AMERIPRISE FINANCIAL INC quarterly report, Q1 FY2013

Ameriprise Financial, Inc. — First-Quarter 2013 Form 10-Q Summary

Business context and reporting period

Ameriprise Financial is a diversified financial-services company providing financial planning, wealth management, asset management, annuity, insurance and related services. The filing covers the unaudited three months ended March 31, 2013, compared with the three months ended March 31, 2012, and balance-sheet changes from December 31, 2012. The company reported more than $707 billion of assets under management and administration and more than 9,700 advisors at March 31, 2013.

Ameriprise completed the conversion of Ameriprise Bank, FSB to a limited-powers national trust bank in January 2013. Deposit-taking and credit-originating activities were terminated, releasing approximately $375 million of capital, but management estimated an approximately $60 million reduction in 2013 earnings, with the expected enterprise-level EPS impact neutralized through share repurchases.

Key financial metrics

Metric	Q1 2013	Q1 2012	Change
Total revenues	$2.699 billion	$2.572 billion	+5%
Total net revenues	$2.691 billion	$2.561 billion	+5%
Income before tax from continuing operations	$487 million	$322 million	+51%
Income from continuing operations	$366 million	$249 million	+47%
Net income attributable to Ameriprise	$335 million	$244 million	+37%
Diluted EPS	$1.58	$1.05	+50%
Operating earnings	$338 million	$335 million	+1%
Operating diluted EPS	$1.59	$1.45	+10%
Cash dividends declared per share	$0.45	None	Newly reported

GAAP net income attributable to Ameriprise represented approximately 12.4% of total net revenues, versus approximately 9.5% in the prior-year quarter. Pretax income from continuing operations represented approximately 18.1% of net revenues, versus approximately 12.6% in Q1 2012. The filing does not provide a consolidated GAAP operating margin.

Management and financial advice fees increased 10% to $1.244 billion, primarily from higher average assets under management and pricing adjustments.
Distribution fees increased 8% to $434 million, reflecting higher client assets and activity.
Net investment income declined 8% to $489 million because of low interest rates and the sale of Ameriprise Bank’s investment portfolio.
Total expenses declined 2% to $2.204 billion. Benefits, claims, losses and settlement expenses fell 19%, while DAC amortization increased to $75 million from $31 million.
Assets under management increased 3% year over year to $582.6 billion; total assets under management and administration increased 5% to $707.7 billion.
Operating earnings by segment were $131 million for Advice & Wealth Management, $144 million for Asset Management, $156 million for Annuities, $110 million for Protection and a $(81) million Corporate & Other loss.

Cash flow, balance sheet, debt and liquidity

Net cash used in operating activities was $466 million, compared with $175 million of operating cash flow provided in Q1 2012. The 2013 outflow was significantly affected by consolidated investment entities, collateral movements on derivatives and working-capital changes.
Net cash provided by investing activities was $389 million, compared with $234 million used in Q1 2012, primarily reflecting lower purchases and higher proceeds from sales and maturities of available-for-sale securities.
Net cash used in financing activities was $114 million, compared with $417 million in Q1 2012.
Cash and cash equivalents were $2.160 billion at March 31, 2013, down from $2.371 billion at year-end 2012.
Total assets were $137.296 billion and total equity was $9.617 billion at March 31, 2013. Ameriprise shareholders’ equity was $8.960 billion.
Ameriprise debt consisted of $2.389 billion of long-term debt and $500 million of short-term borrowings, for total company debt of $2.889 billion. Consolidated investment entities had an additional $5.148 billion of debt that was non-recourse to the company in the case of CDO debt.
The company had no borrowings under its $500 million unsecured revolving credit facility, with $2 million of letters of credit outstanding. Management stated that liquidity was sufficient for operating needs and that all applicable debt covenants were satisfied.
The company repurchased 5.2 million shares for $360 million during the quarter, at an average price of $69.00 per share. Approximately $1.8 billion remained under the repurchase authorization at March 31, 2013.

