0.38% in 2002 from 0.42% in 2001. Charge card
provision increased in 2001 due to higher volumes and generally weaker
economic and business conditions. The worldwide lending provision rose in both
2002 and 2001, reflecting portfolio growth and, in 2002, increased reserve
coverage levels. In 2001, the increase was also due to generally weaker
economic and business conditions, as unemployment and bankruptcies increased.
The net write-off rate was 6.0% in 2002 versus 5.6% in 2001.
Charge card interest expense declined 33 percent in 2002 due to a lower
effective cost of funds and a lower average receivable balance. Charge card
interest expense rose in 2001 as a result of higher borrowing rates which were
partly offset by lower billed business volumes.
13 (2002 Annual Report p.38)
<Page>
In 2002 and 2001, human resources expense decreased 12 percent and 3 percent,
respectively, as a result of a lower average number of employees, reflecting
ongoing reengineering efforts throughout both years, and, in 2002, the impact
of a technology outsourcing agreement. Other operating expenses increased 14
percent in 2002 due to higher costs related to cardmember loyalty programs,
losses primarily from strategic investments versus gains in the prior year, as
well as the impact of the technology outsourcing agreement, which transferred
costs from human resources expense, although at a lower level. These increases
were partially offset by reengineering initiatives and other cost containment
efforts. Similarly, in 2001, other operating expenses rose due to cardmember
loyalty programs, business growth and lower gains than the prior year,
partially offset by reengineering activities and other cost containment
efforts.
<Table>
<Caption>
SELECTED STATISTICAL INFORMATION
(Billions, except percentages and where indicated)
Years Ended December 31, 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total cards-in-force (millions):
United States 35.1 34.6 33.3
Outside the United States* 22.2 20.6 18.4
- ---------------------------------------------------------------------------------------------------------------------
Total 57.3 55.2 51.7
- ---------------------------------------------------------------------------------------------------------------------
Basic cards-in-force (millions):
United States 26.9 26.8 26.3
Outside the United States* 18.3 15.6 13.9
- ----------------------------------------------------------------------------------------------------------------------
Total 45.2 42.4 40.2
- ----------------------------------------------------------------------------------------------------------------------
Card billed business:
United States $ 234.1 $ 224.5 $ 221.7
Outside the United States 77.3 73.5 75.0
- ----------------------------------------------------------------------------------------------------------------------
Total $ 311.4 $ 298.0 $ 296.7
- ----------------------------------------------------------------------------------------------------------------------
Average discount rate* 2.64% 2.67% 2.70%
Average basic cardmember spending (dollars)* $ 7,645 $ 7,666 $ 8,229
Average fee per card -- managed (dollars)* $ 34 $ 34 $ 36
Non-Amex brand:**
Cards-in-force (millions) 0.7 0.7 0.6
Billed business $ 3.7 $ 3.4 $ 3.2
Travel sales $ 15.5 $ 17.2 $ 22.6
Travel commissions and fees/sales 9.1% 8.9% 8.1%
Travelers Cheque:
Sales $ 22.1 $ 23.5 $ 24.6
Average outstandings $ 6.5 $ 6.4 $ 6.4
Average investments $ 6.9 $ 6.6 $ 6.2
Tax equivalent yield 8.7% 9.0% 8.9%
======================================================================================================================
</Table>
* CARDS-IN-FORCE INCLUDE PROPRIETARY CARDS AND CARDS ISSUED UNDER
NETWORK PARTNERSHIP AGREEMENTS OUTSIDE THE U.S. AVERAGE DISCOUNT
RATE, AVERAGE BASIC CARDMEMBER SPENDING AND AVERAGE FEE PER CARD ARE
COMPUTED FROM PROPRIETARY CARD ACTIVITIES ONLY. AT SEPTEMBER 30,
2002, 1.5 MILLION OF CANADIAN LENDING CARDS WERE TRANSFERRED TO BASIC
(THOUGH THESE TYPES OF CARDS WERE AVAILABLE UNDER A SUPPLEMENTAL CARD
PROGRAM) AS THE SPECIFIC CARDS WERE ISSUED UNDER A STAND-ALONE OFFER.
THE IMPACT OF THIS TRANSFER ON THE YEAR ENDED DECEMBER 31, 2001 WOULD
HAVE BEEN TO INCREASE BASIC CARDS-IN-FORCE OUTSIDE THE U.S. TO 16.8
MILLION AND DECREASE AVERAGE BASIC CARDMEMBER SPENDING TO $7,447.
** THESE DATA RELATE TO VISA AND EUROCARDS ISSUED IN CONNECTION WITH
JOINT VENTURE ACTIVITIES.
14 (2002 Annual Report p.39)
<Page>
<Table>
<Caption>
SELECTED STATISTICAL INFORMATION (continued)
(Billions, except percentages and where indicated)
Years Ended December 31, 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Charge card receivables:
Total receivables $ 26.3 $ 26.2 $ 29.0
90 days past due as a % of total 2.2% 2.9% 2.3%
Loss reserves (millions) $ 930 $1,032 $ 964
% of receivables 3.5% 3.9% 3.3%
% of 90 days past due 162% 136% 142%
Net loss ratio 0.38% 0.42% 0.36%
U.S. Lending -- Owned Basis:
Total loans $ 17.1 $ 16.9 $ 17.4
Past due loans as a % of total:
30-89 days 2.0% 2.0% 1.7%
90+ days 1.3% 1.3% 0.8%
Loss reserves (millions):
Beginning balance $ 668 $ 553 $ 505
Provision 954 998 663
Net charge-offs/other (824) (883) (615)
- ---------------------------------------------------------------------------------------------------------
Ending balance $ 798 $ 668 $ 553
=========================================================================================================
% of loans 4.7% 3.9% 3.2%
% of past due 143% 120% 124%
Average loans $ 15.3 $ 16.9 $ 14.9
Net write-off rate 5.9% 5.5% 4.4%
U.S. Lending -- Managed Basis:
Total loans $ 34.3 $ 32.0 $ 28.7
Past due loans as a % of total:
30-89 days 1.9% 2.1% 1.9%
90+ days 1.2% 1.2% 0.9%
Loss reserves (millions):
Beginning balance $ 1,077 $ 820 $ 672
Provision 2,053 1,933 1,258
Net charge-offs/other (1,833) (1,676) (1,110)
- ---------------------------------------------------------------------------------------------------------
Ending balance $ 1,297 $1,077 $ 820
=========================================================================================================
% of loans 3.8% 3.4% 2.9%
% of past due 120% 101% 104%
Average loans $ 32.0 $ 30.7 $ 25.8
Net write-off rate 6.0% 5.6% 4.4%
Net interest yield 9.8% 8.8% 7.6%
=========================================================================================================
</Table>
TRS' owned portfolio is primarily comprised of cardmember receivables
generated by the company's charge card products, unsecuritized U.S. cardmember
loans, international cardmember loans and unsecuritized equipment leasing
receivables.
As discussed more fully in Financing Activities, the company securitizes U.S.
cardmember loans as part of its financing strategy; consequently, the level of
unsecuritized U.S. cardmember loans is primarily a function of the company's
financing requirements. As a portfolio, unsecuritized U.S. cardmember loans
tend to be less seasoned than securitized loans, primarily because of the lead
time required to designate and securitize each loan. The company does not
securitize international loans. Delinquency, reserve coverage and net write-off
rates have historically been generally comparable between the company's owned
and managed portfolios.
15 (2002 Annual Report p.40)
<Page>
<Table>
<Caption>
LIQUIDITY AND CAPITAL RESOURCES
SELECTED BALANCE SHEET INFORMATION (GAAP BASIS)
December 31, (Billions, except percentages) 2002 2001
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Accounts receivable, net $ 28.1 $ 28.5
Travelers Cheque investments $ 7.4 $ 6.8
U.S. cardmember loans $ 17.1 $ 16.9
Total assets $ 72.2 $ 69.4
Travelers Cheques outstanding $ 6.6 $ 6.2
Short-term debt $ 21.7 $ 31.8
Long-term debt $ 14.8 $ 6.0
Total liabilities $ 64.9 $ 62.7
Total shareholder's equity $ 7.3 $ 6.7
Return on average equity* 29.9% 21.9%
Return on average assets** 3.2% 2.1%
==========================================================================================
</Table>
* COMPUTED ON A TRAILING 12-MONTH BASIS EXCLUDING THE EFFECT ON
SHAREHOLDER'S EQUITY OF UNREALIZED GAINS OR LOSSES RELATED TO SFAS
NO. 115 AND SFAS NO. 133.
** COMPUTED ON A TRAILING 12-MONTH BASIS EXCLUDING THE EFFECT ON TOTAL
ASSETS OF UNREALIZED GAINS OR LOSSES RELATED TO SFAS NO. 115 AND SFAS
NO. 133 TO THE EXTENT THAT THEY DIRECTLY AFFECT SHAREHOLDER'S EQUITY.
FINANCING ACTIVITIES
TRS funds its charge card receivables and cardmember loans using various
funding sources, such as long- and short-term debt, medium-term notes,
commercial paper and asset securitizations. In 2002, the company shifted its
funding strategy to reduce its reliance on short-term debt; at December 31,
2002, short-term debt was 56% of total debt versus 80% a year ago. Charge card
receivables are predominantly funded by Credco and its subsidiaries while
funding for cardmember loans is primarily through Centurion Bank.
SECURITIZATIONS
The American Express Credit Account Master Trust (the Trust) securitized $4.6
billion and $4.3 billion of loans in 2002 and 2001, respectively, through the
public issuance of investor certificates. During 2002 and 2001, $2 billion and
$1 billion, respectively, of investor certificates that were previously issued
by the Trust matured. The securitized assets consist of loans arising in a
portfolio of designated consumer American Express Credit Card, Optima Line of
Credit and Sign & Travel/Extended Payment Option revolving credit accounts or
features owned by Centurion Bank, a wholly-owned subsidiary of TRS, and, in
the future, may include other charge or credit accounts, features or products.
