AMERIPRISE FINANCIAL INC quarterly report, Q2 FY2016

Business Context and Reporting Period

Ameriprise Financial, Inc. filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2016. The company provides financial planning, advice, asset management, annuity, insurance, banking and related services through Advice & Wealth Management, Asset Management, Annuities, Protection and Corporate & Other segments. Assets under management and administration were $776.6 billion at June 30, 2016, down 4% from $811.1 billion a year earlier.

Financial Metrics

Metric	Q2 2016	Q2 2015	Six months 2016	Six months 2015
Total net revenues	$2.871 billion	$3.128 billion	$5.636 billion	$6.181 billion
Pretax income	$410 million	$615 million	$885 million	$1.233 billion
Net income attributable to Ameriprise	$335 million	$415 million	$699 million	$808 million
Diluted EPS	$1.97	$2.23	$4.06	$4.30
Operating earnings	$379 million	$434 million	$757 million	$846 million
Operating diluted EPS	$2.23	$2.33	$4.40	$4.51
Operating return on equity, excluding AOCI	23.9% trailing twelve months	23.5% prior-year comparable

Q2 net revenues declined 8%, pretax income declined 33%, and net income attributable to Ameriprise declined 19% year over year. For the six months, net revenues declined 9%, pretax income declined 28%, and attributable net income declined 13%.
Approximate attributable net-income margin was 11.7% in Q2 2016 versus 13.3% in Q2 2015; for the six months it was approximately 12.4% versus 13.1%.
Six-month operating earnings declined 11%; operating diluted EPS declined 2% because of substantially lower share count from repurchases.
Cash provided by operating activities was $1.345 billion versus $1.532 billion in the prior-year period. Investing activities provided $63 million versus using $182 million. Financing activities used $908 million versus $1.421 billion.
Cash and cash equivalents excluding consolidated investment entities were $2.8 billion at June 30, 2016, compared with $2.4 billion at December 31, 2015.
Ameriprise corporate debt totaled $2.652 billion, including $2.452 billion of long-term debt and $200 million of short-term borrowings, versus $2.892 billion at year-end 2015. The company redeemed the remaining $229 million of junior subordinated notes due 2066 in June.
The company had no borrowings under its $500 million unsecured revolving credit facility, which expires in May 2020, and was in compliance with its debt covenants.
Shareholders' equity attributable to Ameriprise was $7.089 billion at June 30, 2016, compared with $7.217 billion at December 31, 2015. The company repurchased 9.8 million shares for $895 million during the first six months and had $1.7 billion remaining under its repurchase authorization.

Material Changes Versus the Prior Comparable Period

Management and financial advice fees fell 5% in both the quarter and six-month period, primarily because of lower average assets under management and lower performance fees.
Asset Management AUM declined 9% to $459.6 billion, with six-month net outflows of $12.2 billion. Operating earnings declined 25% in Q2 and 23% for the six months.
Advice & Wealth Management operating earnings were essentially flat in Q2 at $221 million and declined 1% for the six months to $426 million. Wrap account assets increased 4% year over year to $189.7 billion.
Annuities operating earnings declined 3% in Q2 and 16% for the six months. Fixed annuity balances declined 8% year over year to $10.3 billion, and management expects the fixed annuity book to gradually run off.
Protection operating earnings declined 49% in Q2 and 14% for the six months, primarily due to higher auto and home losses and the absence of prior-year long-term-care reserve benefits.
Benefits, claims, losses and settlement expenses increased 10% in Q2. Catastrophe losses were $37 million in Q2 2016 versus $48 million in Q2 2015.
Results benefited from a lower effective tax rate of 18.4% in Q2 and 21.0% for the six months, compared with 22.6% in both prior-year periods. The 2016 rate included a $17 million benefit related primarily to completed prior-year tax audits.
The company adopted consolidation guidance effective January 1, 2016, deconsolidating several collateralized loan obligations and all previously consolidated property funds. The adoption reduced reported assets by approximately $6.2 billion, liabilities by $4.9 billion and equity by $1.3 billion, and materially reduced reported consolidated investment-entity results.

Guidance, Outlook, Commentary, Risks and Unusual Items

Management's long-term financial targets are operating total net revenue growth of 6% to 8%, operating diluted EPS growth of 12% to 15% and operating return on equity excluding AOCI of 19% to 23%.
Management expects continued low-interest-rate pressure, including spread compression, declining portfolio yields and eventual earnings declines in fixed annuities. The average yield on investment purchases during the first six months was approximately 2.9%.
Management expects former-parent-related, primarily low-margin, Columbia and Threadneedle outflows to continue for the foreseeable future. The June 2016 U.K. referendum created additional uncertainty, foreign-exchange pressure and negative U.K. and European flows.
The Department of Labor fiduciary rule is expected to require changes to advice and distribution practices. The company incurred $12 million of related implementation expense in the first half and $7 million in Q2.
Q2 included $23 million of expense related to resolving a legacy hedge-fund legal matter. The company also recognized an $11 million loss on the March 2016 sale of $271 million of consumer loans.
Variable-annuity guarantee liabilities are sensitive to market conditions and policyholder behavior. The fair value of GMWB and GMAB embedded derivative liabilities was $1.965 billion at June 30, 2016, compared with $851 million at year-end 2015.
A hypothetical 10% equity-market decline was estimated to reduce pretax income by approximately $463 million after hedging; a hypothetical 100-basis-point interest-rate increase was estimated to increase pretax income by approximately $236 million. Actual results may differ materially.
Pending legal and regulatory matters include an English High Court lawsuit involving Threadneedle with claimed damages of $120 million; management could not reasonably estimate any potential loss. The company also faces ongoing regulatory inquiries involving product sales, advisor supervision, claims administration, client information, trading and escheatment practices.
PwC identified a potential independence issue under the SEC Loan Rule involving lenders that own interests in Columbia Threadneedle funds. PwC stated it believes it can continue serving as independent auditor based on SEC staff no-action relief and its analysis.
The company reported effective disclosure controls as of June 30, 2016 and no material changes in internal control over financial reporting.

Important Facts for Investors to Verify

Separate the effects of CIE deconsolidation, market-sensitive guarantee revaluations, hedge results, tax benefits and the legacy legal charge from underlying operating performance.
Monitor Asset Management net flows, former-parent-related outflows, U.K. and European flows, foreign-currency effects and the resulting pressure on fee revenue.
Assess the sustainability of annuity and insurance earnings under prolonged low interest rates, declining reinvestment yields and fixed-annuity runoff.
Review variable-annuity guarantee liabilities, hedge effectiveness, nonperformance-risk assumptions and sensitivity to equity, interest-rate and volatility changes.
Confirm the status and potential exposure of legal, regulatory, tax and auditor-independence matters, including the Threadneedle litigation and SEC Loan Rule issue.
Evaluate capital deployment against liquidity and subsidiary dividend constraints, including the $1.7 billion remaining share-repurchase authorization and ongoing quarterly dividends.