Originally created 02/02/05

American Express to jettison financial advisers business

NEW YORK - Financial services giant American Express Co. said Tuesday it plans to spin off its financial advisory business to its shareholders so it can focus on its charge and credit card, payments processing and travel businesses.

The move by the New York-based company comes a day after Citigroup Inc., the nation's largest financial institution, announced that it was selling its Travelers life insurance and annuity business to MetLife Inc. for $11.5 billion.

Both moves are aimed at improving the profitability of the parent company and suggest that the "supermarket" approach to financial services that was so popular in the 1980s and 1990s may be proving cumbersome to manage.

American Express said its shareholders would get all of the shares of the new company, which will include the American Express Financial Advisors unit, based in Minneapolis, as well as Threadneedle Asset Management, which American Express acquired in 2003.

The spinoff is to be completed in the third quarter, American Express said.

American Express shares rose $2.75, or more than 5 percent, in morning trading on the New York Stock Exchange. Citigroup shares advanced 32 cents to $49.37, also on the Big Board.

The American Express financial advisory business provides financial planning and advice, asset management, insurance, annuities and related businesses through a network of more than 12,500 advisers. It generated revenues of about $7 billion and earned about $700 million in 2004.

"This spin-off will create two distinct businesses and allow them to capitalize on their respective growth opportunities," Kenneth I. Chenault, chairman and chief executive officer of American Express, said in a statement.

In a conference call with analysts, Chenault said that American Express decided to spin off the advisory unit rather than sell it because of "the tax consequences." He added: "We never considered a sale for that reason."

Chenault emphasized that the spin off would leave American Express with net income of $2.7 billion on revenues of $22 billion. For all of 2004, American Express including the financial advisory earned $3.4 billion on revenues of $29 billion.

He also said the company could raise its target for return on equity to a range of 28 percent to 30 percent from the current 18 percent to 20 percent while maintaining its dividend.

Chenault called it "a critical turning point in the strategic development of American Express" so the company could capitalize on changes in the card industry as a result of recent court rulings that forced Visa and MasterCard associations to allow their member banks to issue American Express and Discover cards.

The independent financial advisory service, meanwhile, will have "flexibility and resources to drive its business... without the constraints of the competing corporate priorities that exist today."

Company officials said that there would be a capital infusion into the American Express Financial Advisors unit before the spin off, but said it was too early to give figures.

The financial advisory service was born out of a series of acquisitions that American Express made in the late 1970s, including its purchase of Investors Diversified Services, which provided financial advice to middle-class families. The service was rebranded as American Express Financial Advisors in 1995. Its insurance unit continues to function under the IDS name as IDS Life Insurance Co.

In 2003 and 2002, American Express Financial Advisors reported a series of losses in its investment portfolio, including a hit on WorldCom debt holdings when the communications company went into bankruptcy reorganization. Chenault ordered the division to reduce its risk, and it has been profitable since.

After the spin-off, American Express will consist of a charge and credit card business and a network that processes more than $400 billion in transactions from merchants throughout the world. It will also operate global travel and Travelers Cheque businesses and an international bank serving wealthy consumers and financial institutions.

The two companies will be independent, have separate public ownership, boards of directors and management.

The spinoff business will continue to be led by James Cracchiolo as chairman and chief executive.

Fitch Ratings put American Express debt on "watch negative" while it studies the implications of the capital transfer. Insurance rating agency A.M. Best, meanwhile, put its rating of the IDS Life on review "with negative implications" because of the spin off.

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