American Express 2007 Annual Report Download - page 40

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2007 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
greater interest expense due to a higher coupon rate paid to
certificate holders, a lower average securitization balance, and
the impact of higher than anticipated cardmember completion
of consumer debt repayment programs and certain associated
payment waivers.
Other revenues in 2007 decreased $44 million or 3 percent
to $1.6 billion as higher network, merchant, publishing, and
insurance-related revenues were more than offset by the $105
million of charges recorded in the third and fourth quarters
of 2007, related to the reclassification of AEIDC’s investment
portfolio as previously mentioned and a positive impact in
2006 related to the rebalancing of the Company’s Travelers
Cheque and Gift Card investment portfolio. Other revenues
increased $372 million or 28 percent to $1.7 billion in 2006
primarily due to $68 million of gains related to the rebalancing
of the Company’s Travelers Cheque and Gift Card investment
portfolio as discussed previously, fees associated with transition
services agreements with Ameriprise as well as higher network
partner-related fees.
Interest income rose $1.7 billion or 29 percent to $7.4 billion
in 2007 primarily reflecting an increase in cardmember lending
finance revenue, which grew $1.6 billion or 34 percent due to a
29 percent increase in average worldwide cardmember lending
balances primarily reflecting spending growth on lending
products and new cardmembers acquired, as well as a higher
portfolio yield. During 2006, interest income increased $1.3
billion or 30 percent to $5.7 billion, reflecting an increase in
cardmember lending finance revenue due to growth in average
worldwide lending balances and a higher portfolio yield.
Interest expense increased $1.1 billion or 40 percent to $3.8
billion in 2007, reflecting a $544 million or 35 percent increase
in charge card and other interest expense and a $542 million
or 45 percent increase in cardmember lending interest expense
due to increased debt funding levels in support of growth in
receivable and loan balances, respectively, and a higher effective
cost of funds. Interest expense of $2.7 billion in 2006 was
$761 million or 38 percent higher than 2005 reflecting a higher
effective cost of funds and increased debt funding levels in
support of growth in loans and receivable balances.
Expenses
Consolidated expenses for 2007 were $17.8 billion, up $835
million or 5 percent from $17.0 billion in 2006. The increase in
2007 was primarily driven by increased marketing, promotion,
rewards and cardmember services expenses and higher human
resources expenses, partially offset by lower other, net expenses.
Consolidated expenses for 2006 were $17.0 billion, up $1.4
billion or 9 percent from $15.6 billion in 2005. The increase
in 2006 was driven primarily by higher marketing, promotion,
rewards and cardmember services expenses, increased human
resources expenses, and greater professional services expenses.
Consolidated expenses in 2007, 2006, and 2005 also included
$66 million, $152 million and $273 million, respectively, of
reengineering costs primarily within the Company’s business
travel, prepaid services, international consumer and small
business services, and technology areas in 2007 and within the
business travel, operations, finance, and technology areas in
2006 and 2005.
Marketing, promotion, rewards and cardmember services
expenses increased $1.3 billion or 20 percent to $7.8 billion in
2007, reflecting a $685 million charge related to the Membership
Rewards liability due to enhancements to the method of liability
estimation as discussed above, a higher redemption rate, higher
volume-related rewards costs, and incremental marketing and
promotion and business-building costs, partially offset by the
impact of charges in 2006 associated with adjustments made to
the Membership Rewards reserve models.
Marketing, promotion, rewards and cardmember services
expenses increased $681 million or 12 percent to $6.5 billion
in 2006 reflecting greater rewards costs and higher marketing
and promotion expenses. The higher rewards costs continued
to reflect volume growth, a higher redemption rate, and strong
cardmember loyalty program participation. Rewards costs
in 2006 included $174 million of charges related to certain
adjustments made to the Membership Rewards reserve model
in the United States and outside the United States. Marketing
expenses reflected relatively high levels of spending related to
various business-building initiatives, but lower costs versus 2005
related to the Company’s ongoing global “MyLife, MyCard(SM)”
advertising campaign, which was in a more active phase during
2005.
Human resources expenses increased $398 million or
8 percent to $5.4 billion in 2007 due to a higher level of
employees and merit increases, partially offset by the $63
million pension-related gain previously discussed and lower
severance-related costs compared to 2006. The increased
level of employees primarily reflected employee additions
related to customer service volumes and initiatives and the
acquisition of Harbor Payments, Inc. on December 31, 2006,
and the acquisition of a travel services business in 2007. Human
resources expenses in 2006 increased $295 million or 6 percent
to $5.0 billion compared to 2005 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. Reengineering costs in 2007, 2006, and 2005, included
$49 million, $111 million, and $195 million, respectively, of
severance, of which $34 million, $89 million, and $159 million
was restructuring-related and is included within human
resources expenses.
Professional services expenses remained flat in 2007
compared to 2006 and increased $283 million or 14 percent
in 2006 due to higher technology service fees, greater
business and service-related volumes and increased credit and
collection costs.
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