At December 31, 2002 and 2001, TRS had a total of $16.9 billion and $14.3
billion, respectively, of Trust-related securitized loans which are not on the
Consolidated Balance Sheets. In early 2003, the company securitized an
additional $920 million of loans.
Under the terms of the Trust pooling and servicing agreement, the occurrence
of certain events could result in the Trust being required to pay down the
investor certificates before their expected payment dates over an early
amortization period. Examples of these events include: the failure or the
decline of the securitized assets to generate specified yields over a defined
period of time, and the decline of the total of the securitized assets'
principal balances below a specified percentage of total investor certificates
outstanding after the failure to add additional securitized assets as required
by the agreement. The company does not expect an early amortization event to
occur. In the event of a pay down, $15.4 billion of assets would revert to the
balance sheet and an alternate source of funding of a commensurate amount
would have to be obtained. Had a total pay down hypothetically occurred at a
single point in time at December 31, 2002, the one-time negative effect on
results of operations would have been approximately $693 million pretax, to
re-establish reserves and accelerate amortization of the interest-only strip
related to the $16.9 billion of cardmember loans that would revert to the
balance sheet.
The American Express Master Trust (the Master Trust) securitizes charge card
receivables generated under designated American Express Card, Gold Card and
Platinum Card consumer accounts through the issuance of trust certificates. In
2002 and 2001, the Master Trust securitized $1.8 billion and $750 million,
respectively, which remain on the Consolidated Balance Sheets. In 2001, $600
million of accounts receivable trust certificates that were previously issued
by the Master Trust matured from the charge card securitization portfolio. The
Master Trust specifies events, the occurrence of which would result in a pay
16 (2002 Annual Report p.41)
<Page>
down. The company does not expect a pay down to occur. While virtually no
financial statement impact would result from a pay down, an alternate source
of funding for $4.8 billion of receivables would have to be obtained.
With respect to both the Trust and the Master Trust, a decline in the actual
or implied short-term credit rating of TRS below A-1/P-1 will trigger a
requirement that TRS, as servicer, transfer collections on the securitized
assets to investors on a daily, rather than a monthly, basis or make
alternative arrangements with the rating agencies so as to allow TRS to
continue to transfer collections on a monthly basis. Such alternative
arrangements include obtaining appropriate guarantees for the performance of
the payment and deposit obligations of TRS, as servicer.
TRS also securitizes equipment lease receivables. At December 31, 2002 and
2001, the amount sold and outstanding to third party investors was $254
million and $675 million, respectively. These sales result in a reduction of
interest expense and provisions for losses, as well as servicing revenue, all
of which are insignificant to the company's results of operations.
OTHER FINANCING ACTIVITIES
TRS, primarily through Credco, maintained commercial paper outstanding of
approximately $11.2 billion at an average interest rate of 1.3% and
approximately $18.0 billion at an average interest rate of 1.9% at December
31, 2002 and 2001, respectively. Additionally, during 2002, Credco issued an
aggregate of $6.8 billion of medium-term notes at fixed and floating rates
with maturities of one to three years. This reflects a shift in the funding
strategy as the company is placing less reliance on short-term debt. In early
2003, Credco issued an additional $2 billion of floating rate medium-term
notes, with maturities of one year that can be extended by the holders to up
to five years.
Bank notes issued and Fed Funds purchased by Centurion Bank totaled
approximately $8 billion during 2002. Borrowings under bank lines of credit
totaled $1.2 billion and $1.3 billion at December 31, 2002 and 2001,
respectively.
As of December 31, 2002, Credco had the ability to issue approximately $3.2
billion of debt securities under a shelf registration statement filed with the
SEC, which amount was increased to approximately $18.2 billion in early 2003.
In addition, approximately $10 billion of the company's unused lines of credit
supporting TRS' commercial paper borrowings were allocated to Credco at
December 31, 2002. These lines expire in increments from 2003 through 2007.
Also, TRS had $2.6 billion in committed back-up lines of credit available at
December 31, 2002 for other corporate purposes.
RISK MANAGEMENT
For TRS' charge card and fixed rate lending products, interest rate exposure
is managed through a combination of shifting the mix of funding toward fixed
rate debt and through the use of derivative instruments, with an emphasis on
interest rate swaps, that effectively fix TRS' interest expense for the length
of the swap. The company endeavors to lengthen the maturity of interest rate
hedges in periods of falling interest rates and to shorten their maturity in
periods of rising interest rates. For the majority of its cardmember loans,
which are linked to a floating rate base and generally reprice each month, TRS
uses floating rate funding. TRS regularly reviews its strategy and may modify
it. Nontrading interest rate products, primarily interest rate swaps, with
notional amounts of approximately $44 billion (a portion of which extends to
2005) were outstanding at December 31, 2002.
The detrimental effect on TRS' pretax earnings of a hypothetical 100 basis
point increase in interest rates would be approximately $50 million ($40
million related to the U.S. dollar) and $48 million ($31 million related to
the U.S. dollar), based on 2002 and 2001 year-end positions, respectively.
This effect is primarily a function of the extent of variable rate funding of
charge card and fixed rate lending products, to the degree that interest rate
exposure is not managed by derivative financial instruments.
TRS' foreign exchange risk arising from cross-currency charges and balance
sheet exposures is managed primarily by entering into agreements to buy and
sell currencies on a spot or forward basis. At December 31, 2002, foreign
currency products with total notional amounts of approximately $6.4 billion
were outstanding, including foreign currency forward sales with notional
amounts of $645 million which were contracted to manage a substantial portion
of anticipated cash flows from operations in major overseas markets for 2003.
Based on the year-end 2002 and 2001 foreign exchange positions, but excluding
the forward contracts managing the anticipated overseas operating results for
the subsequent year, the effect on TRS' earnings of a hypothetical 10 percent
strengthening of the U.S. dollar would be immaterial. With respect to the
forward contracts related to anticipated overseas operating results for the
subsequent year, a 10 percent strengthening would create hypothetical pretax
gains of $59 million and $29 million related to the 2002 and 2001 year-end
positions, respectively. Such gains, if any, would mitigate the negative
effect of a stronger U.S. dollar on overseas earnings for the subsequent year.
17 (2002 Annual Report p.42)
<Page>
<Table>
<Caption>
AMERICAN EXPRESS FINANCIAL ADVISORS
RESULTS OF OPERATIONS
STATEMENTS OF INCOME
Years Ended December 31, (Millions) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Investment income $ 2,058 $ 1,162 $ 2,292
Management and distribution fees 2,292 2,458 2,812
Other revenues 1,267 1,171 1,026
- -----------------------------------------------------------------------------------------------------
Total revenues 5,617 4,791 6,130
=====================================================================================================
Expenses:
Provision for losses and benefits:
Annuities 1,034 989 1,018
Insurance 737 648 556
Investment certificates 183 329 337
- -----------------------------------------------------------------------------------------------------
Total 1,954 1,966 1,911
Human resources 1,898 1,969 2,093
Other operating expenses 907 762 643
Restructuring charges -- 107 --
Disaster recovery charge (7) 11 --
- -----------------------------------------------------------------------------------------------------
Total expenses 4,752 4,815 4,647
=====================================================================================================
Pretax income (loss) 865 (24) 1,483
Income tax provision (benefit) 233 (76) 451
- -----------------------------------------------------------------------------------------------------
Net income $ 632 $ 52 $ 1,032
=====================================================================================================
</Table>
American Express Financial Advisors' net income increased to $632 million in
2002 from $52 million in 2001, a 95 percent decline from 2000. Included in
2001 results are restructuring charges of $107 million ($70 million after-tax)
and one-time costs of $11 million ($8 million after-tax) directly related to
the September 11th terrorist attacks. In addition, 2001 investment income and
results included $1.01 billion in charges ($669 million after-tax) from the
write down and sale of high-yield securities and from reducing risk within its
investment portfolio. 2002 results include a benefit of $7 million ($4 million
after-tax) to reverse a portion of the 2001 September 11th related reserves as
a result of lower than anticipated insured loss claims. Total revenues rose 17
percent in 2002 due to higher investment income, reflecting the impact of the
high-yield losses noted previously and higher levels of invested assets,
higher insurance premiums and advice services fees, and higher distribution
fees partially offset by reduced management fees from lower average levels of
managed assets. Total revenues fell 22 percent in 2001 due to lower yields on
investment portfolio products, reduced management and distribution fees and
the high-yield losses noted earlier.
Investment income increased 77 percent reflecting the effect of the $1.01
billion in investment losses noted previously, higher average invested assets
and the effect of depreciation in the S&P 500 this year on the value of
options hedging outstanding stock market certificates and equity indexed
annuities, which was offset in the related provisions for losses and benefits.
Investment income decreased 49 percent in 2001 as the benefit from growth in
average invested assets was more than offset by the high-yield losses
mentioned earlier and from the decrease in the value of options hedging the
outstanding stock market certificates, which was offset in the certificate
provision for losses and benefits. Lower average yields, primarily due to the
investment portfolio repositioning, also contributed to the decline in
investment income during 2001.
AEFA's gross realized gains on sales of securities classified as
Available-for-Sale, using the specific identification method, were $342
million, $157 million and $48 million for the years ended December 31, 2002,
2001 and 2000, respectively. Gross realized losses on sales were ($168
million), ($529 million) and ($35 million) for the same periods. AEFA also
recognized losses of
18 (2002 Annual Report p.43)
<Page>
($204 million), ($428 million) and ($55 million) in other-than-temporary
impairments on structured securities and corporate debt securities for the
years ended December 31, 2002, 2001 and 2000, respectively.
For the year ended December 31, 2001, the "Investment Income" line in the
Statement of Income is reduced by a $34 million charge ($22 million after-tax)
related to the cumulative effect of the adoption of EITF Issue No. 99-20,
"Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets" as of January 1, 2001.
