AMERIPRISE FINANCIAL INC quarterly report, Q3 FY2012

Business Context and Reporting Period

Ameriprise Financial, Inc. filed an unaudited Form 10-Q for the three and nine months ended September 30, 2012. The company provides financial planning, wealth management, asset management, annuity, insurance, banking and brokerage services through Advice & Wealth Management, Asset Management, Annuities, Protection and Corporate & Other segments.

Assets under management and administration were $678.5 billion at September 30, 2012, up 13% from $599.9 billion a year earlier. The company had more than 9,800 affiliated advisors and reported a 92% client retention rate.

Key Financial Metrics

Metric	Q3 2012	Q3 2011	9M 2012	9M 2011
Total net revenues	$2.468 billion	$2.455 billion	$7.543 billion	$7.610 billion
Income from continuing operations	$152 million	$217 million	$572 million	$802 million
Net income attributable to Ameriprise	$173 million	$324 million	$640 million	$880 million
Diluted EPS	$0.79	$1.34	$2.84	$3.52
Operating earnings per diluted share	$1.32	$1.19	$3.90	$3.86
Net cash from operating activities	Not separately reported for the quarter	$883 million	$1.451 billion

Calculated GAAP pretax margins were approximately 8.1% in Q3 and 10.9% for the first nine months. Attributable net income margins were approximately 7.0% and 8.5%, respectively. Operating earnings were $289 million, or $1.32 per diluted share, in Q3 and $878 million, or $3.90 per diluted share, for the nine months.

Q3 management and financial advice fees increased 6% to $1.191 billion; nine-month fees increased 1% to $3.475 billion.
Q3 net investment income declined 4% to $427 million; nine-month net investment income declined 2% to $1.430 billion.
Total assets were $138.564 billion at September 30, 2012, compared with $132.307 billion at December 31, 2011.
Cash and cash equivalents were $3.325 billion, compared with $2.781 billion at year-end 2011.
Long-term debt was $2.413 billion and short-term borrowings were $500 million. The company reported compliance with debt covenants and no borrowings under its $500 million revolving credit facility; $2 million of letters of credit were outstanding.
The company repurchased $1.008 billion of common stock during the first nine months and paid $218 million of regular dividends. A new $2.0 billion repurchase authorization was approved in October 2012.

Material Changes Versus the Prior Comparable Period

Q3 net income attributable to Ameriprise fell 47%, while nine-month net income fell 27%. The primary drivers were unfavorable variable-annuity guarantee market impacts, actuarial assumption changes, realized investment losses and continued low interest rates.
Q3 benefits, claims, losses and settlement expenses increased $271 million, while nine-month expense increased $371 million. Variable-annuity guaranteed living benefit market impacts reduced pretax earnings by $91 million in Q3 and $220 million year-to-date, versus a $77 million benefit and $49 million benefit, respectively, in the prior-year periods.
Amortization of deferred acquisition costs declined $135 million in Q3 and $169 million year-to-date, partly offsetting the adverse guarantee impacts. The prior periods were retrospectively adjusted for the new DAC accounting standard.
Q3 Asset Management operating earnings rose 30% to $155 million, aided by market appreciation, $17 million of redemption-driven hedge fund performance fees and expense control. Nine-month operating earnings rose 4% to $416 million.
Q3 Annuities operating earnings fell 33% to $91 million, and nine-month operating earnings fell 14% to $396 million, primarily because of low interest rates, lower investment income and unfavorable assumption unlocking.
Q3 Protection operating earnings increased 27% to $89 million; nine-month operating earnings increased 12% to $305 million, driven by improved auto and home results.
Advice & Wealth Management operating earnings increased 3% in Q3 to $119 million but were essentially flat for the nine months at $324 million.
Managed assets rose 11% year over year to $460.9 billion, although total asset-management net flows were negative $14.7 billion for the first nine months.
Operating cash flow declined $568 million year over year, primarily because of a $642 million reduction in derivative collateral-related cash compared with a $449 million increase in the prior period. Investing activities provided $1.113 billion, while financing activities used $1.461 billion.

Guidance, Outlook, Commentary 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 accumulated other comprehensive income of 15% to 18%.
Ameriprise intends to transition Ameriprise Bank, FSB to a limited-powers national trust bank by year-end 2012, subject to regulatory approvals. The company recognized $62 million of net investment losses in Q3, expects related investment gains in Q4, and incurred $17 million of Q3 restructuring charges. Total transition restructuring expenses are expected to be approximately $20 million excluding the interest-rate hedge impact.
The bank transition is expected to release approximately $375 million of required capital for share repurchases. Management estimated a $13 million reduction in Advice & Wealth Management earnings in Q4 2012 and approximately $60 million of annual earnings impact in 2013, with enterprise-level EPS expected to be neutralized by the end of 2013 through repurchases.
Management estimated that low interest rates reduced 2012 earnings by approximately $55 million versus 2011 and expected an additional $40 million reduction in 2013. The filing states that interest-rate effects on spreads, DAC and DSIC amortization and insurance reserves could be material.
The third-quarter actuarial assumption review primarily reflected the low-rate environment and assumed rates would remain flat for the following 12 months. The starting 10-year Treasury assumption was reduced by 150 basis points.
A $32 million tax expense was recorded in Q2 2012 to correct prior-period tax calculations related to securities lending data. Management considered the correction immaterial to current and prior financial statements and discontinued the related securities-lending activity.
The new DAC accounting standard, adopted retrospectively January 1, 2012, reduced beginning retained earnings by $1.4 billion after tax and reduced total equity by approximately $1.3 billion.
Management expected above-normal Hurricane Sandy losses in Q4 2012 and 2013 of approximately $20 million. Catastrophe reinsurance provides a $110 million per-event limit, with a $20 million retention.
The company reported a $29 million estimated liability for guaranty-fund assessments, primarily related to Executive Life Insurance Company of New York, partially offset by a $23 million premium-tax asset.
Gross unrecognized tax benefits were $103 million at September 30, 2012; management estimated that up to $78 million could decrease over the following 12 months.
Key market sensitivities included an estimated $351 million net pretax loss from a hypothetical 10% equity-market decline and a $162 million net pretax benefit from a hypothetical 100-basis-point rate increase. These are scenarios, not forecasts.

Risks, Contingencies and Investor Verification

The principal risks are equity-market, interest-rate, credit, foreign-exchange and volatility exposure; variable-annuity guarantee valuation and hedging; low-rate spread compression; policyholder behavior and mortality, morbidity and persistency assumptions; investment and derivative counterparty risk; regulatory capital and subsidiary dividend restrictions; litigation and regulatory investigations; operational and cybersecurity interruptions; and asset-management outflows.

Verify the sustainability of operating earnings after excluding market impacts, realized investment losses, restructuring charges and other non-GAAP items.
Assess the sensitivity of variable-annuity guarantees, DAC/DSIC amortization and insurance reserves to interest rates, equity markets, volatility, nonperformance spreads and policyholder behavior.
Track execution and regulatory approval of the Ameriprise Bank transition, including the timing of investment-gain realization, capital release and planned repurchases.
Reconcile the $1.008 billion of year-to-date repurchases, the remaining prior authorization of approximately $482 million and the additional $2.0 billion authorization.
Evaluate asset-management flow trends, particularly Columbia and institutional outflows, despite higher ending AUM.
Review liquidity available at the parent company versus regulated subsidiaries, since subsidiary dividends and capital transfers are subject to regulatory restrictions.
Monitor guaranty-fund assessments, tax audits, the ERISA 401(k) class action, regulatory inquiries and other legal proceedings for developments that could create material losses.