American Express 2001 Annual Report Download - page 44

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FINANCIAL REVIEW
American Express Financial Advisors reported a 95 percent decline in net income in 2001. Included in these results are restructuring
charges of $107 million ($70 million after-tax) and insurance claims of $11 million ($8 million after-tax) directly related to the Sep-
tember 11th terrorist attacks. The restructuring charge primarily reflects severance for the elimination of approximately 1,300 jobs
and costs related to facility consolidation. Excluding these items, net income would have been $130 million, an 87 percent decrease
from a year ago. In addition, during the first half of 2001 AEFA incurred $1.01 billion in charges ($669 million after-tax) from the write
down and sale of some high-yield securities and from reducing risk within its investment portfolio. Net revenues fell 33 percent in
2001 due to lower spreads on investment portfolio products,reduced management and distribution fees and the high-yield losses noted
above. Net revenues and net income in 2000 increased 13 percent and 10 percent, respectively, over 1999 levels. These results reflected
higher fees due to growth in average managed assets and product sales, partially offset by the effect of narrower spreads on the invest-
ment portfolio. The spreads included a $123 million pretax ($88 million after-tax) charge to write down high-yield securities.
Management and distribution fees declined 13 percent in 2001 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. Con-
versely, in comparing 2000 with 1999, management and distribution fees increased 24 percent due to greater management fee rev-
enue from higher average assets under management, positive net sales and net year-over-year benefits from equity fee hedges.
Investment income decreased in both 2001 and 2000. Both years benefited from growth in average investments, although this 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 are offset in the certificate provisions. Lower average yields, primarily due to the portfolio reposi-
tioning, also contributed to the decline in investment income during 2001. Other revenues rose in both years from increased life
and property-casualty insurance premiums and charges and from higher financial planning fees. Starting in 2000, franchise fees
from Platform 2 advisors (those that operate as independent contractors under the American Express brand) were collected and
have been included in other revenues. The provision for losses and benefits for annuities declined due to lower fixed annuities
in-force in both years; 2001 also benefited from lower accrual rates, while in 2000, higher accrual rates partially offset the decline.
Insurance provisions rose in 2001 and 2000, reflecting higher in-force levels in both years and greater accrual rates in 2000. Invest-
ment certificate provisions decreased in 2001 as higher in-force levels were offset by lower accrual rates. In 2000, investment cer-
tificate provisions rose due to both higher in-force levels and accrual rates. In both years, investment certificate provisions were
decreased by the impact of depreciation in the S&P 500 on the stock market certificate product.
Human resources expenses declined in 2001, reflecting lower field force compensation-related expenses due to the decline in advi-
sors and the impact of lower volumes on advisor compensation, as well as the benefits of reengineering and cost containment ini-
tiatives within the home office where the average number of employees was down 7 percent from last year. In 2000, human
resources expenses rose due to higher advisor compensation from growth in sales volumes and asset levels and a greater number
of advisors and employees; additionally the increase in 2000 reflected costs related to the new advisor platforms. Other operating
expenses increased in both years. In 2001, the increase reflects accelerated investing activities for various strategic, reengineering,
technology and product development projects and a higher minority interest related to a joint venture with AEB. In 2000, the
increase was due to costs related to higher business volumes and the implementation of the new advisor platforms, including
greater rent and equipment support costs. In both 2001 and 2000, human resources and other operating expenses included higher
amortization of DAC for variable insurance and annuity products.