Ameriprise Financial, Inc. — 1Q 2019 Form 10-Q Summary
Business context and reporting period
Ameriprise Financial is a diversified financial services company providing financial advice, asset management, annuities, protection products and banking-related services. This unaudited report covers the three months ended March 31, 2019, with comparison to the three months ended March 31, 2018. Results are materially influenced by equity markets, interest rates, investment performance, asset flows, insurance assumptions and valuation changes.
Assets under management and administration were $891.2 billion, compared with $887.2 billion a year earlier. The company reported five segments: Advice & Wealth Management, Asset Management, Annuities, Protection, and Corporate & Other.
Financial performance and key metrics
| Metric | 1Q 2019 | 1Q 2018 | Change |
|---|---|---|---|
| Total revenues | $3.153 billion | $3.184 billion | (1%) |
| Total net revenues | $3.118 billion | $3.168 billion | (2%) |
| Pretax income | $470 million | $696 million | (32%) |
| Net income | $395 million | $594 million | (34%) |
| Diluted EPS | $2.82 | $3.91 | (28%) |
| Adjusted operating earnings | $525 million | $558 million | (6%) |
| Adjusted operating diluted EPS | $3.75 | $3.67 | 2% |
| Effective tax rate | 15.9% | 14.7% | Up 1.2 points |
Net income margin on total net revenues was approximately 12.7%, versus 18.8% in the prior-year quarter. Pretax margin was approximately 15.1%, versus 22.0%.
- Management and financial advice fees declined 3% to $1.627 billion, primarily due to lower average assets under management.
- Distribution fees increased 3% to $480 million, while premiums increased 8% to $371 million.
- Benefits, claims, losses and settlement expenses increased 36% to $670 million. Interest credited to fixed accounts increased 45% to $204 million.
- Amortization of deferred acquisition costs fell 83% to $16 million, largely reflecting market-related offsets and mean-reversion impacts.
- Operating cash flow was $172 million, compared with cash used of $188 million in 1Q 2018. Investing cash flow was an outflow of $481 million, and financing cash flow was an inflow of $291 million.
- Cash and cash equivalents excluding consolidated investment entities were $3.3 billion at March 31, 2019. Total cash and cash equivalents, including restricted amounts, were $5.761 billion.
- Total debt was $3.595 billion, including $3.394 billion of long-term debt and $201 million of short-term borrowings. The company issued $500 million of 3.00% senior notes due 2022.
- Shareholders’ equity was $5.843 billion, compared with $5.588 billion at December 31, 2018.
Segment and operating developments
- Advice & Wealth Management: Adjusted operating earnings rose 11% to $350 million. Net revenues increased 4% to $1.554 billion, supported by wrap-account net inflows and higher brokerage cash earnings. Wrap-account assets increased 11% year over year to $278.8 billion.
- Asset Management: Adjusted operating earnings declined 25% to $146 million. Net revenues fell 11% to $689 million, reflecting net outflows, lower average equity markets, foreign-currency effects and the absence of a $14 million prior-year vendor credit. Managed assets declined 5% year over year to $459.1 billion; quarterly net flows were negative $7.2 billion.
- Annuities: Adjusted operating earnings increased 2% to $128 million. Variable annuity balances declined 2% year over year to $76.9 billion, while fixed deferred annuity balances declined 6% to $8.6 billion.
- Protection: Adjusted operating earnings increased 14% to $74 million, supported by higher investment income and favorable life claims experience.
- Corporate & Other: Adjusted operating loss increased to $63 million from $51 million, partly due to higher compensation, technology investment and bank-establishment costs.
Material changes, unusual items and outlook
- GAAP earnings were adversely affected by market-related items, including a $142 million expense from the market impact on variable annuity guaranteed benefits, compared with a $5 million expense in 1Q 2018; a $51 million expense from IUL benefits, compared with a $25 million benefit; and a $10 million expense from investment hedges, compared with a $16 million benefit.
- The unfavorable impact of the nonperformance credit spread adjustment on variable annuity guarantees was $158 million, compared with a $13 million favorable impact in the prior-year quarter.
- Other comprehensive income was $326 million, driven primarily by $322 million of net unrealized securities gains. Total comprehensive income was $721 million.
- The company entered into a reinsurance arrangement covering approximately $1.7 billion of fixed annuity policies, with a $1.6 billion reinsurance deposit receivable at March 31, 2019. The transaction reduced investing cash flow by $345 million during the quarter.
- Ameriprise Auto & Home was classified as held for sale. The announced sale to American Family Insurance is expected to generate $1.05 billion of gross cash proceeds and approximately $950 million after an affinity-partner payment, subject to adjustments, regulatory approvals and closing conditions. Closing was expected in the second half of 2019. The company recorded a $5 million impairment on investments held by the business.
- Management’s multi-year financial targets are adjusted operating total net revenue growth of 6% to 8%, adjusted operating diluted EPS growth of 12% to 15%, and adjusted operating return on equity excluding AOCI of 19% to 23%. The filing does not provide a specific quarterly or annual earnings forecast.
- The company expected to convert Ameriprise National Trust Bank into a federal savings bank in May 2019 and launch its initial product suite in the second quarter of 2019, subject to remaining operational and regulatory processes.
- The company paid $127 million of dividends and repurchased approximately 2.8 million shares for $355 million during the quarter. A new $2.5 billion repurchase authorization was approved through March 31, 2021; $154 million remained under the prior authorization at March 31, 2019.
Liquidity, risks and contingencies
- The company had an unsecured revolving credit facility of up to $750 million, expandable to $1.0 billion subject to approvals. There were no borrowings and $1 million of letters of credit outstanding; the company was in compliance with its covenants.
- Management stated that operating cash flows, available cash and revolver capacity should be sufficient for operating liquidity needs. Parent-company liquidity depends substantially on dividends and capital returns from regulated subsidiaries.
- Key risks include sustained low interest rates, spread compression, reinvestment risk, equity-market declines, credit and foreign-exchange volatility, insurance claims and persistency experience, variable annuity guarantee exposures, derivative-counterparty risk, regulatory and litigation matters, cybersecurity, Brexit-related disruption and execution of the Auto & Home sale and bank conversion.
- A hypothetical 10% equity-price decline was estimated to reduce pretax income by approximately $231 million net of hedges. A hypothetical 100-basis-point parallel interest-rate increase was estimated to increase pretax income by approximately $632 million. These are scenario estimates, not forecasts.
- The filing describes ongoing regulatory inquiries and legal proceedings but does not identify a reasonably estimable aggregate loss exposure. The company states that no material changes occurred to the risk factors disclosed in its 2018 Form 10-K.
Investor verification points
- Verify whether the Auto & Home transaction closed on the expected timetable and the final proceeds and adjustments.
- Track Asset Management net flows, investment performance and fee-generating assets, particularly in active equity products.
- Assess sensitivity of earnings and statutory capital to variable annuity guarantees, nonperformance spreads, interest rates and equity-market movements.
- Reconcile adjusted operating earnings and EPS to GAAP results, including market impacts, mean reversion, hedging effects and restructuring charges.
- Monitor the conversion and product launch of the federal savings bank, including regulatory capital and deposit trends.
- Review debt maturities, including the $300 million of senior notes due June 2019, and the use of proceeds from the 2022 note issuance.
- Evaluate the sustainability of dividends and share repurchases given subsidiary dividend restrictions, insurance-company capital requirements and market conditions.