American Express 2001 Annual Report Download - page 31

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FINANCIAL REVIEW
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. The com-
pany also incurred costs of approximately $58 million since September 11th, which are expected to be covered by insurance and,
consequently, did not impact results. These include the cost of duplicate facilities and equipment associated with the relocation of
the company’s offices in lower Manhattan and certain other business recovery expenses. Costs associated with the damage to
the company’s offices, extra operating expenses and business interruption losses are still being evaluated. As of January 2002,
approximately $30 million of such costs relating to the company’s portion of the repair of its headquarters building have been iden-
tified. The company expects that a substantial portion of these losses will be covered by insurance.
The company expects a weak economy in 2002. As a result, achieving revenue growth targets will be a challenge as, at a minimum,
year-over-year revenue trends will be under pressure in the first half of 2002 as two key drivers, Cardmember spending and equity
valuations, will face difficult comparisons. During 2001, the company made some important changes to reduce risk and build a
more flexible cost structure. The benefits expected from the restructuring charges and ongoing reengineering efforts position the
business so earnings growth and solid returns can be achieved at lower levels of revenue growth.
This financial review 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 accounting principles generally accepted in the United
States(GAAP). First, results are presented as if there had been no asset securitizations at Travel Related Services (TRS). This format
is generally termed on a “managed basis.”Second, revenues are shown net of AEFA’s provisions for annuities, insurance and invest-
ment certificates products, which are essentially spread businesses.
CERTAIN CRITICAL ACCOUNTING POLICIES
In December 2001,the Securities and Exchange Commission (SEC) issued a financial reporting release, FR-60,“Cautionary Advice
Regarding Disclosure About Critical Accounting Policies.” In this connection, the following information has been provided about
certain critical accounting policies that are important to the Consolidated Financial Statements and that entail, to a significant
extent, the use of estimates, assumptions and the application of management’s judgment. These policies relate to reserves for
Cardmember credit losses, Membership Rewards costs, the recognition of impairment within the investment portfolio and
deferred acquisition costs.
❚Provisions for credit losses related to Cardmember loans and receivables is one of the largest operating expenses of the company.
Reserves for these credit losses are primarily based upon statistically driven models derived from historical experience, as well
as management judgment as to the economic and business environment. In determining the reserves, management evaluates
both internal credit metrics,such as migration analysis,write-off rates, recovery rates and net write-off coverage, as well as exter-
nal economic data, such as unemployment, bankruptcy filings and consumer confidence, among other indicators that may
impact the portfolios. 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 provision for
losses, as applicable.
❚The company’s Membership Rewards Loyalty Program allows 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 merchants when Card-
members redeem their points and establishes reserves in connection with such redemptions. The provision for the cost of Mem-
bership Rewards is based upon points awarded in the current year which are ultimately expected to be redeemed by program
members and the current average cost per point of redemption. The cumulative liability for unredeemed points is adjusted over
time based on actual experience and current trends with respect to redemptions. To the extent that the assumptions differ from
actual redemptions, the company’s future Membership Reward program cost could be higher or lower, as applicable.
❚Generally, investment securities are carried at fair value on the balance sheet. 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 not temporary, which requires judgment regarding the amount and timing of recovery. Typically, the company