Before this accounting change, which the company deems immaterial, the
company's consolidated net income for the year ended December 31, 2001 was
$1,333 million, basic earnings per common share was $1.01, and diluted
earnings per common share was $1.00.
Management and distribution fees declined 7 percent in 2002 due to lower
average assets under management, partially offset by higher distribution fees.
The distribution fee increase is the result of lower mutual fund sales being
more than offset by other product related sales increases. In 2001, management
and distribution fees declined 13 percent due to lower average assets under
management and weaker sales, particularly in mutual fund products, reflecting
the negative impact of weak equity market conditions throughout the year.
Other revenues rose in both 2002 and 2001 due to increased life and
property-casualty insurance premiums and charges and higher financial planning
and advice service fees.
The provision for losses and benefits for annuities increased 5 percent during
2002 reflecting a higher inforce level, increased costs related to guaranteed
minimum death benefits, and the effect of depreciation in the S&P 500 on
equity indexed annuities, partially offset by the benefit of a lower crediting
rate. In 2001, the provision for losses and benefits for annuities declined
due to lower fixed annuities inforce and the benefit of lower crediting rates.
Insurance provisions for losses and benefits rose in 2002 and 2001, reflecting
higher inforce levels in both years and, in 2002, higher claims, partially
offset by a lower crediting rate. Investment certificate provisions for losses
and benefits decreased 44 percent during 2002 due to lower crediting rates,
partially offset by higher average reserve levels and the effect on the stock
market certificate product of depreciation in the S&P 500 during 2002.
Investment certificate provisions for losses and benefits decreased slightly
in 2001 as higher average reserve levels were offset by lower crediting rates.
In the following table, the company presents AEFA's aggregate revenues on a
basis that is net of provisions for losses and benefits because the company
manages the AEFA business and evaluates its financial performance, where
appropriate, in terms of the "spread" on its products. An important part of
AEFA's business is margin related, particularly the insurance, annuity and
certificate businesses. One of the gross margin drivers for the AEFA business
is the return on invested cash, primarily generated by sales of insurance,
annuity and investment certificates, less provisions for losses and benefits
on these products. These investments tend to be interest rate sensitive. Thus,
GAAP revenues tend to be higher in periods of rising interest rates, and lower
in times of decreasing interest rates. The same relationship is true of
provisions for losses and benefits, only it is more accentuated
period-to-period because rates credited to customers' accounts generally reset
at shorter intervals than the yield on underlying investments. The company
presents this portion of the AEFA business on a net basis to eliminate
potentially less informative comparisons of period-to-period changes in
revenue and provisions for losses and benefits in light of the impact of these
changes in interest rates.
<Table>
<Caption>
Years Ended December 31, (Millions) 2002 2001 2000
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total GAAP revenues $ 5,617 $ 4,791 $ 6,130
Less: Provision for losses and benefits -
Annuities 1,034 989 1,018
Insurance 737 648 556
Investment certificates 183 329 337
- --------------------------------------------------------------------------------------------------
Total 1,954 1,966 1,911
- --------------------------------------------------------------------------------------------------
Net revenues $ 3,663 $ 2,825 $ 4,219
==================================================================================================
</Table>
Human resources expense declined 4 percent in 2002, reflecting lower field
force compensation-related costs and the benefits of reengineering and cost
containment initiatives within the home office where the average number of
employees was down 15 percent from last year. Human resources expense also
declined in 2001, reflecting lower field force compensation-related expenses
due to the decline in the number of advisors and the impact of lower volumes
on advisor compensation, as well as the
19 (2002 Annual Report p.44)
<Page>
benefits of reengineering and cost containment initiatives. In addition, 2001
expenses included an unfavorable net DAC adjustment of $39 million. Other
operating expenses increased in both years. The 2002 increase reflects the
impact of the technology outsourcing agreement, which resulted in the transfer
of costs from human resources expense, a higher minority interest for premium
deposits related to a joint venture with AEB, and a $44 million net increase
in DAC expenses related to AEFA's third quarter 2002 adjustment discussed
below. In 2001, the increase reflects accelerated investing activities for
various strategic, reengineering, technology and product development projects
and a higher minority interest related to the premium deposits joint venture
with AEB. In 2001, other operating expenses included an unfavorable DAC
adjustment of $28 million.
For annuity and insurance products, the projections underlying the
amortization of DAC require the use of certain assumptions, including interest
margins, mortality rates, persistency rates, maintenance expense levels, and
customer asset value growth rates for variable products. Management routinely
monitors a wide variety of trends in the business, including comparisons of
actual and assumed experience. Management reviews and, where appropriate,
adjusts its assumptions with respect to customer asset value growth rates on a
quarterly basis. Management monitors other principal DAC assumptions, such as
persistency, mortality rate, interest margin and maintenance expense level
assumptions, each quarter. Unless management identifies a material deviation
over the course of the quarterly monitoring, management reviews and updates
these DAC assumptions annually in the third quarter of each year. When
assumptions are changed, the percentage of estimated gross profits or portion
of interest margins used to amortize DAC may also change. A change in the
required amortization percentage is applied retrospectively; an increase in
amortization percentage will result in an acceleration of DAC amortization
while a decrease in amortization percentage will result in a deceleration of
DAC amortization. The impact on results of operations of changing assumptions
with respect to the amortization of DAC can be either positive or negative in
any particular period, and is reflected in the period in which such changes
are made. In 2002, excluding the third quarter, the impact of resetting these
assumptions, along with the impact of unfavorable equity market performance,
was an acceleration of $22 million pretax of DAC amortization. Third quarter
impacts are described below.
During the third quarter of 2002, AEFA completed a comprehensive review of its
DAC related practices. The specific areas reviewed included costs deferred and
DAC amortization periods in addition to customer asset value growth rate
assumptions (which are typically reviewed on a quarterly basis) and other
assumptions including mortality rates and product persistency (which are
typically updated on an annual basis in the third quarter). As a result of
this review, AEFA took certain actions that resulted in a net $44 million
increase in expenses in the third quarter of 2002.
o AEFA reset its customer asset value growth rate assumptions for
variable annuity and variable life products to anticipate near-term
and long-term growth at an annual rate of 7%. The customer asset
value growth rate is the rate at which contract values are assumed to
appreciate in the future. This rate is net of asset fees, and
anticipates a blend of equity and fixed income investments. Prior to
resetting these assumptions, AEFA was projecting long-term customer
asset value growth at 7.5% and near-term growth at approximately
twice that rate. The impact of resetting these assumptions, along
with the impact of unfavorable third quarter 2002 equity market
performance, was an acceleration of $173 million pretax of DAC
amortization.
Going forward, AEFA intends to continue to use a mean reversion
method as a guideline in setting the near-term customer asset value
growth rate, also referred to as the mean reversion rate. In periods
when market performance results in actual contract value growth at a
rate different than that assumed, AEFA will reassess the near-term
rate in order to continue to project its best estimate of long-term
growth. For example, if actual contract value growth during a quarter
is less than 7% on an annualized basis, AEFA would increase the mean
reversion rate assumed over the near term to the rate needed to
achieve the long-term annualized growth rate of 7% by the end of that
period, assuming this long-term view is still appropriate.
o AEFA revised certain mortality and persistency assumptions for
universal and variable universal life insurance products and fixed
and variable annuity products to better reflect actual experience and
future expectations. The company completed a project to update the
mortality table used in pricing universal and variable universal life
products and in valuing the associated DAC. The most recently
published life insurance industry mortality table was used as a
starting point, and was then modified based on AEFA's experience.
AEFA also observed that recent persistency of its universal life
products was consistently better than expected, and determined the
trend justified an improvement in assumed persistency rates.
Additionally, AEFA reviewed and updated persistency assumptions for
fixed and variable deferred annuity products. AEFA also reviewed
20 (2002 Annual Report p.45)
<Page>
the periods over which DAC is amortized for fixed and variable
deferred annuity products. Analysis showed that significant volumes
of advisor-distributed fixed annuities were expected to persist
beyond AEFA's 10-year DAC amortization period. As a result, the
company extended the amortization period from 10 to 15 years to be
more consistent with the period over which significant profits were
expected and would result in a more appropriate matching of revenues
and expense. Similarly, AEFA made slight increases in the
amortization periods used for certain blocks of advisor-distributed
variable annuities. These changes, along with revised assumptions
projecting more favorable persistency and mortality rates, resulted
in a decrease in DAC expense of $155 million pretax.
o Finally, AEFA reviewed its acquisition costs to clarify those costs
that vary with and are primarily related to the acquisition of new
and renewable annuity and insurance contracts, or are incremental and
vary directly with the acquisition of back-end loaded mutual funds.
AEFA revised the types and amounts of costs deferred, in part to
reflect the impact of advisor platform changes and the effects of
related reengineering. This resulted in an increase in expense of $26
million pretax recognized in the third quarter of 2002.
The adjustments made to customer asset value growth rate assumptions should
reduce the risk of adverse DAC adjustments going forward, while changes made
to mortality and persistency assumptions and DAC amortization periods somewhat
increase the risk of adverse adjustments. Overall, AEFA believes it is less
exposed to the risk of adverse DAC adjustments as a result of these changes.
The changes relating to the types and amounts of costs deferred will somewhat
accelerate the recognition of ongoing expenses, although these additional
expenses should be offset to some extent as reengineering and other cost
control initiatives are expected to mitigate their impact.
IMPACT OF RECENT MARKET-VOLATILITY ON RESULTS OF OPERATIONS
Various aspects of AEFA's business are impacted by equity market levels and
other market-based events. Three areas in particular involve DAC, asset
management fees and structured investments. The direction and magnitude of the
changes in equity markets can increase or decrease DAC expense levels and
asset management fees and correspondingly affect results of operations in any
particular period. Similarly, the value of AEFA's structured investment
portfolio is impacted by various market factors. Persistency of, or increases
in, bond and loan default rates, among other factors, could result in negative
adjustments to the market values of these investments in the future, which
would adversely impact results of operations. See discussion of structured
investments below.
