AMERIPRISE FINANCIAL INC quarterly report, Q3 FY2015

Ameriprise Financial, Inc. — 2015 Q3 Form 10-Q Summary

Business Context and Reporting Period

Ameriprise is a diversified financial-services company providing financial planning, wealth management, asset management, annuities, insurance and related products. The filing covers the unaudited three and nine months ended September 30, 2015, compared with the same periods in 2014. The company reported more than $765 billion of assets under management and administration and approximately 9,800 branded advisors at quarter-end.

Key Financial Metrics

Metric	Q3 2015	Q3 2014	9M 2015	9M 2014
Total net revenues	$2.886 billion	$3.111 billion	$9.067 billion	$9.179 billion
Income before tax	$463 million	$720 million	$1.696 billion	$1.989 billion
Net income attributable to Ameriprise	$397 million	$420 million	$1.205 billion	$1.194 billion
Diluted EPS	$2.17	$2.17	$6.48	$6.08
Operating earnings per diluted share	$2.35	$2.10	$6.85	$6.23
Cash flow from operations	Not provided for quarter	Not provided for quarter	$1.903 billion	$1.981 billion

Q3 net revenue declined 7%, while nine-month net revenue declined 1%. Q3 pretax margin was approximately 16.0%, versus 23.1% in the prior-year quarter; the nine-month pretax margin was approximately 18.7%, versus 21.7%.
Q3 net income attributable to Ameriprise decreased 5%, but nine-month attributable net income increased 1%, reflecting lower noncontrolling-interest income in 2015.
Operating earnings increased 5% in Q3 and 4% for the first nine months. Operating return on equity excluding accumulated other comprehensive income was 24.0% for the trailing twelve months, above management’s 19%–23% target range.
Assets under management and administration were $765.8 billion at September 30, down 4% from $796.8 billion a year earlier. AUM was $622.6 billion, down 5%; AUA was $143.2 billion, down 1%.
Cash and cash equivalents were $2.780 billion, compared with $2.638 billion at December 31, 2014. Operating cash flow was $1.903 billion, investing activities used $447 million and financing activities used $1.302 billion during the first nine months.
Ameriprise debt consisted of $3.019 billion of long-term debt and $200 million of short-term borrowings. The company had no borrowings under its $500 million unsecured revolving credit facility, with $1 million of letters of credit outstanding. The facility was extended to May 2020.
Total assets were $145.320 billion and total Ameriprise shareholders’ equity was $7.629 billion at September 30, 2015.

Material Changes Versus the Prior Comparable Period

Q3 net investment income fell 25% to $321 million, primarily from lower fixed-maturity income, unfavorable investment hedge results and lower income from consolidated investment entities.
Q3 other revenues fell 24% to $296 million, mainly because of lower consolidated-investment-entity revenues.
Management and financial advice fees declined 1% in Q3 but increased 3% for the nine months, supported by growth in Advice & Wealth Management wrap assets. Q3 wrap assets had $3.0 billion of net inflows but declined $8.1 billion from market depreciation and other effects.
Asset Management operating earnings declined 13% in Q3 and 4% for the nine months. Managed assets declined 7% year over year to $471.1 billion, with $7.4 billion of Q3 net outflows and $15.2 billion of nine-month net outflows.
Annuities operating earnings increased 38% in Q3 and 5% for the nine months, substantially aided by favorable annual valuation-assumption unlocking. Fixed-annuity balances declined 12% year over year to $10.9 billion because of low rates, limited new sales and higher lapses.
Protection operating earnings declined 62% in Q3 and 31% for the nine months. Higher auto and home reserves, higher life claims, catastrophe losses and long-term-care reserve activity were significant adverse factors.
Q3 benefits, claims, losses and settlement expenses included a $58 million benefit from unlocking, compared with a $6 million expense in the prior-year quarter. The nine-month period included a $58 million benefit, compared with a $6 million expense in 2014.
The company repurchased approximately 9.8 million shares for $1.2 billion during the first nine months and had $553 million remaining under its repurchase authorization at September 30. Quarterly dividends declared increased to $0.67 per share from $0.58.

Guidance, Outlook, Commentary and Risks

Management’s multi-year financial targets are operating total net revenue growth of 6%–8%, operating diluted EPS growth of 12%–15% and operating ROE excluding AOCI of 19%–23%. The filing does not provide revised full-year guidance.
Management expects continued outflows of primarily low-margin assets associated with former Columbia and Threadneedle parent relationships, although the timing, volume and mix are uncertain.
The prolonged low-interest-rate environment is compressing spreads, reducing reinvestment yields and potentially increasing reserves and DAC/DSIC amortization. The company expects portfolio income yields to continue declining if rates remain low.
At September 30, a hypothetical 10% equity-price decline was estimated to reduce pretax income by $444 million after hedges. A hypothetical 100-basis-point parallel increase in interest rates was estimated to increase pretax income by $126 million. These are sensitivity scenarios, not forecasts.
Variable-annuity guarantee exposure remains significant. The fair value of GMWB and GMAB embedded-derivative liabilities was $1.107 billion, and gross notional derivatives hedging these benefits were $134.1 billion.
Management identified risks from market volatility, credit spreads and defaults, foreign exchange, insurance morbidity and mortality, persistency, auto and home claims, regulatory change, litigation, technology and cybersecurity, counterparty performance and restrictions on subsidiary dividends.
The company is subject to ongoing regulatory inquiries and legal proceedings involving product sales, advisor supervision, claims administration, client information, trading activity, systems and UK operations. A UK lawsuit involving Threadneedle alleges approximately $120 million of damages; the company stated that any loss could not reasonably be estimated.
The company plans to adopt new consolidation guidance on January 1, 2016 using a modified retrospective approach. It estimated deconsolidation of certain CLOs and all property funds could reduce reported assets by approximately $7.0 billion, liabilities by $5.6 billion and equity by $1.4 billion, without a material earnings effect.

Important Facts for Investors to Verify

Reconcile GAAP earnings and EPS with operating earnings, particularly the effects of unlocking, variable-annuity market impacts, investment hedges, consolidated investment entities and noncontrolling interests.
Monitor asset-management net flows, former-parent-related outflows, market performance, foreign-exchange effects and fee-rate trends.
Assess the sensitivity of annuity guarantees, DAC/DSIC balances and earnings to interest rates, equity markets, volatility and contractholder behavior.
Review Protection segment loss ratios, auto and home reserve development, life claims, catastrophe losses and long-term-care assumptions.
Confirm liquidity after the planned $350 million repayment of senior notes due in November 2015, ongoing dividends and share repurchases.
Evaluate the effect of the 2016 CLO and property-fund deconsolidation on reported assets, liabilities, equity, leverage and segment comparability.
Track regulatory inquiries, the Threadneedle litigation and unrecognized tax benefits, which totaled $239 million at September 30, 2015.