American Express To Spin Off Financial Advice Business

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American Express Company, New York, plans to spin off its American Express Financial Advisors unit to shareholders.

The company says it wants to shed the Minneapolis-based subsidiary so it can focus on its highly profitable charge and credit card business and a charge-processing network that handles more than $400 billion in transactions annually.

American Express expects the deal to be completed in the third quarter of 2005. It is too early to tell what the value of the new entity would be, company officials say.

The new company would include American Express IDS Life Insurance Company, which has around $145 billion of life insurance in force. It would not include American Express Bank Ltd.

“This spin-off would create two distinct businesses that would be in a position to capitalize on different growth opportunities,” says Kenneth I. Chenault, American Express chairman and CEO. “As an independent company, AEFA would not have to compete for capital or management resources with other American Express businesses and therefore would be able to react more quickly to market opportunities for new products, partnerships and expansion.”

The announcement came on Feb. 1, a day after Citigroup announced its decision to sell Travelers Life & Annuity to MetLife. Although Citigroup and American Express gave different reasons for their divestitures, they share at least one significant feature: They are two of the most prominent financial “supermarkets” created in the 1990s to take advantage of a widely predicted convergence of financial services.

Now, within 24 hours of each other, they have declared their desire to focus on core businesses and part company with their less profitable units.

AEFA was a drag on American Express profits, though it did contribute to its revenues. The unit lost money in both 2002 and 2003, when a stock market slump hurt bottom lines throughout the life insurance and financial service industries.

Chenault estimates that once it has shed the AEFA unit American Express would earn a return on equity as high as 30%, well up from the current range of 18% to 20%. American Express earned $2.7 billion last year on revenue of $22 billion.

On its own, AEFA would be a formidable competitor in financial services. Last year, it generated net income of about $700 million on around $7 billion in revenues. It owns or manages over $410 billion in assets.

Once the spinoff is complete, both AEFA and Amex still would be ranked in the Fortune 500.

James Cracchiolo, chairman and CEO of AEFA, would continue in that position after the spinoff, as would other members of the companys top management team.

Both Chenault and Cracchiolo said during a conference call with financial analysts last week that AEFAs recent favorable results made a strong case for the spinoff. The company has strong capabilities in both manufacturing and distribution, Cracchiolo noted, backed up by an extensive financial planning network with a high customer retention record.

Another major driving force behind the spinoff was a federal court decision early last year upholding a Department of Justice antitrust ruling against Visa and MasterCard, Chenault said.

In that ruling, the DOJ held that Visa and MasterCard could not bar their member banks from issuing rival credit cards. That decision will help sharply increase sales of American Express cards and network services, Chenault predicted.

Among details still to be worked out for the spinoff is what to call the new company, he said. In addition, the two companies probably will cobrand and cross-sell some products at least for a time. They must also negotiate how much capital American Express will commit to the new entity.

Both AEFA and IDS, the insurance unit, “will be capitalized in a manner that supports an AA rating that will provide easy access to capital,” Chenault said. “We believe we have substantial capital reserves to support both.”

One rating service, Standard & Poors, New York, said it had placed its A+ long-range rating for American Express and its subsidiaries on credit watch, with an eye on a possible downgrade.

“In the event of a downgrade, S&P does not believe the ratings would be lowered more than one notch,” says Daniel Martin, an S&P analyst.

Cracchiolo predicted strong top line and bottom line growth for his new company. “Financial planning advice is more important now than ever, particularly for the mass affluent population.”


Reproduced from National Underwriter Edition, April 29, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.