Citigroup Inc. said Wednesday it will spin off its Travelers Property Casualty insurance unit as a separate company, as Chairman Sanford Weill works to make the biggest U.S. financial services firm's earnings less cyclical.
One of Weill's goals is to lift Citigroup's stock valuation on Wall Street, and the announcement had the desired effect: The shares (ticker symbol: C) rose $1.90 to $50 on the New York Stock Exchange.
The sale of Travelers will be in two parts: Up to 20% of the stock will be issued in an initial public stock offering in the first quarter of 2002. The remaining stake will be distributed to Citigroup shareholders later--subject to regulatory approval and to the Internal Revenue Service's agreeing that the transaction would be tax-free to shareholders, as is typical of such spinoffs.
Weill, who has spent much of his career in the insurance business, said that Citigroup decided to divest itself of Travelers because the property and casualty business has a lower growth rate than other Citigroup units, creating a drag on its stock price.
New York-based Citigroup may reap between $4 billion and $5 billion in a Travelers IPO, thanks to the strong rally in insurance stocks in recent months, analysts said. Though the industry has suffered huge losses in the wake of the Sept. 11 terrorist attacks, that is leading to higher insurance premiums that should boost the companies' earnings in 2002 and beyond.
Nonetheless, Weill said he views the insurance industry's growth prospects to be weaker than what other Citigroup businesses may achieve. The company's main banking unit is Citibank and its brokerage arm is Salomon Smith Barney.
Weill told analysts he expects Citigroup, minus Travelers, to post "higher returns on equity and higher growth rates than what we've seen over the last three years."
Also, the property-casualty insurance business has been notoriously cyclical. And Weill said that selling homeowner and car insurance to Citigroup's banking and brokerage customers--so-called cross-selling--hasn't worked after five years of trying.
Weill "has tried to increase the predictability of the companies he runs," said James Ellman, a senior portfolio manager at Merrill Lynch Investment Management, which owns Citigroup shares. "This would get him out of an unpredictable business."
The planned transaction is Weill's first major sale after a decade of acquisitions culminating in the 1998 creation of Citigroup, when Travelers was merged into Citicorp.
Under Weill, Travelers bought Aetna Life & Casualty's property and casualty insurance unit for $4billion in 1996, combining it with its own property insurance business to form the fourth-largest U.S. property insurance firm.
Weill "bought low and is selling [the insurance business] back at a high price" based on the IPO plans, Ellman said.
Several major insurers have gone public this year to warm receptions. Most recently, Prudential Financial raised $3 billion last week in its IPO.
Weill said Citigroup expects to use the proceeds from the sale of Travelers to invest in higher-growth businesses, particularly in emerging markets. "Maybe in China," he said.
Associated Press was used in compiling this report.
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