Business Context and Reporting Period
Ameriprise Financial, Inc. filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. The company provides financial planning, advice, asset management, annuity, insurance, banking and related services through Advice & Wealth Management, Asset Management, Annuities, Protection and Corporate & Other segments. It reported more than 9,700 branded advisors and a 92% client retention rate.
During the quarter, Ameriprise agreed to sell Securities America for $150 million in cash plus potential future payments. The sale closed on November 4, 2011; Securities America was classified as discontinued operations and held for sale.
Key Financial Metrics
| Metric | Q3 2011 | Q3 2010 | Change |
|---|---|---|---|
| Total revenues | $2.467 billion | $2.349 billion | Up 5% |
| Total net revenues | $2.455 billion | $2.334 billion | Up 5% |
| Income from continuing operations | $166 million | $314 million | Down 47% |
| Net income attributable to Ameriprise | $273 million | $344 million | Down 21% |
| Diluted EPS from continuing operations | $1.12 | $1.33 | Down 16% |
| Operating earnings per diluted share | $1.04 | $1.35 | Down 23% |
| Cash dividend per share | $0.23 | $0.18 | Up 28% |
For the nine months ended September 30, 2011, total net revenues were $7.610 billion, up 9%; income from continuing operations attributable to Ameriprise was $896 million, up 10%; net income attributable to Ameriprise was $823 million, up 1%; diluted continuing-operations EPS was $3.58, up 16%; and operating EPS was $3.68, up 14%.
- Management and financial advice fees increased 13% in the quarter to $1.127 billion and 30% year to date to $3.436 billion.
- Distribution fees increased 11% in the quarter to $389 million and 13% year to date to $1.202 billion.
- Net investment income decreased 15% in the quarter to $445 million and 18% year to date to $1.458 billion, partly reflecting losses from consolidated investment entities and the low interest-rate environment.
- Operating net revenues, a non-GAAP measure, increased 8% in the quarter and 15% year to date.
- Assets under management were $501.3 billion at September 30, down 4% from the prior year; total assets under management and administration were $599.9 billion, down 4%.
- Branded client wrap assets increased 6% year over year to $96.9 billion, supported by net inflows but offset by market depreciation.
- Cash and cash equivalents were $2.664 billion at September 30, compared with $2.838 billion at December 31, 2010.
- Total assets were $130.380 billion, compared with $131.214 billion at year-end 2010. Total equity was $10.987 billion, compared with $11.285 billion.
- Ameriprise debt consisted of $2.404 billion of long-term debt and $504 million of short-term borrowings at September 30, compared with total debt of $2.714 billion at December 31, 2010.
- Net cash provided by operating activities was $1.451 billion, compared with $1.823 billion in the prior-year period. Investing activities used $1.059 billion and financing activities used $559 million.
- The company repurchased $1.233 billion of common stock during the first nine months and had $1.7 billion remaining under its repurchase authorizations at September 30.
Material Changes Versus the Prior Comparable Period
- Third-quarter earnings declined despite revenue growth, primarily because of updated valuation assumptions and models, adverse market impacts on deferred acquisition cost and deferred sales inducement cost amortization, higher distribution expenses and higher general and administrative costs.
- Third-quarter operating earnings included a $39 million pretax charge from valuation assumption and model changes, compared with a $22 million pretax benefit in the prior-year quarter. Market-related DAC and DSIC amortization was a $65 million pretax charge versus a $39 million benefit.
- Benefits, claims, losses and settlement expenses declined to $257 million from $636 million, but DAC amortization changed from a $246 million benefit to a $318 million expense.
- Advice & Wealth Management pretax operating income increased 30% to $116 million in the quarter, with operating margin improving to 12.4% from 10.7%.
- Asset Management pretax operating income decreased 2% to $119 million in the quarter. AUM declined because of net outflows and market depreciation; Columbia and Threadneedle experienced combined third-quarter net outflows of approximately $4.8 billion.
