Lowering Risk Profile
As I stated earlier, the second major step we took to improve the company's long-term position was to decrease our overall risk profile:
AT AMERICAN EXPRESS FINANCIAL ADVISORS, WE HAVE SUBSTANTIALLY REDUCED OUR EXPOSURE TO HIGH-YIELD INVESTMENTS AND UPGRADED THE QUALITY OF OUR HIGH-YIELD BONDS. Over the past several years, we had a larger percentage of high-yield investments in our portfolio than was the insurance industry norm. While these investments had provided excellent returns for many years, we did not anticipate the full effect that the economic downturn, coupled with the worst high-yield default rate in many years, would have on our portfolio. Given our loss experience, as well as our view that the default rates would continue to be high for some time, we took decisive action to rebalance the portfolio's risk-reward profile.
We sold or wrote down specific investments and repositioned our portfolio toward lower-risk securities. We continued our risk reduction efforts throughout 2001, thereby decreasing our level of high-yield securities to approximately 4 percent of AEFA's $34 billion investment portfolio. This is down from 12 percent at the end of 2000. Going forward, we plan to work toward a level that is more in line with the industry average of approximately 7 percent.
AT AMERICAN EXPRESS BANK, WE HAVE SIGNIFICANTLY SHIFTED OUR LOAN EXPOSURE. In recent years we have increasingly moved away from the corporate banking business toward more broad-based consumer activities. As a result, we had less than $1 billion in corporate loans at year-end 2001, down from $3.1 billion in 1997. During the same period, our Personal Financial Services and Private Banking loans grew to $3.2 billion from $1.4 billion, or 60 percent of total loans, up from 22 percent. Despite the deterioration in many economies around the world, non-performing loans at AEB have been well controlled.
IN TRAVEL RELATED SERVICES, WE ADDRESSED BOTH INDUSTRY-WIDE DETERIORATION IN CREDIT QUALITY AND THE GROWING RISK RELATED TO MERCHANT BANKRUPTCIES. Within our U.S. charge card and lending portfolios, we have maintained our coverage ratios at the higher end of our reserve range. We also increased our reserve coverage of total receivables and loans and coverage of past due balances in excess of 100 percent. To reduce the risk associated with merchant bankruptcies in a difficult economy - particularly in the travel industry where merchants may be paid by American Express prior to rendering the actual services to cardmembers - we hold reserves to cover this exposure where appropriate. In some cases, we have instituted annual fees or lengthened the time between when the card charges are submitted to us and when we pay the merchant.
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