Ameriprise Downgraded to Neutral – Analyst Blog

Given the current critical sustainability factor, we are downgrading our recommendation on the shares of Ameriprise Financial Inc. (AMP) to Neutral from Outperform. Although the company’s third quarter earnings were significantly ahead of the Zacks Consensus Estimate, concerns related to sluggish equity markets, higher tax expense projections for 2010 and significant cost of maintaining high liquidity levels resulted in a cautious growth outlook for the near term.

 

Moreover, weak equity and other credit markets induced the market-driven decline in Ameriprise’s asset-based fees and hindered the maintenance of high liquidity levels and lower cash product spreads. Consistent with the slow sales environment for the industry, life insurance in force is also witnessing flattish to negative growth compared to the historical levels.

 

Although the company is successfully reducing its deferred and acquisition related costs through re-engineering initiatives, Ameriprise’s fixed interest costs and claims continue to inflate significantly. Benefits, claims, losses and settlement expenses are also increasing radically, primarily driven by increased auto and home benefits from higher business volumes, higher variable annuity death and living benefit expenses and the impact of unlocking. Further, management’s higher tax rate projections in 2010 only add to the expense burden.

 

Additionally, Ameriprise operates in a highly competitive financial services industry where brand integrity and market sentiments play an important role in the sales, net inflows and managed assets leverage. Given the current sluggish economic factors, low ratings and negative representation in financial publications can lead to outflows anytime, which may reduce demand and management fee revenues and impede achieving the benefits of economies of scale.

 

However, Ameriprise continues to operate on a healthy balance sheet by utilizing enterprise risk management capabilities and product hedging to anticipate and mitigate risk. The variable annuity hedging program continues to perform well. The modest dip in the company’s debt-to-total capital ratio − from 22.1% at the end of fiscal 2008 to 19.5% at the end of 2009 − projects management’s ability to pose significant capital leverage for the company in the future.

 

We believe the modest improvement witnessed in retail client activity will drive operating leverage in the upcoming quarters. Ameriprise continues to work on capturing greater assets by improving its product solutions and expanding its distribution reach. Also, the prospective acquisition of Columbia Management will significantly shore up the inorganic growth in the medium to long term. However, increasing expenses on account of higher tax projections, debt restructuring and processing charges impel us to hold on to the stock in the near term.