SELECTED STATISTICAL INFORMATION
<Table>
<Caption>
Years Ended December 31, (Millions, except where indicated) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Life insurance inforce (billions) $ 119.0 $ 107.9 $ 98.1
Deferred annuities inforce (billions) $ 41.0 $ 41.3 $ 45.3
Assets owned, managed or administered (billions):
Assets managed for institutions $ 42.3 $ 49.7 $ 55.0
Assets owned, managed or administered for individuals:
Owned assets:
Separate account assets 22.0 27.3 32.3
Other owned assets 51.7 44.2 41.3
- ---------------------------------------------------------------------------------------------------------------
Total owned assets 73.7 71.5 73.6
- ---------------------------------------------------------------------------------------------------------------
Managed assets 81.6 98.7 112.0
Administered assets 33.0 33.4 34.4
- ---------------------------------------------------------------------------------------------------------------
Total $ 230.6 $ 253.3 $ 275.0
===============================================================================================================
Market appreciation (depreciation) during the period:
Owned assets:
Separate account assets $ (5,057) $ (5,752) $ (5,109)
Other owned assets $ 898 $ 879 $ 106
Managed assets $ (16,788) $(18,662) $(14,467)
- ---------------------------------------------------------------------------------------------------------------
</Table>
21 (2002 Annual Report p.46)
<Page>
SELECTED STATISTICAL INFORMATION (continued)
<Table>
<Caption>
Years Ended December 31, (Millions, except percentages 2002 2001 2000
and where indicated)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash sales:
Mutual funds $31,945 $ 33,581 $ 44,068
Annuities 8,541 5,648 5,886
Investment certificates 4,088 3,788 3,297
Life and other insurance products 710 895 900
Institutional 3,727 5,006 6,601
Other 5,201 5,276 3,557
- ---------------------------------------------------------------------------------------------------------------------
Total cash sales $54,212 $ 54,194 $ 64,309
=====================================================================================================================
Number of financial advisors 11,689 11,535 12,663
Fees from financial plans and advice services $ 113.9 $ 107.5 $ 97.7
Percentage of total sales from financial plans and advice
services 73.3% 72.5% 68.1%
=====================================================================================================================
</Table>
LIQUIDITY AND CAPITAL RESOURCES
SELECTED BALANCE SHEET INFORMATION
<Table>
<Caption>
December 31, (Billions, except percentages) 2002 2001
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Investments $38.2 $ 33.6
Separate account assets $22.0 $ 27.3
Deferred acquisition costs $ 3.8 $ 3.7
Total assets $73.7 $ 71.5
Client contract reserves $37.3 $ 32.8
Separate account liabilities $22.0 $ 27.3
Total liabilities $67.4 $ 66.1
Total shareholder's equity $ 6.3 $ 5.4
Return on average equity* 11.6% 1.0%
- -------------------------------------------------------------------------------------------------
</Table>
* COMPUTED ON A TRAILING 12-MONTH BASIS EXCLUDING THE EFFECT ON
SHAREHOLDER'S EQUITY OF UNREALIZED GAINS OR LOSSES RELATED TO SFAS
NO. 115 AND SFAS NO. 133.
AEFA's total assets and liabilities increased in 2002 primarily due to higher
investments and client contract reserves which were partially offset by
decreases in separate account assets and liabilities, which declined primarily
as a result of market depreciation. AEFA's total assets and liabilities
decreased in 2001 due to declines in separate account assets and liabilities
as a result of market depreciation, partly offset by positive net sales.
Investments primarily include corporate debt and mortgage-backed securities.
AEFA's corporate debt securities comprise a diverse portfolio with the largest
concentrations, accounting for approximately 63 percent of the portfolio, in
the following industries: banking and finance, utilities, communications and
media, and transportation. Investments include $2.4 billion and $1.3 billion
in below investment grade debt securities at December 31, 2002 and 2001,
respectively, and $4.0 billion in investment loans at both December 31, 2002
and 2001. Non-performing assets relative to invested assets (excluding
short-term cash positions) were 0.1% at both December 31, 2002 and 2001.
Investments are principally funded by sales of insurance, annuities and
certificates and by reinvested income. Maturities of these investments are
largely matched with the expected future payments of insurance and annuity
obligations.
During 2002, AEFA continued to hold investments in CDOs and secured loan
trusts (SLTs), some of which are also managed by AEFA. As a condition to its
managing certain CDOs, AEFA is required to invest in the residual or "equity"
tranche of the CDO, which is typically the most subordinated tranche of
securities issued by the CDO entity. AEFA invested in CDOs and SLTs as part of
its investment strategy in order to pay a competitive rate to contractholders'
accounts. AEFA's exposure as an investor is limited solely to its aggregate
investment in the CDOs and SLTs, and it has no obligations or commitments,
contingent or otherwise, that could require any further funding of such
investments. As of December 31, 2002, the carrying values of the CDO residual
tranches and SLT notes were $28 million and $684 million, respectively. CDOs
and SLTs are illiquid investments. As an investor in the residual tranche of
CDOs, AEFA's return correlates to the performance of portfolios of high-yield
bonds and/or bank loans. As a noteholder of SLTs, AEFA's return is based on a
reference portfolio of loans. The carrying value
22 (2002 Annual Report p.47)
<Page>
of the CDO and SLT investments and AEFA's projected return are based on
discounted cash flow projections that require a significant degree of
management judgment as to assumptions primarily related to default and
recovery rates of the high-yield bonds and/or bank loans either held directly
by the CDO or in the reference portfolio of the SLT and, as such, are subject
to change. Generally, the SLTs are structured such that the principal amount
of the loans in the reference portfolio may be up to five times that of the
par amount of the notes held by AEFA. Although the exposure associated with
AEFA's investment in CDOs and SLTs is limited to the carrying value of such
investments, they are volatile investments and have a substantial degree of
risk associated with them because the amount of the initial value of the loans
and/or other debt obligations in the related portfolios is significantly
greater than AEFA's exposure. Deterioration in the value of the high-yield
bonds or bank loans would likely result in deterioration of AEFA's investment
return with respect to the relevant CDO or SLT, as the case may be. In the
event of significant deterioration of a portfolio, the relevant CDO or SLT may
be subject to early liquidation, which could result in further deterioration
of the investment return or, in severe cases, loss of the carrying amount. See
Note 1 to the Consolidated Financial Statements.
During 2001 the company placed a majority of its rated CDO securities and
related accrued interest, as well as a relatively minor amount of other liquid
securities (collectively referred to as transferred assets), having an
aggregate book value of $905 million, into a securitization trust. In return,
the company received $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,
2002, the retained interests had a carrying value of $754 million, of which
$520 million is considered investment grade. The company has no obligations,
contingent or otherwise, to such unaffiliated investors. One of the results of
this transaction is that increases and decreases in future cash flows of the
individual CDOs are combined into one overall cash flow for purposes of
determining the carrying value of the retained interests and related impact on
results of operations.
AEFA's client contract reserves are for current and future obligations related
to fixed annuities, investment certificates, and life and disability
insurance. The obligations for fixed annuities, universal life contracts and
investment certificates are based on the underlying contract accumulation
values. The obligations for other traditional life insurance products are
based on various assumptions, including mortality rates, morbidity rates and
policy persistency. To the extent that actual future experience differs with
respect to other traditional life insurance products, these reserves would be
adjusted through the provision for losses and benefits.
Separate account assets, primarily investments carried at market value, and
liabilities represent funds held for the exclusive benefit of variable annuity
and variable life insurance contract holders. AEFA earns investment management,
administration and other fees from the related accounts.
The National Association of Insurance Commissioners (NAIC) adopted 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, 2002,
AEFA's life insurance businesses had adjusted capital in excess of amounts
requiring regulatory action. Any dividend distributions in 2003 in excess of
10% of statutory capital and surplus would require approval of the Department
of Commerce of the State of Minnesota.
In light of the investment losses recorded during the first half of 2001, AEFA
received a capital contribution of $490 million from the Parent Company during
2001.
RISK MANAGEMENT
At AEFA, interest rate exposures arise primarily within its insurance and
investment certificate subsidiaries. Rates credited to customers' accounts
generally reset at shorter intervals than the yield on underlying investments.
Therefore, AEFA's interest spread margins are affected by changes in the
general level of interest rates. The extent to which the level of rates
affects spread margins is managed primarily by a combination of modifying the
maturity structure of the investment portfolio and entering into swaps or
other derivative instruments that effectively lengthen the rate reset interval
on customer liabilities. Interest rate derivatives with notional amounts
totaling approximately $4.8 billion were outstanding at December 31, 2002 to
hedge interest rate exposures.
The negative effect on AEFA's pretax earnings of a 100 basis point increase in
interest rates, which assumes repricings and customer behavior based on the
application of proprietary models, to the book of business at December 31,
2002 and 2001, would be approximately $21 million and $35 million for 2002 and
2001, respectively.
23 (2002 Annual Report p.48)
<Page>
AEFA has two primary exposures to the general level of equity markets: asset
management fees and customer crediting rates based upon the returns on equity
markets. AEFA earns fees from the management of equity securities in variable
annuities, variable insurance, proprietary mutual funds and other managed
assets. The amount of fees is generally based on the value of the portfolios,
and thus is subject to fluctuation with the general level of equity market
values. To reduce the sensitivity of AEFA's fee revenues to the general
performance of equity markets, AEFA has from time to time entered into various
combinations of financial instruments that mitigate the negative effect on
fees that would result from a decline in the equity markets. In addition, AEFA
writes and purchases index options to manage the margin related to certain
investment certificate and annuity products that pay interest based upon the
relative change in a major stock market index between the beginning and end of
the product's term. At December 31, 2002, equity-based derivatives with a net
notional amount of $208 million were outstanding to hedge equity market
exposures.
The negative effect on AEFA's pretax earnings of a 10 percent decline in
equity markets would be approximately $57 million and $81 million based on
assets under management, certificate and annuity business in-force, and index
options as of December 31, 2002 and 2001, respectively.
