AMP

Ameriprise Financial Inc. Q2 2008 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended June 30, 2008. Ameriprise Financial, Inc. is a diversified financial services firm providing financial planning, asset management, annuities, and protection products. The company operates through five segments: Advice & Wealth Management, Asset Management, Annuities, Protection, and Corporate & Other. The reporting period reflects the impact of volatile financial markets, including declines in equity values and the sub-prime mortgage crisis.

Key Financial Metrics

Note: Balance sheet figures are as of June 30, 2008, compared to December 31, 2007 ($3,836 million cash; $7,810 million equity).

Material Changes vs. Prior Period

• Revenue Decline: Net revenues decreased 8% in Q2 and 5% YTD compared to the prior year. This was driven by a 22% drop in net investment income (due to lower fixed annuity volumes and realized losses) and a 15% drop in distribution fees.
• Investment Impairments: The company recorded other-than-temporary impairments of $28 million in Q2 and $60 million YTD, primarily related to Alt-A mortgage-backed securities.
• Expense Reduction: Total expenses decreased 9% in Q2 and 5% YTD. A significant factor was the absence of $63 million in separation costs in Q2 2008 (compared to Q2 2007) and $148 million YTD (compared to YTD 2007), as the separation from American Express was completed in 2007.
• Asset Flows: Owned, Managed, and Administered (OMA) assets declined 7% to $445.4 billion, impacted by market declines and net outflows in RiverSource and Threadneedle funds, partially offset by inflows in wrap accounts.
• Accounting Changes: The company adopted SFAS 157 (Fair Value Measurements) on January 1, 2008, resulting in a $30 million cumulative effect reduction to retained earnings. Reclassifications were made to align derivative mark-to-market adjustments with related expense lines.

Guidance, Outlook, and Risks

• Financial Targets: Management targets net revenue growth of 6-8%, diluted EPS growth of 12-15%, and a return on equity of 12-15% on an adjusted basis (excluding separation costs).
• Dividend Increase: On July 23, 2008, the Board declared a quarterly dividend of $0.17 per share, a 13% increase from the previous $0.15.
• Share Repurchases: The company repurchased 10.4 million shares YTD 2008. As of June 30, $1.4 billion remained under repurchase authorization.
• Acquisition: On July 7, 2008, Ameriprise announced an agreement to acquire J. & W. Seligman & Co. for approximately $440 million.
• Risks:
  • Market Risk: Significant exposure to equity market declines and interest rate fluctuations affecting asset-based fees and annuity spreads.
  • Credit Risk: Exposure to sub-prime and Alt-A mortgage-backed securities, though management expects to receive contractual payments on non-impaired holdings.
  • Regulatory/Tax: Uncertainty regarding IRS regulations on the Dividends Received Deduction (DRD) for variable contracts, which could impact future tax benefits.
  • Legal: Ongoing litigation and regulatory inquiries regarding sales practices and product disclosures.

Investor Verification Checklist

• Verify the extent of exposure to Alt-A and sub-prime mortgage-backed securities and the adequacy of impairment provisions.
• Monitor the impact of the pending IRS regulations on the Dividends Received Deduction (DRD) for variable annuity separate accounts.
• Assess the sustainability of net inflows in wrap accounts versus outflows in mutual funds and institutional assets.
• Review the effectiveness of hedging strategies for variable annuity guaranteed living benefits (GMWB/GMAB) in a volatile interest rate environment.
• Confirm the integration timeline and financial impact of the J. & W. Seligman & Co. acquisition.