AMERIPRISE FINANCIAL INC quarterly report, Q2 FY2012

Ameriprise Financial, Inc. — 2012 Q2 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, banking and related products. The filing covers the unaudited quarter and six months ended June 30, 2012, with comparisons to the corresponding 2011 periods. The company reported $654.8 billion of assets under management and administration, including $543.6 billion of AUM, and more than 9,800 affiliated advisors at June 30, 2012. Securities America was sold in the fourth quarter of 2011 and is presented as discontinued operations.

Key financial metrics

Metric	Q2 2012	Q2 2011	Six months 2012	Six months 2011
Total net revenues	$2.514 billion	$2.623 billion	$5.075 billion	$5.155 billion
Income from continuing operations	$171 million	$291 million	$420 million	$585 million
Net income attributable to Ameriprise	$223 million	$315 million	$467 million	$556 million
Diluted EPS from continuing operations	$0.99	$1.27	$2.05	$2.48
Diluted EPS	$0.99	$1.25	$2.04	$2.18
Operating earnings	$254 million	$333 million	$589 million	$677 million
Operating earnings per diluted share	$1.13	$1.33	$2.58	$2.66
Net cash provided by operating activities	Not separately provided	Not separately provided	$468 million	$658 million

Q2 total net revenues declined 4%, while net income attributable to Ameriprise declined 29% and diluted EPS declined 21%. For the first six months, net revenues declined 2%, net income attributable to Ameriprise declined 16%, and diluted EPS declined 6%. The Q2 effective tax rate on continuing operations was 42.8%, versus 29.0% in the prior-year quarter; the six-month rate was 32.4%, versus 26.5%.

Six-month operating segment earnings were $205 million for Advice & Wealth Management, $261 million for Asset Management, $305 million for Annuities, $216 million for Protection and a $132 million loss for Corporate & Other. Q2 operating margins were 11.6% for Advice & Wealth Management and 18.4% for Asset Management; the filing does not provide a consolidated operating margin.

Balance sheet, debt and liquidity

Total assets were $135.270 billion at June 30, 2012, compared with $132.307 billion at December 31, 2011.
Cash and cash equivalents were $2.721 billion, compared with $2.781 billion at year-end 2011.
Ameriprise long-term debt was $2.403 billion and short-term borrowings were $498 million, for total company debt of $2.901 billion, excluding $5.213 billion of debt of consolidated investment entities.
Shareholders’ equity attributable to Ameriprise was $9.005 billion; total equity was $9.613 billion.
The company had an unsecured revolving credit facility of up to $500 million, expandable to $750 million subject to approval, with no borrowings outstanding and $2 million of letters of credit at June 30, 2012.
Management stated that operating cash flows, cash balances and available revolver capacity were sufficient for operating liquidity needs. The company was in compliance with applicable debt covenants.
Cash used in financing activities was $703 million, including $666 million of common-share repurchases and $139 million of shareholder dividends.

Material changes versus the prior comparable period

Lower interest rates and volatile equity markets reduced investment income, asset-based fees, spreads and the value of certain insurance-related balances.
Q2 net investment income decreased 5% to $472 million, management and financial advice fees decreased 2% to $1.152 billion, and distribution fees decreased 5% to $396 million.
Asset Management operating earnings declined 11% in Q2 and 7% for the six months, primarily due to lower average AUM and net outflows. Total managed assets were $445.8 billion, down 5% from June 30, 2011; first-half net flows were negative $11.3 billion.
Advice & Wealth Management Q2 operating earnings increased 3% to $111 million, supported by wrap-account net inflows. Wrap-account assets were $113.4 billion at June 30, 2012, up 7% year over year.
Annuities Q2 operating earnings declined 25% to $116 million and first-half operating earnings declined 6% to $305 million, primarily because of low interest rates, fixed-annuity valuation adjustments and market impacts on deferred acquisition and sales-inducement costs.
Protection Q2 operating earnings increased 18% to $109 million and first-half operating earnings increased 6% to $216 million, aided by favorable life and disability claims, improved Auto & Home results and a $9 million life-insurance reserve release.
The six-month market impact on variable-annuity guaranteed living benefits, net of hedges and related amortization, reduced after-tax earnings by $83 million, versus a $18 million reduction in the 2011 period.
Ameriprise repurchased approximately 12.4 million shares during the first six months at an average price of $52.47. The remaining authorization was $822 million at June 30, 2012.