AEFA's owned investment securities are, for the most part, held by its life
insurance and investment certificate subsidiaries, which primarily invest in
long-term and intermediate-term fixed income securities to provide their
clients with a competitive rate of return on their investments while
controlling risk. Investment in fixed income securities is designed to provide
AEFA with a targeted margin between the interest rate earned on investments
and the interest rate credited to clients' accounts. AEFA does not trade in
securities to generate short-term profits for its own account.
AEFA's life insurance and investment certificate subsidiaries' investment
committees regularly review models projecting various interest rate scenarios
and risk/return measures and their effect on the profitability of the company.
The committees' objectives are to structure their investment security
portfolios based upon the type and behavior of the products in the liability
portfolios to achieve targeted levels of profitability within defined risk
parameters and to meet contractual obligations. Part of the committees'
strategies include the use of derivatives, such as interest rate caps, swaps
and floors, for risk management purposes.
AMERICAN EXPRESS BANK
RESULTS OF OPERATIONS
STATEMENTS OF OPERATIONS
<Table>
<Caption>
Years Ended December 31, (Millions) 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues:
Interest income $ 606 $ 698 $ 735
Interest expense 246 396 484
- -------------------------------------------------------------------------------------------------------------------
Net interest income 360 302 251
Commissions and fees 215 203 214
Foreign exchange income and other revenues 170 144 126
- -------------------------------------------------------------------------------------------------------------------
Total net revenues 745 649 591
===================================================================================================================
Expenses:
Human resources 236 247 257
Other operating expenses 244 255 273
Provision for losses:
Ongoing 147 65 28
Restructuring related -- 26 --
- -------------------------------------------------------------------------------------------------------------------
Total provision for losses 147 91 28
Restructuring charges (3) 70 --
- -------------------------------------------------------------------------------------------------------------------
Total expenses 624 663 558
===================================================================================================================
Pretax income (loss) 121 (14) 33
Income tax provision (benefit) 41 (1) 4
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 80 $ (13) $ 29
===================================================================================================================
</Table>
24 (2002 Annual Report p.49)
<Page>
American Express Bank reported net income of $80 million in 2002, compared
with a net loss of $13 million in 2001. 2001 results included restructuring
charges of $96 million ($65 million after-tax). Net revenues rose 15 percent
in 2002, primarily due to higher net interest income and foreign exchange
income and other revenue. In 2001, net revenues rose 10 percent.
Net interest income in 2002 increased from a year ago due to the effects of
lower funding costs. In 2001, net interest income increased, primarily due to
higher consumer loans and the effects of lower funding costs, partially offset
by decreases in corporate banking volumes. In 2002, commissions and fees
increased due to growth in loan originations in the Personal Financial
Services (PFS) business and greater non-credit transactions in the Financial
Institutions Group, partially offset by lower results in Corporate Banking. In
2001, commissions and fees decreased due to lower results in corporate banking
and lower mutual fund fees within the financial institution business,
partially offset by higher loan volumes in PFS. In 2002, foreign exchange
income and other revenue increased primarily because of higher joint venture
income, due to lower funding costs within the premium deposits joint venture
with AEFA. In 2001, foreign exchange income and other revenue increased due to
higher income from the premium deposit joint venture, partially offset by
lower corporate banking revenue and other joint venture income.
Combined human resources and other operating expenses declined in both 2002
and 2001, reflecting the benefits of reengineering activities and tighter
expense controls. Provision for losses increased substantially in 2002
primarily due to higher bankruptcy related write-offs in the consumer lending
portfolio in Hong Kong. In 2001, provisions for losses increased primarily due
to higher PFS loan volumes.
SELECTED STATISTICAL INFORMATION
<Table>
<Caption>
December 31, (Billions) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets managed*/administered $ 12.5 $11.4 $ 10.6
Assets of non-consolidated joint ventures $ 1.8 $ 1.9 $ 2.1
======================================================================================================
</Table>
* INCLUDES ASSETS MANAGED BY AMERICAN EXPRESS FINANCIAL ADVISORS.
LIQUIDITY AND CAPITAL RESOURCES
SELECTED BALANCE SHEET INFORMATION
<Table>
<Caption>
December 31, (Billions, except percentages and where indicated) 2002 2001
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total loans $ 5.6 $ 5.3
Total non-performing loans (millions) $ 119 $ 123
Other non-performing assets (millions) $ 15 $ 22
Reserve for credit losses (millions)* $ 158 $ 148
Loan loss reserve as a % of total loans 2.7% 2.4%
Total PFS loans $ 1.6 $ 1.6
30+ days past due PFS loans as a % of total 5.4% 4.5%
Total assets $ 13.2 $ 11.9
Deposits $ 9.5 $ 8.4
Total liabilities $ 12.3 $ 11.1
Total shareholder's equity (millions) $ 947 $ 761
Return on average assets** 0.67% (0.11)%
Return on average common equity*** 11.5% (2.0)%
Risk-based capital ratios:
Tier I 10.9% 11.1%
Total 11.4% 12.2%
Leverage ratio 5.3% 5.3%
- -----------------------------------------------------------------------------------------------------------------
*Allocation of reserves (millions):
Loans $ 151 $ 128
Other assets, primarily derivatives 6 4
Other liabilities 1 16
- -----------------------------------------------------------------------------------------------------------------
Total reserve for credit losses $ 158 $ 148
=================================================================================================================
</Table>
** COMPUTED ON A TRAILING 12-MONTH BASIS EXCLUDING THE EFFECT ON TOTAL
ASSETS OF UNREALIZED GAINS OR LOSSES RELATED TO SFAS NO. 115 AND SFAS
NO. 133 TO THE EXTENT THAT THEY DIRECTLY AFFECT SHAREHOLDER'S EQUITY.
*** COMPUTED ON A TRAILING 12-MONTH BASIS EXCLUDING THE EFFECT ON
SHAREHOLDER'S EQUITY OF UNREALIZED GAINS OR LOSSES RELATED TO SFAS
NO. 115 AND SFAS NO. 133.
25 (2002 Annual Report p.50)
<Page>
AEB had worldwide loans outstanding at December 31, 2002 of approximately $5.6
billion, up from $5.3 billion at December 31, 2001. Activity during 2002
included a $400 million net decrease in corporate and other banking loans,
which was more than offset by a $500 million increase in consumer and private
banking loans and a $200 million increase in financial institution loans. As
of December 31, 2002, consumer and private banking loans comprised 66 percent
of total loans versus 60 percent at December 31, 2001. Corporate Banking and
other loans comprised 9 percent of total loans at December 31, 2002 versus 18
percent at December 31, 2001. In addition to the loan portfolio, other banking
activities, such as securities, unrealized gains on foreign exchange and
derivatives contracts, various contingencies and market placements added
approximately $8.0 billion and $7.3 billion to AEB's credit exposures at
December 31, 2002 and 2001, respectively. Included in these additional
exposures are relatively lower risk cash and securities related balances
totaling $5.8 billion at December 31, 2002.
RISK MANAGEMENT
AEB employs a variety of financial instruments in managing its exposure to
fluctuations in interest and currency rates. Derivative instruments consist
principally of foreign exchange spot and forward contracts, foreign currency
options, interest rate swaps, futures and forward rate agreements. Generally,
they are used to manage specific interest rate and foreign exchange exposures
related to deposits, long-term debt, equity, loans and securities holdings. At
December 31, 2002, interest rate products with notional amounts totaling
approximately $7.7 billion and $0.6 billion for trading and nontrading
purposes, respectively, were outstanding. Notional amounts outstanding at
December 31, 2002 for foreign currency products were approximately $18.1
billion and $5.3 billion for trading and nontrading purposes, respectively.
Additionally, equity products with notional amounts of $120 million were
outstanding at December 31, 2002.
The negative effect of a 100 basis point increase in interest rates on AEB's
pretax earnings would be $18 million at both December 31, 2002 and 2001. The
effect on earnings of a 10 percent strengthening of the U.S. dollar would be
negligible and, with respect to translation exposure of foreign operations,
would result in a $16 million and $11 million charge against equity as of
December 31, 2002 and 2001, respectively.
AEB utilizes foreign exchange and interest rate products to meet the needs of
its customers. Customer positions are usually, but not always, offset. They
are evaluated in terms of AEB's overall interest rate or foreign exchange
exposure. AEB also takes limited proprietary positions. Potential daily
exposure from trading activities is calculated using a Value at Risk
methodology. This model employs a parametric technique using a correlation
matrix based on historical data. The Value at Risk measure uses a 99 percent
confidence interval to estimate potential trading losses over a one-day
period. At December 31, 2002 and 2001, the Value at Risk for AEB was less than
$2 million.
Asset/liability and market risk management at AEB are supervised by the Asset
and Liability Committee, which comprises senior business managers of AEB. It
meets monthly and monitors: (i) liquidity, (ii) capital exposure, (iii)
capital adequacy, (iv) market risk and (v) investment portfolios. The
committee evaluates current market conditions and determines AEB's tactics
within risk limits approved by AEB's Board of Directors. AEB's treasury and
risk management operations issue policies and control procedures and delegate
risk limits throughout AEB's regional trading centers.
CORPORATE AND OTHER
Corporate and Other reported net expenses of $176 million, $187 million and
$180 million in 2002, 2001 and 2000, respectively. 2001 results include $14
million ($9 million after-tax) of the restructuring charges noted earlier.
Included in 2002 results were the final preferred stock dividends from Lehman
Brothers totaling $69 million ($59 million after-tax) compared with $46
million ($39 million after-tax) in both 2001 and 2000. The dividends were
offset by business building initiatives in each year.
