American Express To Spin Off Financial Advice Business
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.