Ameriprise: Increasing Our Fair Value Estimate to $379 from $358, Shares Moderately Undervalued

Sector Director

Michael Wong

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An operating expense is an expense a business incurs through its normal business operations. Often abbreviated as OPEX.

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Ameriprise Financial has transformed itself into an investment management powerhouse, with about $1.3 trillion in total assets under management and advisement and around 10,000 financial advisors at the end of the second quarter of 2023. The firm continues to shift away from insurance and to place more emphasis on asset and wealth management operations. In 2019, the company closed the sale of its auto and home insurance business, and in 2020 it discontinued the sale of its proprietary fixed annuities. Columbia Threadneedle Investments, the firm's global asset-management business, turned Ameriprise into a contender in the global asset management industry. Recently about 80% of revenue comes from the company's wealth and asset management segments that should help the company generate operating margins consistently in the low- to mid-20s compared with midteens to low-20s historically.

We expect Ameriprise to weather potential economic turmoil relatively well. Many life insurance companies significantly "derisked" after the global financial crisis and became more conservative with their guaranteed benefit contracts. At the end of 2022, Ameriprise had several billion dollars of capital above regulatory requirements, about 98% of the fixed income securities on its balance sheet were investment-grade with about 75% rated AA or higher, and an estimated 100% of the deposits in its bank subsidiary were within FDIC limits.

In addition to returning most of its operating earnings to shareholders with dividends and share repurchases, the company is funding incremental growth investments. Ameriprise recently increased its presence in investment management with the acquisition of Bank of Montreal's EMEA asset management business in 2021, which increased assets under management by roughly 20%. Ameriprise is also using its capital to support the growth of its bank. Wealth management firms have been able to increase their profits by housing client cash as deposits in their banks and offering loan products, such as securities-based loans.

Business Strategy & Outlook

Wealth management moats are a result of switching costs with some contribution from intangible assets. A typical client stays with their financial advisor for 10 years or more. Wealth management is about trust, and clients are often attracted to the trusted brand of a financial institution and form attachments with their financial advisor. While there may be financial advisors that choose to go to another wealth management firm or start their own independent practice, many financial advisors choose to stay with their current firm, as there are operational difficulties with setting up or learning a new wealth management technology system and significant uncertainties regarding how many of their clients would move with them if they switch firms. Industry data from Cerulli estimates that the average client assets attrition rate is around 30% when an advisor switches.

We believe Ameriprise has built a moat surrounding its asset-management and wealth management businesses. Although the switching costs might not be explicitly large, the benefits of switching from one asset manager or wealth manager to another are at times so uncertain that many clients simply stay where they are. As a result, money that flows into asset and wealth management firms tends to stay there, creating significant asset stickiness.

In our view, Ameriprise has a Morningstar Economic Moat Rating of narrow around its asset-management and wealth management operations. With one of the largest agent channels in the industry, there is no question that Ameriprise has scale. Since its 2005 spinoff from American Express, Ameriprise has gradually moved up the value chain to provide customized services and financial planning solutions to the mass affluent and affluent client groups. Ameriprise’s focus on personal relationships helps the firm build on its switching-cost advantage. The company's retention rate for advisors is over 90%, and the industry retention rate for financial advisors of their retail clients is also around 90%. By positioning itself as a one-stop shop for baby boomers, offering advice in financial planning, fund investment, and insurance purchase, the firm makes it that much harder for boomers to switch to another provider. The size and scale of its operations, the strength of its brands, and the diversity of its AUM by asset class, distribution channel, and geographic reach also provide Ameriprise with a leg up over competitors.

In general, insurers do not benefit from favorable competitive positions. They are in the business of selling commodified insurance products to consumers who attribute very little value to brand. Industry competition is fierce, and there is a high degree of cost uncertainty. Because of the long duration attached to many of the products they sell, insurers do not necessarily know their cost of goods sold for a number of years, allowing them to underprice policies without knowing it. Firms have a large incentive to chase growth without regard for profitability, a cycle that repeats itself as competitors are forced to match artificially low prices or risk losing business.

From our perspective, insurance and annuities are very mature, and insurance products are mostly commodities that can be replicated by a competitor fairly easily. In fact, most companies lose money on underwriting, and they rely heavily on investment income to make up for underwriting losses. Since the typical life insurer is operationally leveraged to the state of the capital markets, over which the company has no direct control, we think it is difficult for most life insurance companies to generate consistent excess returns, a requirement for an economic moat.

Narrow

Economic Moat

Ameriprise Financial

Ameriprise Financial, Inc. operates as a holding company. The firm provides financial planning, asset management and insurance services to individuals, businesses and institutions. It operates through the following business segments: Advice & Wealth Management, Asset Management, Retirement & Protection Solutions, and Corporate & Other. The Advice & Wealth Management segment provides financial planning and advice, as well as full-service brokerage and banking services, primarily to retail clients through the company's financial advisors. The Asset Management segment provides investment advice and investment products to retail and institutional clients. It also provides products and services on a global scale through two complementary asset management businesses: Columbia Management and Threadneedle. The Columbia Management business primarily provides U.S. domestic products and services and Threadneedle primarily provides international investment products and services. Its international retail products are primarily provided through third-party financial institutions. The segments retail products include mutual funds and variable product funds underlying insurance and annuity separate accounts. The Retirement & Protection Solutions segment offers a variety of protection products to address the protection and risk management needs of the company's retail clients, including life, DI, and property-casualty insurance. The Corporate & Other segment consists of net investment income on corporate level assets, including excess capital held in the company's subsidiaries and other unallocated equity and other revenues from various investments as well as unallocated corporate expenses. The company was founded by John Tappan in 1894 and is headquartered in Minneapolis, MN.

Earnings data Q1 2024

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