Guidance, outlook, commentary and unusual items

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 estimated that low interest rates would reduce 2012 earnings by approximately $55 million versus 2011, with an additional $40 million impact in 2013 and less than $10 million of incremental impact in 2014.
On July 10, 2012, the company announced plans, subject to regulatory approval, to transition Ameriprise Bank, FSB to a non-depository national trust bank by year-end 2012. The transition is expected to generate approximately $20 million of one-time non-operating expenses, release approximately $375 million of required capital for anticipated 2013 share repurchases, eliminate bank-related revenue and earnings beginning in Q4 2012, and reduce Advice & Wealth Management earnings by an estimated $45 million to $50 million pretax in 2013. Management expects the enterprise-level EPS impact to be immaterial after capital redeployment.
The company recorded a $32 million reduction to net income attributable to Ameriprise for a prior-period tax correction arising from incomplete third-party securities-lending data. Management determined the correction was not material to current or prior financial statements, resolved the data issue and stopped the related securities lending activity. The correction contributed to the higher reported effective tax rate.
The company retrospectively adopted new deferred acquisition cost accounting rules. Adoption reduced January 1, 2012 retained earnings by $1.4 billion, increased AOCI by $113 million and reduced total equity by approximately $1.3 billion after tax. Prior-period results were recast.
Estimated guaranty-fund assessments, primarily associated with Executive Life Insurance Company of New York, resulted in a $30 million liability and a $24 million related premium-tax asset at June 30, 2012. The expected assessment and tax-recovery periods are uncertain.
Management reported a net $6 million Q2 charge in Annuities for projected insurance-industry guaranty-fund assessments and a $12 million Q2 expense from fixed-annuity valuation adjustments.

Risks and contingencies

Results remain sensitive to interest rates, equity prices, credit spreads, volatility, foreign exchange movements, investment performance, policyholder behavior, mortality, morbidity and persistency.
A hypothetical 10% equity-market decline was estimated to reduce pretax income by $330 million after hedging; a hypothetical 100-basis-point rate increase was estimated to increase pretax income by $57 million. Actual results may differ materially.
The company estimated that eliminating the nonperformance-risk spread used in variable-annuity liability valuation would reduce net income by approximately $265 million after tax and related amortization effects, based on June 30, 2012 spreads.
The investment portfolio included $34.6 billion of available-for-sale securities, with $386 million of gross unrealized losses and $140 million of noncredit OTTI in AOCI. Approximately 5% of fixed-maturity securities were below investment grade.
Legal, regulatory and arbitration matters remain ongoing, including inquiries involving product sales and disclosures, trading practices, advisor supervision, information security and unclaimed-property practices. The filing states that potential losses generally cannot be reasonably estimated for several matters.
A putative ERISA class action concerning the Ameriprise 401(k) plan alleged more than $20 million of damages; the company’s motion to dismiss was pending and no loss range was estimable as of the filing date.
The company faces operational, cybersecurity, system-interruption, third-party service-provider, counterparty, liquidity, regulatory-capital and subsidiary-dividend restrictions.

Most important facts for investors to verify

Reconcile GAAP earnings with operating earnings, including the tax correction, variable-annuity guarantee market impacts, integration charges, realized investment gains and consolidated investment entities.
Assess the sustainability of Asset Management net outflows and the year-over-year decline in AUM, particularly at Columbia and Threadneedle.
Monitor the effect of continued low interest rates on annuity spreads, DAC and DSIC amortization, guarantee reserves and future earnings.
Verify regulatory approvals, timing, costs and earnings effects of the Ameriprise Bank transition and the planned capital release for repurchases.
Review variable-annuity guarantee exposure, hedging effectiveness, Level 3 valuation assumptions and sensitivity to market movements and nonperformance spreads.
Track guaranty-fund assessments, tax audits and unrecognized tax benefits, including the potential $78 million reduction in gross unrecognized tax benefits management expected within 12 months.
Confirm capital and liquidity at the holding-company and regulated-subsidiary levels, as well as the constraints on subsidiary dividends and future share repurchases.