- Annuities pretax operating income decreased 68% to $82 million in the quarter, largely because of valuation assumption changes and market-related DAC and DSIC impacts. Fixed annuities remained in net outflows because of low client demand at prevailing interest rates.
- Protection pretax operating income decreased 3% to $65 million in the quarter. Auto and Home results included $23 million of catastrophe losses, primarily related to Hurricane Irene.
- The Columbia Management acquisition contributed an additional four months of results in the year-to-date comparison. Pretax integration costs were $24 million in the quarter and $74 million year to date; management stated that $130 million of 2011 net synergies remained on track.
- Year-to-date discontinued operations included a $73 million after-tax loss, including a $77 million after-tax charge related to previously disclosed legal expenses, compared with $2 million of income in the prior-year period.
Guidance, Outlook, Risks and Unusual Items
- Management’s long-term financial targets are average, over-time operating 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 12% to 15%.
- Management expected Columbia Management integration to be completed in early 2012 and expected the 2011 net synergy target of $130 million to remain on track.
- Effective January 1, 2012, the company will retrospectively adopt new insurance acquisition-cost rules. Management estimated a $2.0 billion to $2.2 billion reduction in the DAC asset and a $1.3 billion to $1.4 billion after-tax reduction in retained earnings or book value. It expected only a marginal impact on 2012 operating earnings and no impact on cash flow or excess capital.
- Liquidity was described as substantial. The company had $2.7 billion of cash and cash equivalents and access to an unsecured revolving credit facility of up to $500 million, expiring in November 2011, which management intended to renew. No borrowings were outstanding under the facility; $2 million of letters of credit were outstanding.
- Market sensitivity was significant. Management estimated that a 10% equity-market decline would reduce pretax income by approximately $301 million after hedging, while a 100-basis-point parallel increase in interest rates would reduce pretax income by approximately $11 million. Actual results could differ materially.
- Variable annuity guarantees remained a major exposure. At September 30, net amounts at risk included $2.607 billion for GMDB, $2.238 billion for GMWB and $161 million for GMAB. Gross notional derivatives hedging GMWB and GMAB was $84.0 billion.
- The filing identifies risks from equity, interest-rate, credit and foreign-exchange volatility; investment performance and asset flows; insurance morbidity, mortality and persistency assumptions; guarantee and hedging performance; counterparty defaults; regulatory and legal actions; capital and liquidity constraints; tax-law changes; and acquisition or divestiture execution.
- Legal and regulatory activity remained elevated. The company disclosed ongoing proceedings and inquiries involving mutual funds, annuities, insurance, brokerage, advisor supervision, information security, claims handling and other practices. The filing states that ultimate outcomes and potential losses cannot be predicted.
- An October 2011 ERISA putative class action alleged fiduciary breaches involving the company’s 401(k) plan and sought more than $20 million in damages. The company stated that it intended to defend the action vigorously.
- A third-quarter accounting adjustment provided a $39 million pretax benefit, or $25 million after tax, for prior-period bond discount amortization related to revised classification of certain structured securities. Management deemed the adjustment immaterial to current and prior periods.
Facts Investors Should Verify
- Reconcile GAAP earnings and EPS with management’s operating measures, including the effects of CIE consolidation, variable annuity guarantee marks, DAC and DSIC amortization, integration costs and discontinued operations.
- Assess the expected balance-sheet and book-value impact of the January 1, 2012 DAC accounting adoption.
- Monitor variable annuity guarantee liabilities, net amounts at risk, hedge effectiveness and sensitivity to equity and interest-rate movements.
- Evaluate the sustainability of asset-based fee growth given the 4% decline in total AUM and continued Asset Management net outflows.
- Confirm completion economics and any contingent consideration from the Securities America sale, which closed after the reporting date.
- Review regulatory capital and dividend restrictions at insurance, banking, broker-dealer and other subsidiaries, as parent-company liquidity depends substantially on subsidiary distributions.
- Track legal, regulatory, tax and ERISA proceedings, including the potential effect of adverse outcomes on earnings, capital and reputation.