Ameriprise Financial, Inc. — Form 10-Q Summary
Business context and reporting period
Ameriprise Financial is a diversified financial services company providing financial advice, wealth management, asset management, annuity, insurance and related services. The filing covers the unaudited three and nine months ended September 30, 2013, compared with the corresponding 2012 periods. The company reported more than $734 billion of assets under management and administration and more than 9,700 advisors at quarter-end.
Operating segments are Advice & Wealth Management, Asset Management, Annuities, Protection, and Corporate & Other. Securities America remains presented as discontinued operations following its 2011 sale.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Total net revenues | $2,813 million | $2,468 million | $8,253 million | $7,543 million |
| Income before tax | $602 million | $199 million | $1,491 million | $820 million |
| Net income attributable to Ameriprise | $382 million | $173 million | $1,038 million | $640 million |
| Diluted EPS | $1.86 | $0.79 | $4.97 | $2.84 |
| Operating earnings per diluted share | $1.91 | $1.32 | $5.18 | $3.90 |
| Cash dividends declared per share | $0.52 | $0.35 | $1.49 | $0.70 |
- Revenue increased 14% in the quarter and 9% year to date. Management and financial advice fees increased 11% in both periods, while distribution fees increased 13% and 11%, respectively.
- Net income attributable to Ameriprise increased 121% in the quarter and 62% year to date. Diluted EPS increased 135% and 75%, respectively, aided by higher earnings and lower share count.
- Approximate GAAP pretax margin was 21.4% in Q3 and 18.1% for the first nine months; net income attributable to Ameriprise margin was approximately 13.6% and 12.6%, respectively.
- Operating earnings were $392 million in Q3 and $1,082 million for the first nine months, compared with $289 million and $878 million in the prior-year periods.
- Operating segment earnings for Q3 were $153 million for Advice & Wealth Management, $178 million for Asset Management, $219 million for Annuities, $75 million for Protection, and a $73 million loss for Corporate & Other.
- Assets under management and administration increased 8% year over year to $734.9 billion, including $605.1 billion of AUM, up 7%. Wrap account assets increased 19% year over year to $144.1 billion.
- Asset Management AUM was $479.3 billion, up 4%, but segment net flows were negative $4.3 billion in Q3 and negative $12.2 billion for the first nine months.
Cash flow, balance sheet, debt and liquidity
| Balance sheet metric | September 30, 2013 | December 31, 2012 |
|---|---|---|
| Total assets | $140.2 billion | $134.7 billion |
| Cash and cash equivalents | $3.125 billion | $2.371 billion |
| Long-term debt | $2.947 billion | $2.403 billion |
| Short-term borrowings | $500 million | $501 million |
| Shareholders’ equity attributable to Ameriprise | $8.325 billion | $9.092 billion |
- Operating cash flow was $1.106 billion for the first nine months, compared with $883 million in 2012.
- Investing activities used $143 million, compared with $1.113 billion of cash provided in the prior-year period, primarily reflecting higher purchases of available-for-sale securities and consolidated investment entity investments.
- Financing activities used $207 million, compared with $1.461 billion in 2012. Financing included $593 million of net debt issuance, $300 million of shareholder dividends paid and $1.205 billion of share repurchases.
- Ameriprise issued $600 million of 4.00% senior notes due 2023 in September 2013. It had no borrowings under its $500 million unsecured revolving credit facility, which expires in September 2018, and had $2 million of letters of credit outstanding.
- The company was in compliance with applicable debt and credit facility covenants. Management stated that operating cash flows, cash balances and revolver availability should be sufficient for operating liquidity needs.
Material changes versus the prior comparable period
- Results benefited materially from the third-quarter insurance and annuity assumption review, or “unlocking.” The 2013 review primarily reflected expected higher interest rates and changes in assumed policyholder behavior and increased pretax earnings by approximately $66 million, compared with an $83 million unfavorable impact in Q3 2012.
- Annuities operating earnings increased to $219 million from $91 million, largely due to unlocking and improved market impacts on variable annuity guarantees. Protection operating earnings declined to $75 million from $89 million because of higher auto and home claims, catastrophe losses and related expenses.
- Low interest rates continued to cause spread compression. Management estimated a pretax earnings impact of approximately $39 million in Q3 and $98 million for the first nine months versus the prior-year periods.
- Advice & Wealth Management benefited from wrap account inflows and market appreciation, but earnings continued to be pressured by the January 2013 conversion of Ameriprise Bank to a limited powers national trust bank. Management estimated the transition would reduce 2013 earnings by approximately $60 million, with released capital redeployed to shareholders.
- Share repurchases totaled 14.3 million shares for approximately $1.1 billion during the first nine months. Approximately $1.0 billion remained under the repurchase authorization at September 30, 2013.
- Accumulated other comprehensive income declined to $605 million from $1.194 billion, primarily due to net unrealized securities losses. Net unrealized securities losses in OCI were $869 million for the first nine months.
Guidance, outlook, management commentary and risks
- Management’s long-term, on-average 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 15% to 18%.
- Management expects continued pressure from low interest rates, including lower reinvestment yields, spread compression and potential adverse effects on DAC and DSIC amortization and insurance reserves.
- Management expects asset outflows from primarily low-margin assets associated with former Columbia and Threadneedle parent companies to continue for the foreseeable future; the timing, volume and mix remain uncertain.
- Variable annuity guarantees remain sensitive to equity prices, interest rates, volatility, policyholder behavior and the company’s nonperformance spread. A hypothetical 10% equity market decline was estimated to produce a $391 million net pretax loss, while a hypothetical 100-basis-point rate increase was estimated to produce an $87 million net pretax benefit. These are sensitivities, not forecasts.
- Insurance and annuity results remain dependent on mortality, morbidity, persistency, claims, catastrophe experience and policyholder behavior assumptions. The filing identifies $124 million of estimated after-tax earnings exposure if the nonperformance spread used in embedded derivative valuations moved to zero.
- The company faces elevated regulatory activity and legal proceedings involving, among other matters, retirement-plan fiduciary claims, REIT sales practices, software licensing and unclaimed-property practices. The company could not reasonably estimate potential losses for the described lawsuits.
- The company reported $181 million of gross unrecognized tax benefits at September 30, 2013 and estimated that gross unrecognized tax benefits could decrease by approximately $143 million over the following 12 months.
- A fourth-quarter 2013 pretax loss of approximately $20 million was expected from redeeming $350 million of 5.65% senior notes due 2015.
Important facts for investors to verify
- Reconcile GAAP earnings and EPS with operating earnings and assess how much of the improvement came from unlocking, market impacts, realized gains and other non-GAAP adjustments.
- Monitor the persistence of Advice & Wealth Management inflows and the continued asset outflows in Columbia and Threadneedle portfolios.
- Assess sensitivity to sustained low interest rates, reinvestment yields, spread compression and changes in DAC, DSIC and guarantee assumptions.
- Review variable annuity guarantee exposure, hedging effectiveness, derivative notional amounts and the impact of changes in equity markets, volatility and policyholder behavior.
- Evaluate capital available at regulated subsidiaries, restrictions on dividends to the holding company, debt maturities and the pace of share repurchases and dividends.
- Track legal, regulatory, tax and guaranty-fund contingencies, including the unresolved proceedings and unrecognized tax benefits.
- Confirm the fourth-quarter note redemption loss and the post-quarter issuance of the $0.52 per-share dividend announced October 29, 2013.