26 (2002 Annual Report p.51)
<Page>
OTHER REPORTING MATTERS
ACCOUNTING DEVELOPMENTS
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45), which provides accounting and
disclosure requirements for certain guarantees. The accounting provisions of
FIN 45, which are effective for certain guarantees issued or modified
beginning January 1, 2003, will impact the company based upon the fair value
amount of guarantees that are issued or modified beginning at that time. The
company is still evaluating the impact of adopting FIN 45 on the Consolidated
Financial Statements; the disclosure requirements of FIN 45 are addressed in
Note 11 to the Consolidated Financial Statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46), which addresses consolidation by
business enterprises of variable interest entities (VIEs). The accounting
provisions and disclosure requirements of FIN 46 are effective immediately for
VIEs created after January 31, 2003, and are effective for reporting periods
beginning after June 15, 2003, for VIEs created prior to February 1, 2003. The
company is still evaluating the impact of adopting FIN 46 on the Consolidated
Financial Statements. It is likely that the company will either consolidate or
disclose additional information about VIEs when FIN 46 becomes fully
effective. Certain disclosures are required for financial statements issued
after January 31, 2003 and are addressed in Note 1 to the Consolidated
Financial Statements.
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure." The company has
applied the recognition and measurement provisions of Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its
stock-based employee compensation plans. No stock-based employee compensation
expense is reflected in net income for the years ended December 31, 2002, 2001
or 2000, as all options granted under those plans had an exercise price equal
to the market value of the underlying common stock on the date of grant.
Effective January 1, 2003, the company will adopt, prospectively, the fair
value recognition provisions of SFAS No. 123 "Accounting for Stock-Based
Compensation," and expense all new awards granted to employees after January
1, 2003. While the company cannot predict the full year 2003 unfavorable
impact on diluted EPS, the negative effect associated with the stock options
granted in January 2003 is expected to be $0.01 per share. See Notes 1 and 14
to the Consolidated Financial Statements for further discussion.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This Statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets
and the associated asset retirement costs. The company has adopted the
provisions of the Statement as of January 1, 2003. The impact to the company's
financial statements is expected to be immaterial.
In July 2002, the FASB issued SFAS No. 146, "Obligations Associated with
Disposal Activities." The Statement is effective for exit or disposal
activities initiated after December 31, 2002. Previously issued financial
statements shall not be restated. The provisions of EITF Issue 94-3 shall
continue to apply for an exit activity initiated under an exit plan that met
the criteria of Issue 94-3 prior to this Statement's initial application. This
Statement will impact the company's accounting for any future restructuring
activities.
FORWARD-LOOKING STATEMENTS
This Annual Report includes forward-looking statements, which are subject to
risks and uncertainties. The words "believe," "expect," "anticipate,"
"optimistic," "intend," "plan," "aim," "will," "should," "could," "likely,"
and similar expressions are intended to identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date on which they are made. The
company undertakes no obligation to update or revise any forward-looking
statements. Factors that could cause actual results to differ materially from
these forward-looking statements include, but are not limited to: the
company's ability to successfully implement a business model that allows for
significant earnings growth based on revenue growth that is lower than
historical levels, including the ability to improve its operating expense to
revenue ratio both in the short-term and over time, which will depend in part
on the effectiveness of reengineering and other cost control initiatives, as
well as factors impacting the company's revenues; the company's ability to
grow its business and meet or exceed its 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 on the company's ability
27 (2002 Annual Report p.52)
<Page>
to manage its capital needs and the effect of business mix, acquisitions and
rating agency requirements; the ability to increase investment spending, which
will depend in part on the equity markets and other factors affecting
revenues, and the ability to capitalize on such investments to improve
business metrics; fluctuation in the equity markets, which can affect the
amount and types of investment products sold by AEFA, the market value of its
managed assets, management and distribution fees received based on those
assets and the amount of amortization of DAC; changes in assumptions relating
to DAC which also could impact the amount of DAC amortization; potential
deterioration in AEFA's high-yield and other investments, which could result
in further losses in AEFA's investment portfolio; the ability of AEFA to sell
certain high-yield investments at expected values and within anticipated
timeframes and to maintain its high-yield portfolio at certain levels in the
future; developments relating to AEFA's platform structure for financial
advisors, including the ability to increase advisor productivity (including
new clients), increase the growth of productive new advisors and create
efficiencies in the infrastructure; AEFA's ability to roll out new and
attractive products in a timely manner and effectively manage the economics in
selling a growing volume of non-proprietary products; investment performance
in AEFA's businesses; the success, timeliness and financial impact, including
costs, cost savings and other benefits, of reengineering initiatives being
implemented or considered by the company, including cost management,
structural and strategic measures such as vendor, process, facilities and
operations consolidation, outsourcing (including, among others, technologies
operations), relocating certain functions to lower cost overseas locations,
moving internal and external functions to the internet to save costs, the
scale-back of corporate lending in certain regions, and planned staff
reductions relating to certain of such reengineering actions; the ability to
control and manage operating, infrastructure, advertising and promotion and
other expenses as business expands or changes, including balancing the need
for longer-term investment spending; the impact on the company's businesses
and uncertainty created by the September 11th terrorist attacks, and the
potential negative effect on the company's businesses and infrastructure,
including information technology systems, of any such attacks or disaster in
the future; the impact on the company's businesses resulting from a war with
Iraq; the company's ability to recover under its insurance policies for losses
resulting from the September 11th terrorist attacks; the overall level of
consumer confidence; consumer and business spending on the company's travel
related services products, particularly credit and charge cards and growth in
card lending balances, which depend in part on the ability to issue new and
enhanced card products and increase revenues from such products, attract new
cardholders, capture a greater share of existing cardholders' spending,
sustain premium discount rates, increase merchant coverage, retain cardmembers
after low introductory lending rates have expired, and expand the global
network services business; the ability to 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 purchasing card and other means, and further globalizing business
capabilities; the ability to manage and expand cardmember benefits, including
Membership Rewards,'r' in a cost effective manner; the triggering of
obligations to make payments to certain co-brand partners, merchants, vendors
and customers under contractual arrangements with such parties under certain
circumstances; successfully expanding the company's on-line and off-line
distribution channels and cross-selling financial, travel, card and other
products and services to its customer base, both in the U.S. and abroad;
effectively leveraging the company's assets, such as its brand, customers and
international presence, in the Internet environment; investing in and
competing at the leading edge of technology across all businesses; a downturn
in the company's businesses and/or negative changes in the company's and its
subsidiaries' credit ratings, which could result in contingent payments under
contracts, decreased liquidity and higher borrowing costs; increasing
competition in all of the company's major businesses; fluctuations in interest
rates, which impact the company's borrowing costs, return on lending products
and spreads in the investment and insurance businesses; credit trends and the
rate of bankruptcies, which can affect spending on card products, debt
payments by individual and corporate customers and businesses that accept the
company's card products and returns on the company's investment portfolios;
foreign currency exchange rates; political or economic instability in certain
regions or countries, which could affect lending activities, among other
businesses; legal and regulatory developments, such as in the areas of
consumer privacy and data protection; acquisitions; the adoption of recently
issued accounting rules related to the consolidation of variable interest
entities, including those involving collateralized debt obligations, secured
loan trusts, mutual funds, hedge funds and limited partnerships that the
company manages and/or invests in, which could affect both the company's
balance sheet and results of operations; and outcomes in litigation. A further
description of these and other risks and uncertainties can be found in the
company's Annual Report on Form 10-K for the year ended December 31, 2002, and
its other reports filed with the SEC.
