A.M. Best Affirms Ratings of Ameriprise Financial, Inc. and Its Subsidiaries
September 22, 2014 by Best's News Service
Oldwick – A.M. Best has affirmed the financial strength rating (FSR) of A+ (Superior) and issuer credit ratings (ICR) of “aa-” of RiverSource Life Insurance Company (Minneapolis, MN) and its wholly owned subsidiary, RiverSource Life Insurance Company of New York (Albany, NY). A.M. Best also has affirmed the FSR of A (Excellent) and ICRs of “a+” for IDS Property Casualty Insurance Company (IDS) and its wholly owned, fully reinsured subsidiary, Ameriprise Insurance Company (both domiciled in De Pere, WI). Together, these companies represent the key life/health and property/casualty insurance subsidiaries of Ameriprise Financial, Inc. (Ameriprise) (headquartered in Minneapolis, MN) [NYSE: AMP]. Concurrently, A.M. Best has affirmed the ICR of “a-” and the existing debt ratings of Ameriprise. The outlook for these ratings is stable.
Additionally, A.M. Best has assigned a debt rating of “a-” to Ameriprise’s recent issuance of $550 million, 3.70% senior unsecured notes due 2024. The assigned outlook is stable. (See below for a detailed listing of debt ratings.)
The ratings of the life/health companies primarily reflect their improved operating results, favorable risk-adjusted capital positions despite significant stockholder dividends in recent periods, and effective hedging programs. Operating earnings have improved considerably over the most recent period due to higher management and financial advisor fees from improved market conditions, leading to higher assets under management. In addition, operating earnings have benefited from higher distribution fees due to increased client activity. The growth in operating earnings has contributed to the life/health companies maintaining their favorable capital positions. Furthermore, Ameriprise continues to employ effective hedge programs that are primarily constructed to hedge GAAP income and economic risk but also limit statutory capital volatility. The group also has continued to reduce the risk of some of its product offerings. This includes the recent launch of its managed volatility funds that are now required for all new variable annuities with a living benefit rider. The managed volatility funds are expected to help Ameriprise lower hedge costs and performance volatility, while also reducing required capital.
The ratings also consider Ameriprise’s broad multi-platform network of financial advisors, its leading market position and well-developed enterprise risk management program. A.M. Best notes that the number of branded financial advisors has generally declined in recent periods, but overall retention rates on experienced advisors remain in the mid 90% range.
A.M. Best notes that Ameriprise’s earnings remain highly correlated to movements in interest rates and equity markets. Approximately three-quarters of Ameriprise admitted assets are in separate accounts which are susceptible to sizable equity market declines. Earnings are also likely to be materially impacted should the current low interest rate environment persist, particularly in the fixed annuity and long-term care insurance lines of business. Although A.M. Best remains concerned with the potential earnings volatility, this concern is somewhat mitigated by Ameriprise’s robust enterprise risk management practices, which measures its key risks to ensure decisions are made that will enhance its overall business profile and performance.
While life insurance sales have rebounded over the past three years, statutory premiums from Ameriprise’s annuity and life and health segments generally have declined over the past few years and remain well below levels prior to the financial crisis. This is primarily due to a substantial decline in variable annuity and variable universal life sales following the financial crisis. Sales of variable annuities have been impacted since the organization decided to cease marketing through third-party distribution channels and the transition to new volatility managed annuity products in the past two years. However, the company’s product mix has become more balanced as ordinary life insurance sales have increased in recent periods. Although improved during the first half of 2014, Ameriprise has experienced significant outflows in its annuity and asset management businesses over the years. While earnings have benefitted from market appreciation and expense management initiatives in these business segments, a substantial decline in equity markets may result in a considerable decline in operating results should these negative outflows go back to historical levels.
A.M. Best anticipates that Ameriprise’s adjusted financial leverage ratio, which includes equity credit treatment for a portion of its existing junior subordinated securities, will increase to approximately 25% as a result of the current senior notes offering. Despite the increase in leverage, A.M. Best notes that Ameriprise’s financial leverage and interest coverage ratios remain well within A.M. Best’s guidelines for its current ratings.
The ratings of IDS and its reinsured subsidiary, Ameriprise Insurance Co., are based on the consolidated operating results and financial positions that reflect their contribution to, as well as the financial strength support it receives from Ameriprise through diversification of risks and earnings, expanded product offerings to affinity partners and tax benefits from their municipal bond portfolio. In addition, the ratings take into account the companies’ strong risk-adjusted capitalization and positive, albeit declining, operating results generated primarily by consistent net investment income from a growing invested asset base. However, operating results have been negatively impacted by underwriting volatility due to recent loss and loss adjustment expense reserve strengthening and above plan, prior year, weather-related, catastrophic losses.
A.M. Best believes that positive rating actions for the members of the Ameriprise are unlikely over the near to medium term. Factors that could lead to a negative rating action include a material decline in RiverSource Life Insurance Company’s risk-adjusted capitalization due to stockholder dividends and/or deteriorating operating results from spread compression or a significant decline in assets management fees.
The following debt rating has been assigned:
Ameriprise Financial, Inc.–
— “a-” on $550 million 3.70% senior unsecured notes, due 2024
The following debt ratings have been affirmed:
Ameriprise Financial, Inc.–
— “a-” on $700 million 5.65% senior unsecured notes, due 2015 (currently $350 million outstanding)
— “a-” on $300 million 7.30% senior unsecured notes, due 2019
— “a-” on $750 million 5.35% senior unsecured notes, due 2020
— “a-” on $750 million 4.00% senior unsecured notes, due 2023
— “bbb” on $500 million 7.518% junior subordinated notes, due 2066 (currently $294 million outstanding)
The following indicative shelf ratings have been affirmed:
Ameriprise Financial, Inc.–
— “a-” on senior unsecured debt
— “bbb+” on subordinated debt
— “bbb” on preferred stock
Ameriprise Capital Trust I, II, III and IV–
— “bbb” on trust preferred securities
The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides
a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
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