American Express 2005 Annual Report Download - page 35

losses and benefits, and $16 million of spin-off expenses
related to Ameriprise principally included in profes-
sional services. These expenses were partially offset by
a $113 million benefit from the recovery of insurance
claims associated with September 11, 2001, included as
a reduction of other expenses. Consolidated expenses
for 2004 were 12 percent higher than 2003 driven by
higher marketing, promotion, rewards and cardmember
services expense and greater human resources costs,
partially offset by lower provisions for losses.
Marketing, promotion, rewards and cardmember
services expenses in 2005 increased 18 percent to
$5.8 billion versus a year ago reflecting higher market-
ing and promotion expenses and greater reward costs.
The increase in marketing and promotion expenses was
primarily driven by the Company’s ongoing global
brand advertising campaign and continued focus on
business-building initiatives. The growth in rewards
costs is attributed to volume growth, a higher redemp-
tion rate and strong cardmember loyalty program
participation. Marketing, promotion, rewards and
cardmember services expenses increased 30 percent
in 2004 to $5.0 billion as a result of higher cardmember
rewards and services expenses reflecting higher volumes
and greater rewards program participation and penetra-
tion, the continuation of brand and product advertising,
and an increase in selected card acquisition activities.
Human resources expenses in 2005 increased 6 percent
to $4.8 billion compared to 2004 due to severance
related costs resulting from the restructuring initiatives
noted above, higher management incentives, including
an additional year of stock-based compensation
expenses, merit increases and increased employee
benefit expenses, which were partially offset by
reengineering benefits. Human resources expenses
increased 16 percent in 2004 to $4.5 billion due to
increased costs related to management incentives, merit
increases and employee benefit expenses as well as the
impact of severance costs related to the reengineering of
certain operations.
Total provisions for losses and benefits in 2005
increased 22 percent over last year to $2.8 billion, as the
charge card and lending provisions rose 25 percent and
19 percent, respectively, and the other provisions grew
by 28 percent. The charge card and lending growth
reflected strong volume increases within both activities,
and higher provision rates mostly due to substantially
higher write-offs during the fourth quarter of 2005
within the lending business due to the October 17, 2005
change in the bankruptcy legislation as well as a $49
million provision during the year to reflect the estimated
costs related to Hurricane Katrina. Total provisions for
losses and benefits in 2004 declined 4 percent to $2.3
billion primarily due to a 7 percent reduction in card-
member lending provisions partially offset by the $115
million reconciliation of securitization-related card-
member loans charge in other provisions. Also, during
2004, a $60 million benefit was recorded for the reduc-
tion in merchant-related reserves.
The effective tax rate was 24 percent in 2005 compared
to 30 percent in 2004 and 32 percent in 2003. The
decrease in the effective tax rate for 2005 reflected the
impact of $242 million of tax benefits related to the
finalization of state tax returns and resolution of IRS
audits of previous years’ tax returns. Unless similar
adjustments arise, the Company’s effective tax rate in
2006 is expected to be more aligned with tax rates for
continuing operations in 2003 and 2004. However, the
actual rate in 2006 will depend on various factors,
including the profitability and mix of the Company’s
businesses, legislative developments and results of tax
audits, among others.
The effective tax rate was lower in 2004 as compared to
2003 primarily as a result of one-time and ongoing ben-
efits related to the changes in international funding
strategy during 2004, favorable variances between esti-
mates of foreign tax expense and returns actually filed
and favorable tax audit experience.
Discontinued Operations
Income from discontinued operations, net of tax for 2005
decreased 38 percent to $513 million from $830 million
in 2004 due to spin-off related costs of $127 million after-
tax partially offset by a $63 million net after-tax gain on cer-
tain dispositions, primarily TBS. Additionally, as discussed
earlier, 2005 results from discontinued operations are
included through September 30, 2005 whereas 2004
included a full year of results from discontinued opera-
tions. Income from discontinued operations, net of tax
increased 25 percent in 2004 from 2003 primarily due to
improved results of Ameriprise. The discontinued opera-
tions generated revenues of $5.8 billion, $7.2 billion and
$6.3 billion for 2005, 2004 and 2003, respectively.
Consolidated Liquidity and Capital Resources
Capital Strategy
The Company generates equity capital primarily
through net income to fund current needs and future
business growth and to maintain a targeted debt rating.
Equity capital generated in excess of these needs is
Financial Review
AXP / AR.2005
[33 ]