American Express 2006 Annual Report Download - page 42

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2006 fi nancial review
american express company
respectively, of reengineering costs. The charges reflect
expenses in connection with several initiatives relating
principally to the restructuring of the Company’s
business travel, operations, finance, and technology
areas. Reengineering costs in 2006 included $111 million
of severance, of which $89 million was restructuring-
related, and is included within human resources, and
$43 million of non-severance exit costs, of which $11
million was restructuring-related, and is included within
other expenses.
Reengineering costs for 2005 included $203 million
of severance, of which $164 million was restructuring-
related, and is included within human resources, and
$83 million of non-severance exit costs, of which $29
million was restructuring-related, and is included within
other expenses. Consolidated expenses for 2005 were
$19.8 billion, up 10 percent from $18.1 billion in 2004.
The increase in 2005 was primarily driven by higher
marketing, promotion, rewards and cardmember services
expenses, greater provisions for losses and benefits, and
increased expenses for human resources, partially offset
by lower other expenses.
Marketing, promotion, rewards and cardmember
services expenses increased 12 percent to $6.5 billion
for 2006, reflecting greater rewards costs, and higher
marketing and promotion expenses. The higher
rewards costs continued to reflect volume growth, a
higher estimated ultimate redemption rate, and strong
cardmember loyalty program participation. Rewards
costs in 2006 included a $112 million charge related to
certain adjustments made to the Membership Rewards
reserve model in the U.S. and a $62 million charge
related to certain adjustments made to the Membership
Rewards reserve model outside the U.S. These
adjustments to the Membership Rewards reserve models
related to a higher ultimate redemption rate assumption
to reflect redemption statistics for cardmembers who left
the program over the past five years, as management
believes this is a better indicator of future redemption
behavior than the redemption statistics for cardmembers
who left the program since inception used previously.
Marketing expenses continued to reflect relatively high
levels of spending related to various business-building
initiatives, but lower costs versus last year related to
the Company’s ongoing global “MyLife, MyCard(SM)”
advertising campaign, which was in a more active phase
during 2005.
Marketing, promotion, rewards and cardmember
services expenses increased 18 percent to $5.8 billion
in 2005 reflecting higher marketing and promotion
expenses and greater rewards 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 redemption rate and strong
cardmember loyalty program participation.
Human resources expenses increased 5 percent to
$5.1 billion for 2006 due to merit increases and larger
benefit-related costs, partially offset by a relatively
flat level of employees and lower severance-related
costs compared to 2005. 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, 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.
Total provisions for losses and benefits in 2006
increased 11 percent over last year to $3.1 billion as the
lending and investment certificate and other provisions
growth of 20 percent and 37 percent, respectively, was
partially offset by a 10 percent decline in the charge card
provision. The increase in the lending provision was
driven by increased loan volumes globally and higher
loss rates outside the U.S., primarily in Taiwan, partially
offset by the favorable impact of lower bankruptcy-related
charge offs and strong credit quality in the U.S., and
lower than expected costs related to Hurricane Katrina
losses that were provided for in 2005. The investment
certificate and other provision rose due to higher interest
rates on larger investment certificate balances and
increased merchant-related reserves. Compared to 2005,
the charge provision reflected the lower loss rate, lower
than expected costs for Hurricane Katrina losses that
were provided for last year, and improved results from
collection activities.
Total provisions for losses and benefits in 2005
increased 22 percent over 2004 to $2.8 billion due to
increases in charge card, lending and other provisions.
These increases were primarily due to increased charge
card and lending volumes and higher provision rates,
which were mostly due to substantially higher write-
offs within the lending business due to the change in
the bankruptcy legislation during the fourth quarter of
2005, as well as a provision to reflect the estimated costs
related to Hurricane Katrina.
Professional services expenses in 2006 and 2005
increased 17 percent and 8 percent to $2.7 billion and
$2.3 billion, respectively, due to higher technology
service fees, greater business and service-related volumes,
and in 2006, increased credit and collection costs.