28 (2002 Annual Report p.53)
<Page>
CONSOLIDATED STATEMENTS OF INCOME
AMERICAN EXPRESS COMPANY
<Table>
<Caption>
Years Ended December 31, (Millions, except per share amounts) 2002 2001 2000
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Discount revenue $ 7,931 $ 7,714 $ 7,779
Interest and dividends, net 2,991 2,137 3,290
Management and distribution fees 2,285 2,458 2,812
Securitization income 1,941 1,432 1,012
Net card fees 1,726 1,675 1,651
Cardmember lending net finance charge revenue 1,485 1,424 1,255
Travel commissions and fees 1,408 1,537 1,821
Other commissions and fees 2,113 2,088 1,989
Life and other insurance revenues 802 674 575
Other 1,125 1,443 1,491
- ----------------------------------------------------------------------------------------------------
Total revenues 23,807 22,582 23,675
====================================================================================================
EXPENSES
Human resources 5,725 6,271 6,633
Provisions for losses and benefits:
Annuities and investment certificates 1,217 1,318 1,355
Life insurance, international banking and other 1,040 909 694
Charge card 960 1,195 1,006
Cardmember lending 1,369 1,318 891
Professional services 2,021 1,651 1,530
Marketing and promotion 1,548 1,301 1,515
Occupancy and equipment 1,458 1,574 1,528
Interest 1,082 1,501 1,354
Communications 514 528 514
Restructuring charges (7) 605 --
Disaster recovery charge (7) 90 --
Other 3,160 2,725 2,747
- ----------------------------------------------------------------------------------------------------
Total expenses 20,080 20,986 19,767
====================================================================================================
Pretax income 3,727 1,596 3,908
Income tax provision 1,056 285 1,098
- ----------------------------------------------------------------------------------------------------
Net income $ 2,671 $ 1,311 $ 2,810
====================================================================================================
EARNINGS PER COMMON SHARE
Basic $ 2.02 $ 0.99 $ 2.12
Diluted $ 2.01 $ 0.98 $ 2.07
- ----------------------------------------------------------------------------------------------------
Average common shares outstanding for
earnings per common share:
Basic 1,320 1,324 1,327
Diluted 1,330 1,336 1,360
====================================================================================================
</Table>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
29 (2002 Annual Report p.54)
<Page>
CONSOLIDATED BALANCE SHEETS
AMERICAN EXPRESS COMPANY
<Table>
<Caption>
December 31, (Millions, except share data)
2002 2001
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 10,288 $ 7,222
Accounts receivable and accrued interest:
Cardmember receivables, less credit reserves: 2002, $930; 2001, $1,032 25,403 25,212
Other receivables, less credit reserves: 2002, $28; 2001, $134 3,684 4,286
Investments 53,638 46,488
Loans:
Cardmember lending, less credit reserves: 2002, $1,030; 2001, $831 21,574 20,131
International banking, less credit reserves: 2002, $151; 2001, $130 5,466 5,155
Other, net 782 1,154
Separate account assets 21,981 27,334
Deferred acquisition costs 3,908 3,737
Land, buildings and equipment--at cost, less accumulated depreciation:
2002, $2,603; 2001, $2,507 2,979 2,811
Other assets 7,550 7,570
- -----------------------------------------------------------------------------------------------------------------
Total assets $ 157,253 151,100
=================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Customers' deposits $ 18,317 $ 14,557
Travelers Cheques outstanding 6,623 6,190
Accounts payable 9,235 6,820
Insurance and annuity reserves:
Fixed annuities 23,411 19,592
Life and disability policies 5,272 4,944
Investment certificate reserves 8,666 8,227
Short-term debt 21,103 31,569
Long-term debt 16,308 7,788
Separate account liabilities 21,981 27,334
Guaranteed preferred beneficial interests in the company's
junior subordinated deferrable interest debentures 511 500
Other liabilities 11,965 11,542
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 143,392 139,063
- -----------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common shares, $.20 par value, authorized 3.6 billion shares; issued and
outstanding 1,305 million shares in 2002 and 1,331 million shares in 2001 261 266
Capital surplus 5,675 5,527
Retained earnings 7,606 6,421
Other comprehensive income (loss), net of tax:
Net unrealized securities gains 1,104 334
Net unrealized derivatives losses (538) (296)
Foreign currency translation adjustments (198) (112)
Minimum pension liability (49) (103)
- -----------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income (loss) 319 (177)
- -----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 13,861 12,037
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 157,253 $ 151,100
=================================================================================================================
</Table>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
30 (2002 Annual Report p.55)
<Page>
CONSOLIDATED STATEMENTS OF CASH FLOWS
AMERICAN EXPRESS COMPANY
<Table>
<Caption>
Years Ended December 31, (Millions) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 2,671 $ 1,311 $ 2,810
Adjustments to reconcile net income
to net cash provided by operating activities:
Provisions for losses and benefits 2,988 3,283 2,697
Depreciation, amortization, deferred taxes and other 951 1,049 393
Non-cash portion of restructuring charges (7) 580 --
Non-cash portion of disaster recovery charge (7) 20 --
Changes in operating assets and liabilities, net of
effects of acquisitions and dispositions:
Accounts receivable and accrued interest 484 455 (1,623)
Other assets (473) (69) (426)
Accounts payable and other liabilities 1,365 (1,456) 2,377
Increase (decrease) in Travelers Cheques outstanding 431 (89) (82)
Increase in insurance reserves 271 240 207
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 8,674 5,324 6,353
=======================================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of investments 13,155 11,049 3,117
Maturity and redemption of investments 6,410 6,182 5,295
Purchase of investments (24,961) (19,912) (9,121)
Net increase in cardmember loans/receivables (7,793) (3,147) (10,661)
Cardmember loans/receivables sold to trust, net 4,339 3,465 3,338
Loan operations and principal collections, net (115) 592 (299)
Purchase of land, buildings and equipment (670) (859) (919)
Sale of land, buildings and equipment 125 22 35
(Acquisitions) dispositions, net of cash acquired/sold (58) (165) 212
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (9,568) (2,773) (9,003)
=======================================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in customers' deposits 3,246 988 954
Sale of annuities and investment certificates 9,950 5,506 5,588
Redemption of annuities and investment certificates (5,782) (4,761) (5,641)
Net (decrease) increase in debt with maturities of three months or less (7,201) (4,220) 7,117
Issuance of debt 19,392 15,083 12,559
Principal payments on debt (14,167) (15,318) (15,362)
Issuance of American Express common shares 161 84 226
Repurchase of American Express common shares (1,153) (626) (1,377)
Dividends paid (430) (424) (421)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 4,016 (3,688) 3,643
Effect of exchange rate changes on cash (56) (128) 23
- -----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 3,066 (1,265) 1,016
Cash and cash equivalents at beginning of year 7,222 8,487 7,471
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 10,288 $ 7,222 $ 8,487
=======================================================================================================================
</Table>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
31 (2002 Annual Report p.56)
<Page>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AMERICAN EXPRESS COMPANY
<Table>
<Caption>
Accumulated
Other
Common Capital Comprehensive Retained
Three Years Ended December 31, 2002 (Millions) Total Shares Surplus Income/(Loss) Earnings
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1999 $ 10,095 $ 268 $ 5,196 $ (402) $ 5,033
============================================================================================================================
Comprehensive income:
Net income 2,810 2,810
Change in net unrealized securities gains 151 151
Foreign currency translation adjustments 33 33
--------
Total comprehensive income 2,994
Repurchase of common shares (1,327) (5) (228) (1,094)
Other changes, primarily employee plans 348 2 471 (125)
Cash dividends declared:
Common, $0.32 per share (426) (426)
- ----------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 2000 11,684 265 5,439 (218) 6,198
============================================================================================================================
Comprehensive income:
Net income 1,311 1,311
Change in net unrealized securities gains 479 479
Cumulative effect of adopting SFAS No. 133 (120) (120)
Change in net unrealized derivatives losses (605) (605)
Derivatives losses reclassified to earnings 429 429
Foreign currency translation adjustments (39) (39)
Minimum pension liability adjustment (103) (103)
--------
Total comprehensive income 1,352
Repurchase of common shares (626) (2) (53) (571)
Other changes, primarily employee plans 51 3 141 (93)
Cash dividends declared:
Common, $0.32 per share (424) (424)
- ----------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 2001 12,037 266 5,527 (177) 6,421
============================================================================================================================
Comprehensive income:
Net income 2,671 2,671
Change in net unrealized securities gains 770 770
Change in net unrealized derivatives losses (614) (614)
Derivatives losses reclassified to earnings 372 372
Foreign currency translation adjustments (86) (86)
Minimum pension liability adjustment 54 54
--------
Total comprehensive income 3,167
Repurchase of common shares (1,153) (7) (139) (1,007)
Other changes, primarily employee plans 235 2 287 (54)
Cash dividends declared:
Common, $0.32 per share (425) (425)
- ----------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 2002 $ 13,861 $ 261 $ 5,675 $ 319 $ 7,606
============================================================================================================================
</Table>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
32 (2002 Annual Report p.57)
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying Consolidated Financial Statements include the accounts of
American Express Company and its subsidiaries (the company). All significant
intercompany transactions are eliminated. Certain reclassifications of prior
period amounts have been made to conform to the current presentation.
PRINCIPLES OF CONSOLIDATION
The company consolidates all entities in which it holds a greater than 50%
interest, except for immaterial seed money investments in mutual and hedge
funds. Entities in which the company holds a greater than 20% but less than
50% equity interest are accounted for under the equity method. All other
investments are accounted for under the cost method unless the company
determines that it exercises significant influence over the entity by means
other than voting rights.
Qualifying Special Purpose Entities (SPEs) under Statement of Financial
Accounting Standards (SFAS) No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities," are not consolidated.
Such SPEs include those that the company utilizes in connection with asset
securitizations at the Travel Related Services (TRS) segment, as well as the
securitization trust containing a majority of the company's rated
collateralized debt obligations (CDOs) described in Note 2 of the Consolidated
Financial Statements. All other SPEs are evaluated using the control, risk and
reward criteria as outlined under accounting principles generally accepted in
the United States (GAAP) in determining whether to consolidate all other SPEs
where the company is the sponsor or transferor. See Recently Issued Accounting
Standards below for further information regarding consolidation of such
entities. Additionally, the company has securitized charge card receivables
totaling $4.8 billion and $3.0 billion as of December 31, 2002 and 2001,
respectively, which are included in cardmember receivables on the Consolidated
Balance Sheets as they do not qualify for off-balance sheet treatment under
SFAS No. 140.
AMOUNTS BASED ON ESTIMATES AND ASSUMPTIONS
Accounting estimates are an integral part of the Consolidated Financial
Statements. In part they are based upon assumptions concerning future events.
Among the more significant are those that relate to reserves for cardmember
credit losses, Membership Rewards, investment securities valuation and the
amortization of deferred acquisition costs. These accounting estimates reflect
the best judgment of management and actual results could differ.
REVENUES
The company generates revenue from a wide range of business activities,
including payment instruments such as charge and credit cards, travel services
including airline, hotel, and rental car reservations, and a wide range of
investment, savings, lending and insurance products.
DISCOUNT REVENUE
The company earns discount revenue from fees charged to service establishments
with whom the company has entered into card acceptance agreements for
processing cardmember transactions. The discount is deducted from payment to
the service establishment and recorded as discount revenue at the time the
charge is captured.
INTEREST AND DIVIDENDS, NET
Interest income for the company's performing fixed income securities and
investment loans is generally accrued as earned using the effective interest
method, which makes an adjustment of the yield for security premiums and
discounts, fees and other payments, so that the related loan or security
recognizes a constant rate of return on the outstanding balance throughout its
term. Gains and losses are recognized on a trade date basis, and
other-than-temporary impairment charges are recorded in the period when
contractual cash flows are no longer expected to be received when due.
33 (2002 Annual Report p.58)
<Page>
Interest income for the company's international banking loans is accrued on
unpaid principal balances in accordance with the terms of the loan. Loan fees
and deferred loan acquisition costs are amortized over the life of the loan
using the effective interest method. Generally, the accrual of interest on
these loans is discontinued at the time the loan is 90 to 180 days delinquent,
depending on loan type, or when an impairment is determined. Interest and
dividends is presented net of interest expense of $254 million, $434 million
and $559 million for the years ended December 31, 2002, 2001 and 2000,
respectively.
For the year ended December 31, 2001, interest and dividends, net was reduced
by a $34 million charge ($22 million after-tax) related to the cumulative
effect of the adoption of Emerging Issues Task Force (EITF) Issue No. 99-20,
"Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets" as of January 1, 2001.
