Ameriprise Financial, Inc. — Form 10-Q Summary
Business context and reporting period
Ameriprise provides financial planning, advice, asset management, annuity, insurance, banking and related services through five segments: Advice & Wealth Management, Asset Management, Annuities, Protection, and Corporate & Other. The filing covers the unaudited three and six months ended June 30, 2009, compared primarily with the same periods in 2008. The company had more than 12,500 affiliated financial advisors and 255.0 million common shares outstanding as of July 24, 2009.
Financial performance and condition
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenues | $1.915 billion, down 5% | $3.676 billion, down 9% |
| Total net revenues | $1.877 billion, down 5% | $3.596 billion, down 9% |
| Pretax income | $115 million, down 50% | $249 million, down 41% |
| Net income attributable to Ameriprise | $95 million, down 55% | $225 million, down 44% |
| Diluted EPS | $0.41, versus $0.93 | $0.99, versus $1.75 |
| Approximate net margin | 5.1% | 6.3% |
Results reflected lower asset-based fees from weak equity markets, reduced distribution fees, low short-term interest rates and significant market-driven volatility in variable-annuity guarantees. These pressures were partly offset by higher fixed-annuity inflows, investment income and realized investment gains.
- Cash and cash equivalents were $4.469 billion at June 30, 2009, versus $6.228 billion at December 31, 2008.
- Investments were $34.793 billion and separate-account assets were $48.661 billion.
- Total assets were $103.214 billion; total liabilities were $94.840 billion; total equity was $8.374 billion.
- Debt was $2.435 billion, up from $2.027 billion at year-end 2008. June issuances included $200 million of 7.75% senior notes due 2039 and $300 million of 7.30% senior notes due 2019.
- Six-month operating cash flow was negative $1.561 billion, versus positive $202 million in 2008. Investing cash flow was negative $5.266 billion, while financing cash flow was positive $5.046 billion.
- Financing sources included $869 million from issuing 36 million common shares and $532 million of net debt issuance proceeds. The company paid $74 million of dividends and repurchased $9 million of common stock; its broader repurchase program was temporarily suspended.
- The company had a $750 million unsecured revolving credit facility, expandable to $1.0 billion, with no borrowings and $2 million of outstanding letters of credit at June 30, 2009.
Material changes versus the prior comparable period
- Management and financial advice fees fell 22% in the quarter and 26% for the six-month period; distribution fees fell 17% and 23%, respectively.
- Net investment income increased 31% in the quarter and 18% year to date, supported by higher fixed-maturity investment income and realized gains.
- Benefits, claims, losses and settlement expenses doubled to $587 million in the quarter and increased 15% to $687 million year to date, primarily from variable-annuity death and living-benefit guarantees.
- Quarterly amortization of deferred acquisition costs was a $125 million benefit versus $144 million of expense in 2008, substantially offsetting variable-annuity guarantee costs.
- Advice & Wealth Management reported a $3 million quarterly pretax loss and a $64 million six-month pretax loss, versus profits of $51 million and $115 million in the comparable 2008 periods.
- Asset Management reported a $12 million quarterly pretax loss attributable to Ameriprise and a $20 million six-month loss, versus profits of $42 million and $60 million.
- Annuities remained profitable, with pretax income of $94 million for the quarter and $223 million for six months, up from $77 million and $119 million.
- Protection pretax income was $110 million for the quarter and $222 million for six months, broadly stable to modestly higher year over year.
- Owned, managed and administered assets declined 10% year over year to $397.3 billion, including a 16% decline in managed assets to $285.0 billion. Fixed-annuity net inflows improved materially, while variable-annuity and asset-management flows weakened.
Guidance, outlook, risks and unusual items
- Management’s longer-term financial targets remained net revenue growth of 6%–8%, diluted EPS growth of 12%–15%, and return on equity of 12%–15% on an average, over-time basis. The filing does not provide specific near-term quarterly or annual earnings guidance.
- The second-quarter results included $340 million of variable-annuity death and living-benefit expenses, including a $604 million pretax noncash impact from the credit-default spread used in valuing living-benefit liabilities. The filing states that the spread adjustment is sensitive to market conditions; a move to zero spread from June 30 levels would have reduced net income by approximately $63 million after tax and related amortization.
- Other unusual items included a $58 million year-to-date gain from repurchasing certain junior notes, $44 million of acquisition integration costs, $132 million of ongoing acquisition-related expenses, and increased legal expenses and a client-settlement provision.
- The company early adopted impairment guidance that produced a $132 million increase in opening retained earnings and a corresponding accumulated other comprehensive loss adjustment. Six-month net impairment losses recognized in earnings were $66 million; gross unrealized losses on available-for-sale securities were $1.383 billion at June 30.
- Market sensitivity disclosed by management estimated a $334 million pretax adverse impact from a 10% equity-market decline and a $96 million pretax adverse impact from a 100-basis-point parallel increase in interest rates, after hedging. Actual results could differ materially.
- Key risks include equity, interest-rate, credit, liquidity and foreign-exchange volatility; valuation of Level 3 investments and annuity guarantees; policyholder mortality, morbidity and persistency; counterparty and reinsurance risk; regulatory capital and subsidiary dividend restrictions; litigation and regulatory investigations; and integration of recent acquisitions.
- Legal and regulatory matters include the remanded Gallus mutual-fund fee litigation, a client arbitration targeted for settlement by September 30, 2009, and continuing inquiries involving sales practices, annuities, supervision and product disclosures. The company cannot estimate the potential loss range for these matters.
- The company may provide limited support to money-market funds holding defaulted structured investment vehicle securities, but had not provided a formal guarantee or capital-support agreement and expected any impact to be immaterial.
Investor verification points
- Verify the sustainability of fee revenue and asset flows if equity markets, foreign exchange rates or client risk preferences change.
- Reconcile cash flow weakness with the $1.6 billion reduction in derivative collateral and assess the liquidity impact of future collateral requirements.
- Review the sensitivity of variable-annuity guarantee liabilities, derivatives and DAC/DSIC balances to credit spreads, market levels, volatility and policyholder behavior.
- Assess the quality, ratings, unrealized losses and valuation assumptions of the investment portfolio, particularly non-agency mortgage-backed and other Level 3 securities.
- Monitor debt maturities, the July 2009 repurchase of $450 million of 2010 notes, credit ratings with negative outlooks, and subsidiary capital and dividend restrictions.
- Track the Gallus litigation, client settlement, regulatory inquiries, tax examinations and potential changes to the separate-account dividends-received deduction.