Material changes versus the prior comparable period

Reported profitability improved substantially because of market appreciation, wrap-account inflows and a sharply smaller unfavorable market impact from variable-annuity guaranteed living benefits.
The variable-annuity guaranteed-living-benefit market impact was a $2 million expense in Q1 2013 versus a $113 million expense in Q1 2012.
Advice & Wealth Management operating earnings rose 39% to $131 million, helped by strong wrap-account growth and expense management.
Asset Management operating earnings rose 10% to $144 million, despite $5.7 billion of managed-asset net outflows during the quarter.
Annuities operating earnings fell 17% to $156 million, primarily because of higher benefits and claims expenses and the absence of a favorable $20 million model-update benefit recorded in Q1 2012.
Protection operating earnings rose 3% to $110 million, while auto and home policy counts increased 9% year over year. Higher auto liability loss development and exposure increased claims expenses.
Corporate & Other operating loss increased to $81 million from $65 million, including an $11 million loss associated primarily with the transfer of former bank assets.
Other comprehensive income changed from $119 million of income to a $151 million loss, mainly because of foreign-currency translation losses and net unrealized securities losses.

Guidance, outlook, management commentary and risks

Management’s stated on-average, over-time financial targets are 6% to 8% operating total net revenue growth, 12% to 15% operating diluted EPS growth and 15% to 18% operating return on equity excluding accumulated other comprehensive income. Trailing-twelve-month operating ROE excluding AOCI was 16.4% at March 31, 2013, compared with 16.0% a year earlier.

Management expects the low-interest-rate environment to continue reducing earnings through spread compression, lower investment income and possible effects on DAC, DSIC and insurance reserves. The company expects approximately $10 million of quarterly pretax pressure on Advice & Wealth Management earnings from low interest rates for the balance of 2013. Management also expects certain primarily low-margin Columbia and Threadneedle outflows to continue, including additional RIA outflows following share-class changes.

Key market exposures include equity prices, interest rates, credit spreads, foreign exchange, volatility and counterparty performance. A hypothetical 10% equity-market decline was estimated to produce a $313 million net pretax reduction, while a 100-basis-point parallel increase in interest rates was estimated to produce a $185 million net pretax increase.
Variable-annuity guarantee valuations and hedging results depend on policyholder behavior, utilization, surrender rates, volatility, interest rates and the company’s nonperformance spread. The filing states that actual results could differ materially from the sensitivity estimates.
Investment risks include credit deterioration, mortgage-backed securities exposure and valuation uncertainty. Available-for-sale securities had $144 million of gross unrealized losses at March 31, 2013, including $100 million on residential mortgage-backed securities.
The company had an estimated $26 million liability for future guaranty-fund assessments, primarily related to Executive Life Insurance Company of New York, and a related $19 million premium-tax asset.
The company remained subject to legal, regulatory and arbitration proceedings, including matters involving mutual funds, annuities, securities, advisor supervision, information security, unclaimed property and alleged fiduciary breaches. For several disclosed matters, the company could not reasonably estimate a potential loss.
Management reported no material changes to the risk factors in the 2012 Form 10-K and concluded that disclosure controls and procedures were effective as of March 31, 2013.

Important facts investors should verify

Whether operating EPS growth can meet the 12% to 15% long-term target after the favorable Q1 2013 variable-annuity market comparison fades.
The sustainability and margin quality of Advice & Wealth Management inflows, including $4.1 billion of Q1 wrap-account net inflows.
The magnitude, composition and persistence of Asset Management net outflows, especially Columbia institutional outflows and expected RIA share-class-related outflows.
The effect of low interest rates on investment income, spread income, DAC and DSIC amortization, reserves and fixed-annuity demand.
The sensitivity of variable-annuity guarantees and hedge effectiveness to equity markets, volatility, interest rates and policyholder behavior.
The adequacy of insurance-subsidiary capital, restrictions on subsidiary dividends and the availability of holding-company liquidity.
Developments in disclosed litigation, regulatory inquiries, guaranty-fund assessments and tax examinations, including the estimated $76 million possible reduction in gross unrecognized tax benefits over the following 12 months.
Whether share repurchases and dividends remain consistent with regulatory capital requirements and the company’s stated capital-allocation plans.