Before this accounting change, income for the year ended December 31, 2001 was
$1,333 million, basic earnings per common share (EPS) was $1.01 and diluted
EPS was $1.00.
MANAGEMENT AND DISTRIBUTION FEES
Management fees relate primarily to managed assets for proprietary mutual
funds and proprietary account assets, and are generally based on the
underlying asset values which are accrued daily and generally collected
monthly. Many of the proprietary mutual funds have a performance incentive
adjustment (PIA). This PIA adjusts the level of management fees received based
on the specific fund's relative performance as measured against a designated
external index. Distribution fees primarily include point-of-sale fees (i.e.,
front-load mutual fund fees) and asset-based fees (i.e., 12b-1 fees) that are
generally based on a contractual fee as a percentage of assets and recognized
when received.
SECURITIZATION INCOME
Securitization income includes revenue associated with retained and
subordinated interests in securitized loans, servicing income from loans sold
and gains recorded at the time of securitization.
NET CARD FEES
Card fees are recognized as revenue over the card membership period covered by
the card fee, net of provision for projected refunds of card fees for
cancellation of card membership.
CARDMEMBER LENDING NET FINANCE CHARGE REVENUE
Cardmember lending finance charges are assessed using the average daily
balance method for receivables owned and are recognized based upon the
principal amount outstanding in accordance with the terms of the applicable
account agreement until the outstanding balance is paid or charged off.
Cardmember lending net finance charge revenue is presented net of interest
expense of $510 million, $939 million and $1,025 million for the years ended
December 31, 2002, 2001 and 2000, respectively.
TRAVEL COMMISSIONS AND FEES
Customer revenue is earned by charging a transaction or management fee for
airline or other transactions based on contractual agreements with the travel
clients. Customer related fees and other revenues are recognized at the time a
client books travel arrangements.
Travel suppliers pay commission on airline tickets issued and on sales and
transaction volumes, based on contractual agreements. These revenues are
recognized at the time a ticket is purchased. Revenue from other travel
suppliers is generally not under firm contractual agreements and is recognized
when cash is received.
LIFE AND OTHER INSURANCE REVENUES
Premiums on traditional life, disability income and long-term care insurance
are recognized as revenue when due. Premiums on property/casualty insurance
are recognized ratably over the coverage period.
OTHER
Other revenues include fees from financial planning, consulting and business
services and miscellaneous investment income.
MARKETING AND PROMOTION
The company expenses advertising costs in the year in which the advertising
first takes place.
34 (2002 Annual Report p.59)
<Page>
CASH AND CASH EQUIVALENTS
At December 31, 2002 and 2001, cash and cash equivalents included $1.1 billion
and $1.0 billion, respectively, segregated in special bank accounts for the
benefit of customers. The company has defined cash equivalents to include time
deposits with original maturities of 90 days or less.
RESERVES FOR CREDIT LOSSES
Reserves for credit losses related to cardmember loans and receivables is one
of the largest operating expenses of the company. The company's reserves for
credit losses represents management's estimate of the amount necessary to
absorb future credit losses inherent in the company's outstanding portfolio of
loans and receivables. Management's evaluation process requires numerous
estimates and judgments. Reserves for these credit losses are primarily based
upon models which analyze portfolio statistics and management's judgment. The
analytic models take into account numerous factors, including average
write-off rates for various stages of receivable aging (i.e., current, 30
days, 60 days, 90 days) over a 24-month period, average bankruptcy rates and
average recovery rates. In exercising its judgment in setting reserve levels,
management considers levels derived from these models, and external
indicators, such as leading economic indicators, unemployment rate, consumer
confidence index, purchasing manager's index, bankruptcy filings and the
regulatory environment. Loans are charged-off when management deems amounts to
be uncollectible, which is generally determined by the number of days the
amount is past due. To the extent historical credit experience is not
indicative of future performance or other assumptions used by management do
not prevail, loss experience could differ significantly, resulting in either
higher or lower future provisions for credit losses, as applicable.
INVESTMENTS
Generally, investment securities are carried at fair value on the balance
sheet with unrealized gains (losses) recorded in equity, net of income tax
provisions (benefits). Gains and losses are recognized in the results of
operations upon disposition of the securities. In addition, losses are also
recognized when management determines that a decline in value is
other-than-temporary, which requires judgment regarding the amount and timing
of recovery. Indicators of other-than-temporary impairment for debt securities
include issuer downgrade, default or bankruptcy. The company also considers
the extent to which cost exceeds fair value, the duration of time of that
decline, and management's judgment about the issuer's current and prospective
financial condition. Fair value is generally based on quoted market prices.
However, the company's investment portfolio also contains structured
investments of various asset quality, including CDOs and secured loan trusts
(backed by high-yield bonds and bank loans) which are not readily marketable.
As a result, the carrying values of these structured investments are based on
cash flow projections which require a significant degree of management
judgment as to default and recovery rates of the underlying investments and as
such are subject to change.
SEPARATE ACCOUNT ASSETS AND LIABILITIES
Separate account assets and liabilities are funds held for the exclusive
benefit of variable annuity and variable life insurance contract holders. The
company receives investment management fees, mortality and expense assurance
fees, minimum death benefit guarantee fees and cost of insurance charges from
the related accounts.
DEFERRED ACQUISITION COSTS
American Express Financial Advisors' (AEFA) deferred acquisition costs (DAC)
represent the costs of acquiring new insurance, annuity and certain mutual
fund business, including, for example, direct sales commissions, related sales
incentive bonuses and awards, underwriting costs, policy issue costs and other
related costs attributable to sales. The costs for universal life and variable
universal life insurance and certain installment annuities are amortized as a
percentage of the estimated gross profits expected to be realized on the
policies. DAC for other annuities are amortized using the interest method. For
traditional life, disability income and long-term care insurance policies, the
costs are amortized in proportion to premium revenue. For mutual fund
products, DAC are generally amortized over fixed periods on a straight-line
basis.
For annuity and insurance products, the projections underlying the
amortization of DAC require the use of certain assumptions, including interest
margins, mortality rates, persistency rates, maintenance expense levels and
customer asset value
35 (2002 Annual Report p.60)
<Page>
growth rates for variable products. Management routinely monitors a wide
variety of trends in the business, including comparisons of actual and assumed
experience. Management reviews and, where appropriate, adjusts its assumptions
with respect to customer asset value growth rates on a quarterly basis.
Management monitors other principal DAC assumptions, such as persistency,
mortality rate, interest margin and maintenance expense level assumptions,
each quarter. Unless management identifies a material deviation over the
course of the quarterly monitoring, management reviews and updates these DAC
assumptions annually in the third quarter of each year. When assumptions are
changed, the percentage of estimated gross profits or portion of interest
margins used to amortize DAC may also change. A change in the required
amortization percentage is applied retrospectively; an increase in
amortization percentage will result in an acceleration of DAC amortization
while a decrease in amortization percentage will result in a deceleration of
DAC amortization. The impact on results of operations of changing assumptions
with respect to the amortization of DAC can be either positive or negative in
any particular period, and is reflected in the period in which such changes
are made.
INSURANCE AND ANNUITY RESERVES
Liabilities for reported and unpaid life insurance claims are equal to the
death benefits payable. For disability income and long-term care claims,
unpaid claim liabilities are equal to benefit amounts due and accrued.
Liabilities for incurred but not reported claims are estimated based on
periodic analysis of the actual reported claim lag. Where applicable, amounts
recoverable from reinsures are separately recorded as receivables. For life
insurance, no claim adjustment expense reserve is held. The claim adjustment
expense reserves for disability income and long-term care are based on the
claim reserves.
Liabilities for fixed and variable universal life insurance and fixed and
variable deferred annuities are accumulation values.
Liabilities for equity indexed deferred annuities issued before 1999 are equal
to the present value of guaranteed benefits and the intrinsic value of
index-based benefits. Liabilities for equity indexed deferred annuities issued
in 1999 or later are equal to the accumulation of host contract values
covering guaranteed benefits and the market value of embedded equity options.
Liabilities for fixed annuities in a benefit status are based on established
industry mortality tables and interest rates, ranging from 5% to 9.5%,
depending on year of issue, with an average rate of approximately 6.5%.
Liabilities for future benefits on term and whole life insurance are based on
the net level premium method, using anticipated mortality, policy persistency
and interest earning rates. Anticipated mortality rates are based on
established industry mortality tables, with modifications based on company
experience. Anticipated policy persistency rates vary by policy form, issue
age and policy duration with persistency on level term and cash value plans
generally anticipated to be better than persistency on yearly renewable term
insurance plans. Anticipated interest rates range from 4% to 10%, depending on
policy form, issue year and policy duration.
Liabilities for future disability income and long-term care policy benefits
include both policy reserves and claim reserves. Policy reserves are based on
the net level premium method, using anticipated morbidity, mortality, policy
persistency and interest earning rates. Anticipated morbidity and mortality
rates are based on established industry morbidity and mortality tables.
Anticipated policy persistency rates vary by policy form, issue age, policy
duration and, for disability income policies, occupation class. Anticipated
interest rates for disability income and long-term care policy reserves are 3%
to 9.5% at policy issue and grade to ultimate rates of 5% to 7% over 5 to 10
years.
Claim reserves are calculated based on claim continuance tables and
anticipated interest earnings. Anticipated claim continuance rates are based
on established industry tables. Anticipated interest rates for claim reserves
for both disability income and long-term care range from 5% to 8%. The company
issues only non-participating life insurance contracts and has no short
duration life insurance liabilities.
GUARANTEED MINIMUM DEATH BENEFITS
The majority of the variable annuity contracts offered by AEFA contain
guaranteed minimum death benefit (GMDB) provisions. At time of issue, these
contracts typically guarantee the death benefit payable will not be less than
the amount invested, regardless of the performance of the customer's account.
Most contracts also provide for some type