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A.M. Best Co. has kept the financial strength rating (“FSR”) of A (Excellent) and issuer credit rating (“ICR”) of “a+” of AMEX Assurance Company, an operating subsidiary of American Express Co. (AXP - Analyst Report) (“AmEx”). The outlook for all the ratings remains stable.

The rating affirmations came on the back of AMEX Assurance’s solid capital positioning owing to its risk-averse nature towards investing. In addition, operating efficiency manifested by the company in generating income by selling insurance related products to the AmEx cardholders was a contributing factor.

The margin expansion has been brought about by AMEX Assurance’s efficiency in restricting its expenditures at low levels, proper direct marketing strategy and its stress on certain specific insurance policies.

However, there are quite a few factors working against the company. All AMEX Assurance businesses are targeted towards AmEx cardholders, and given the sluggish growth of policyholders’ surplus in the last 5 years there is not much upside for the subsidiary. Also, the company has very little reserve as most of it has been eroded over the years by paying dividends.

There is no clear indication that the ratings agency is contemplating an increase in the current ratings. However, A.M. Best expects AMEX Assurance to sustain its operating profitability and maintain the level of premiums earned as a decline would prompt the rating agency to reduce the ratings.

We believe both the company and its subsidiaries need to focus more on product diversification to improve its earnings and reduce its risk to a certain extent. AmEx’s stocks gained 61 cents (or 1.1%) since the announcement of the news to close at $57.10 yesterday.

AmEx’s closest competitors Mastercard Incorporated (MA - Analyst Report) and Visa, Inc. (V - Analyst Report) also received rating affirmations from Standard & Poor's Ratings Services (“S&P”), according to Reuters. The rating agency has confirmed the long-term and short-term counterparty credit ratings of 'A-/A-2' on Mastercard with a positive outlook. Concurrently, it also avowed similar rating of 'A+/A-1' on Visa with a stable outlook.

AmEx currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We also maintain a long-term Neutral recommendation on its stock.

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