On Monday, A.M. Best upgraded its outlook on Ameriprise Financial Inc. (AMP) to ‘Stable’ from ‘Negative’. The rating agency also confirmed its issuer credit rating (ICR) at ‘aa-’ and financial strength rating (FSR) at ‘A+’ for the company’s primary life insurance subsidiaries − RiverSource Life Insurance Company and RiverSource Life Insurance Company of New York.
The upgrade is based on A.M. Best’s improved outlook on the strong risk-adjusted capital position, enhanced liquidity and balance sheet strength of Ameriprise. Though the operating results of the company have been affected by fluctuating reserves supporting variable annuity guarantees, the rating agency believes that the company has taken up various measures to improve hedge effectiveness and reduce the risk in many of its products.
With the narrowing of credit spreads, Ameriprise’s unrealized gains on investment portfolio as of June 30, 2010, were about $1.6 billion. A.M. Best forecasts a further risk of credit impairment in the company’s direct commercial loan portfolio and residential and commercial mortgage-backed securities (CMBS). Though there have been a few delinquent loans in the direct commercial loans portfolio in the recent past and the CMBS has exposure mainly in senior tranches, A.M. Best is apprehensive of Ameriprise’s exposure in the CMBS and direct commercial loans.
According to A.M. Best, although Ameriprise’s fundamental and financial metrics have improved, the company’s earnings remain correlated to the performance of the equity market. Hence, any fluctuation in the equity market will impact the company’s earnings.
A.M. Best also revised the ICR for Ameriprise P&C Companies to ‘a+’ from ‘a’, affirmed the FSR of ‘A’ and provided a ‘Stable’ outlook.
Apart from A.M. Best, Standard & Poor's upgraded Ameriprise’s outlook to ‘Stable’ from ‘Negative’ in July, based on improved second quarter 2010 results. In June, Fitch Ratings also revised its outlook from ‘Negative’ to ‘Stable’ based on the company’s liquidity, financial stability and capitalization.
Though the current global economic scenario is a concern for Ameriprise’s critical sustainability factor, we think that the company has the potential to realize the full benefits of its strategic and cost-cutting initiatives in the long term. Ameriprise has a diverse business mix, a healthy balance sheet with lucrative, long-term investments and a careful restructuring policy. However, increasing expenses on account of higher tax projections and debt restructuring charges remain major concerns at this point.
Ameriprise shares currently retain a Zacks #3 Rank, which translates into a short-term 'Hold' rating. Also, considering the fundamentals, we are maintaining a long-term Neutral recommendation on the shares.
AMERIPRISE FINL (AMP): Free Stock Analysis Report
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