AMERIPRISE FINANCIAL INC quarterly report, Q2 FY2014

Ameriprise Financial, Inc. 2014 Q2 Form 10-Q Summary

Business Context and Reporting Period

Ameriprise Financial is a diversified financial services company providing financial planning, wealth management, asset management, annuities and insurance products. The unaudited filing covers the three and six months ended June 30, 2014, with comparisons to the corresponding 2013 periods. The company reported more than $809 billion of assets under management and administration and approximately 9,600 advisors at June 30, 2014.

Key Financial Metrics

Metric	Three months ended June 30, 2014	Three months ended June 30, 2013	Six months ended June 30, 2014	Six months ended June 30, 2013
Total net revenues	$3,072 million	$2,749 million	$6,068 million	$5,440 million
Income before taxes	$619 million	$402 million	$1,269 million	$889 million
Net income attributable to Ameriprise	$374 million	$321 million	$774 million	$656 million
Diluted EPS	$1.91	$1.54	$3.92	$3.12
Cash dividends declared per share	$0.58	$0.52	$1.10	$0.97

Net revenues increased 12% in both the quarter and first half, while net income attributable to Ameriprise increased 17% and 18%, respectively.
Calculated net margin attributable to Ameriprise was approximately 12.2% for the quarter and 12.8% for the first half. Calculated pretax margin was approximately 20.1% and 20.9%, respectively.
Operating earnings, a non-GAAP measure, were $408 million, or $2.08 diluted operating EPS, for the quarter and $815 million, or $4.12 diluted operating EPS, for the first half, compared with $352 million and $690 million, respectively, in the prior-year periods.
Operating return on equity excluding accumulated other comprehensive income was 21.7% for the trailing twelve months ended June 30, 2014, compared with 17.9% for the prior-year period.

Cash Flow, Liquidity, Debt and Capital

Operating cash flow was $364 million for the first six months of 2014, compared with cash used of $93 million in the prior-year period. Investing activities provided $158 million, while financing activities used $1.027 billion.
Cash and cash equivalents were $2.141 billion at June 30, 2014, down from $2.632 billion at December 31, 2013.
Ameriprise debt consisted of $2.523 billion of long-term debt and $200 million of short-term borrowings, or $2.723 billion in total, excluding debt of consolidated investment entities. Debt of consolidated investment entities was $6.672 billion and is generally non-recourse to Ameriprise.
The company had no borrowings under its $500 million unsecured revolving credit facility, which had $2 million of outstanding letters of credit. Management stated that liquidity and available funding were sufficient for operating needs.
The company redeemed $200 million of senior notes due 2039 on June 16, 2014 and recorded an expense for remaining unamortized issuance costs.
Ameriprise repurchased 6.4 million common shares for $706 million during the first half and paid $215 million of dividends. Approximately $2.4 billion remained under the share repurchase authorization at June 30, 2014.

Material Changes Versus the Prior Comparable Period

Management and financial advice fees increased 12% for the quarter and first half, primarily from higher average assets under management. Total AUM increased 15% year over year to $666.2 billion, and total AUM and AUA increased 15% to $809.9 billion.
Advice & Wealth Management operating earnings increased 29% in the quarter and 34% in the first half, supported by wrap-account growth, net inflows and expense management. Wrap-account assets reached $167.8 billion, up 23% year over year.
Asset Management operating earnings increased 3% in the quarter and 15% in the first half. Managed assets rose 13% to $518.3 billion. First-half net flows improved to a $0.5 billion inflow from a $7.8 billion outflow in 2013, although Columbia experienced $2.5 billion of outflows.
Annuities operating earnings increased 55% in the quarter and 37% in the first half. Results benefited from market appreciation, lower crediting costs and policyholder movement of approximately $3.3 billion into Portfolio Stabilizer funds, which generated a reported first-half earnings benefit of $39 million.
Protection operating earnings were flat in the quarter but declined 23% in the first half. Auto and home premiums grew, but catastrophe losses increased to $42 million from $20 million and the company recorded a $30 million increase in auto liability reserves in the first quarter.
Net investment income declined 4% in both periods, reflecting lower yields and the absence of a $30 million prior-year gain from the sale of Threadneedle’s Cofunds investment. Other revenues increased substantially, partly because of consolidated investment entity activity and variable-annuity guarantee fees.
Other comprehensive income attributable to Ameriprise was $200 million in the quarter and $360 million in the first half, compared with losses in the prior-year periods, primarily reflecting improved unrealized securities results.

Guidance, Outlook, Commentary and Risks

Management’s longer-term financial targets are operating total net revenue growth of 6% to 8%, operating diluted EPS growth of 12% to 15% and operating ROE excluding accumulated other comprehensive income of 19% to 23%. These are multi-year, on-average targets rather than specific 2014 guidance.
Management expects ongoing low interest rates to cause spread compression, declining reinvestment yields and potential pressure on reserves, DAC and DSIC amortization. Approximately $3.7 billion of a five-year guarantee block had been repriced, with approximately $0.4 billion expected to be repriced during the remainder of 2014.
Market sensitivity disclosures estimated a $429 million net pretax adverse impact from a hypothetical 10% equity-price decline and a $59 million net pretax favorable impact from a hypothetical 100-basis-point parallel increase in interest rates. These are scenarios, not forecasts.
Variable-annuity guarantees remain exposed to equity markets, interest rates, volatility, contractholder behavior and nonperformance-risk assumptions. Gross notional derivatives associated with GMWB and GMAB provisions totaled $133.0 billion.
The company identified elevated regulatory activity and pending inquiries involving product sales and distribution, investment personnel, REITs, insurance claims, advisor supervision, client information security and UK controls. It also disclosed a certified ERISA class action involving the 401(k) plan and a REIT-related lawsuit; loss ranges were not reasonably estimable for these matters.
Management expects outflows of primarily low-margin assets associated with former Columbia and Threadneedle parent relationships to continue, although the timing and financial impact are uncertain.
Other risks include credit losses, insurer and counterparty defaults, insurance claims and catastrophe losses, competition, regulatory and litigation developments, subsidiary dividend restrictions, technology failures and cybersecurity or privacy incidents.

Important Facts for Investors to Verify

Reconcile GAAP earnings and EPS with operating earnings and operating EPS, particularly the effects of variable-annuity guarantee market impacts, consolidated investment entities, taxes, realized gains and unusual items.
Monitor the sustainability and quality of AUM growth, including market appreciation versus net flows, Columbia outflows and the concentration of Threadneedle’s institutional inflows in a large mandate.
Assess the effect of persistent low rates, fixed-annuity repricing, reinvestment yields and spread compression on future earnings and statutory capital.
Review variable-annuity guarantee exposure, hedge effectiveness and the sensitivity of Level 3 valuations to policyholder behavior, volatility, interest rates and nonperformance spreads.
Track auto and home loss trends, catastrophe losses and the adequacy of the additional auto liability reserves.
Evaluate the capacity to fund dividends and share repurchases given the holding-company structure, subsidiary dividend restrictions, regulatory capital requirements and cash-flow volatility.
Follow pending legal and regulatory matters, including the ERISA class action, REIT-related litigation and disclosed regulatory reserve provisions.