Ameriprise Financial, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three months ended March 31, 2015, compared with the three months ended March 31, 2014. Ameriprise provides advice and wealth management, asset management, annuity, protection, banking and related financial services through its Advice & Wealth Management, Asset Management, Annuities, Protection and Corporate & Other segments. Assets under management and administration were $814.8 billion at March 31, 2015, up 4% from $782.8 billion a year earlier.
Key Financial Metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenues | $3,060 million | $3,003 million | +2% |
| Total net revenues | $3,053 million | $2,996 million | +2% |
| Income before taxes | $618 million | $650 million | -5% |
| Net income | $479 million | $515 million | -7% |
| Net income attributable to Ameriprise | $393 million | $400 million | -2% |
| Diluted EPS | $2.08 | $2.01 | +3% |
| Cash dividends declared per share | $0.58 | $0.52 | +12% |
| Net cash provided by operating activities | $913 million | $434 million | +$479 million |
GAAP net margin attributable to Ameriprise was approximately 12.9%, compared with 13.3% in the prior-year quarter. Pretax margin was approximately 20.2%, compared with 21.7%. Operating earnings increased to $412 million, or $2.18 per diluted share, from $407 million, or $2.04 per diluted share. Management’s stated long-term 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%.
Balance Sheet, Debt and Liquidity
- Total assets were $151.4 billion at March 31, 2015, compared with $148.8 billion at December 31, 2014.
- Cash and cash equivalents were $2.8 billion, up from $2.6 billion at year-end. Restricted and segregated cash and investments were $2.7 billion.
- Ameriprise standalone long-term debt was $3.1 billion and short-term borrowings were $200 million. Debt of consolidated investment entities was an additional $6.8 billion and is generally non-recourse to Ameriprise.
- The company had no borrowings under its $500 million unsecured revolving credit facility and had $1 million of outstanding letters of credit at March 31, 2015. The facility was amended on May 1, 2015 to extend its expiration to May 2020 and may be increased to $750 million subject to approval.
- Management intended to use cash on hand to repay approximately $350 million of senior notes due in November 2015. The company reported compliance with applicable debt covenants.
- Net cash used in financing activities was $905 million, including $394 million of share repurchases and $107 million of shareholder dividends.
Material Changes Versus the Prior Comparable Period
- Management and financial advice fees increased $82 million, or 6%, primarily from higher average assets under management. Premiums increased $23 million, or 7%, driven by growth in auto and home policies.
- Benefits, claims, losses and settlement expenses increased $83 million, or 18%. The principal unusual item was a $32 million increase in long-term-care reserves after updated claims and utilization information. Management expected to complete its claims-experience review in the second quarter.
- Market impact on variable annuity guaranteed benefits, net of hedges and related adjustments, was a $34 million expense versus a $15 million expense in Q1 2014, reflecting lower interest rates and greater equity-market volatility.
- Q1 2014 benefited from approximately $29 million related to policyholders moving investments into Portfolio Stabilizer funds; the comparable Q1 2015 benefit was approximately $2 million. Management expected minimal future benefit from this activity.
- Advice & Wealth Management operating earnings rose 16% to $210 million, supported by wrap-account growth. Asset Management operating earnings rose 4% to $191 million despite $5.8 billion of net outflows. Annuities operating earnings declined 2% to $172 million, and Protection operating earnings declined 14% to $51 million.
- Fixed annuity balances declined because of low interest rates, limited new sales and higher lapses. The average fixed annuity crediting rate fell to 3.0% from 3.3%.
- Operating cash flow improved substantially, while financing cash outflows increased because of higher policyholder surrenders, share repurchases and distributions to noncontrolling interests.
- Common share repurchases totaled 2.6 million shares at an average price of $131.93. Approximately $1.4 billion remained under the authorized repurchase program at March 31, 2015.
- The Columbia Threadneedle Investments brand launched on March 30, 2015. Management stated that investment teams, processes, funds, portfolios and corporate structure were unchanged.
Outlook, Risks, Contingencies and Unusual Items
- Management expects low interest rates to continue pressuring spread income, portfolio yields, reserves and DAC/DSIC amortization. Reinvestment yields may decline as securities mature or prepay.
- Asset Management reported net outflows of $5.8 billion, including Columbia retail outflows and Threadneedle institutional outflows. Management expected certain low-margin legacy-related outflows to continue for the foreseeable future.
- A hypothetical 10% equity-market decline was estimated to produce a $428 million net pretax reduction, while a hypothetical 100-basis-point parallel increase in interest rates was estimated to produce a $104 million net pretax increase. These are sensitivity scenarios, not forecasts.
- Variable annuity guarantees and associated hedges remain sensitive to interest rates, equity markets, volatility, policyholder behavior, credit spreads and model assumptions. The gross notional amount of derivatives hedging GMWB and GMAB exposures was $139.1 billion.
- If the estimated nonperformance spread on certain insurance liabilities moved to zero, management estimated an approximately $183 million after-tax reduction to net income based on March 31, 2015 conditions.
- The company faces ongoing legal, regulatory and arbitration matters. A proposed $27.5 million settlement of a 401(k) fiduciary class action was submitted for court approval and, net of insurance recovery, was not expected to affect consolidated earnings. A separate U.K. matter involving Threadneedle alleged $120 million of damages; the company could not reasonably estimate any potential loss.
- Regulatory developments, including proposed Department of Labor fiduciary rules for retirement-account advice, could affect fees, advisor compensation, product design and distribution economics.
- Nonconsolidated variable-interest entities generally expose Ameriprise only to the carrying value of its investments; the filing states that the company had no obligation to provide additional support.
Most Important Facts for Investors to Verify
- Whether the $32 million long-term-care reserve increase is sufficient after completion of the second-quarter claims-experience review.
- Continuation of low interest rates, spread compression, reinvestment yields and fixed-annuity lapse trends.
- Asset-management net flows, particularly Columbia retail and Threadneedle institutional outflows, and their effect on fee revenue.
- Variable-annuity guarantee liabilities, hedge effectiveness and sensitivity to equity, interest-rate and volatility changes.
- Cash availability for the November 2015 debt maturity, capital at regulated subsidiaries and restrictions on subsidiary dividends.
- Progress and potential economic effects of the proposed fiduciary regulations and other regulatory inquiries.
- Resolution and potential exposure from the pending legal and regulatory proceedings described in Note 15.