AMERIPRISE FINANCIAL INC quarterly report, Q3 FY2017

Business Context and Reporting Period

Ameriprise Financial, Inc. filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. 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. Assets under management and administration were $869.5 billion, up 9% from September 30, 2016.

Key Financial Metrics

Metric	Q3 2017	Q3 2016	9M 2017	9M 2016
Total revenues	$3.0 billion	$3.0 billion	$8.9 billion	$8.7 billion
Total net revenues	$2.981 billion	$2.998 billion	$8.867 billion	$8.634 billion
Pretax income	$628 million	$238 million	$1.614 billion	$1.123 billion
Net income	$503 million	$215 million	$1.299 billion	$914 million
Diluted EPS	$3.24	$1.30	$8.24	$5.37
Cash dividends declared per share	$0.83	$0.75	$2.41	$2.17

Q3 net income increased 134%, while nine-month net income increased 42%. Approximate net margins were 16.9% versus 7.2% in Q3 2016 and 14.6% versus 10.6% for the nine-month periods. Approximate pretax margins were 21.1% versus 7.9% in Q3 and 18.2% versus 13.0% for the nine-month periods.

Revenue mix: Nine-month management and financial advice fees rose 9% to $4.669 billion; net investment income rose 6% to $1.154 billion. Distribution fees declined 2% to $1.310 billion, premiums declined 7% to $1.035 billion, and other revenues declined 12% to $733 million.
Operating earnings: Management’s non-GAAP operating earnings were $548 million, or $3.53 diluted operating EPS, in Q3 and $1.421 billion, or $9.02 diluted operating EPS, for nine months, compared with $227 million and $984 million, respectively, in the prior-year periods.
Segment performance: Nine-month operating earnings increased to $837 million in Advice & Wealth Management, $526 million in Asset Management and $562 million in Annuities; Protection declined to $169 million and Corporate & Other had a $292 million operating loss.
Cash flow: Nine-month operating cash flow was $1.179 billion versus $2.022 billion in 2016. Investing cash flow used $106 million versus $367 million used previously, while financing cash flow used $1.286 billion versus $573 million used previously. Ending cash, cash equivalents and restricted cash were $5.211 billion.
Balance sheet and liquidity: Total assets were $145.486 billion, including $2.398 billion of cash and cash equivalents excluding consolidated investment entities. Total equity was $6.305 billion.
Debt: Ameriprise corporate long-term debt was $2.902 billion and short-term borrowings were $201 million. No borrowings were outstanding under the revolving credit facility at September 30, 2017. On October 12, 2017, the company entered into a new unsecured revolving facility of up to $750 million, expandable to $1.0 billion subject to approvals, expiring in October 2022.

Material Changes Versus the Prior Comparable Period

Results benefited materially from favorable third-quarter actuarial and market assumption updates, or “unlocking.” The net pretax benefit was approximately $104 million in Q3 2017 versus a $219 million unfavorable impact in Q3 2016.
Annuities operating earnings improved by $349 million in Q3 and $360 million for nine months, primarily because the prior-year period included unfavorable unlocking impacts.
Advice & Wealth Management benefited from wrap-account net inflows and market appreciation. Wrap assets rose 17% year to date to $235.2 billion, including $14.5 billion of nine-month net flows.
Asset Management remained affected by net outflows of $19.0 billion for nine months, including $12.7 billion from former parent-related assets, although market appreciation and expense management lifted operating earnings.
Protection earnings declined because of unfavorable unlocking effects, lower premiums following additional reinsurance arrangements and other insurance-related factors, partially offset by improved auto and home results.
Q3 included a $57 million loss-recognition charge for closed-block long-term-care insurance, primarily due to unfavorable morbidity experience. Q3 2016 included a $31 million long-term-care loss-recognition charge and a $29 million reserve correction.
The company completed its transition to advisory account share classes without 12b-1 fees, reducing Q3 revenue by approximately $54 million and nine-month revenue by approximately $138 million compared with the prior periods.
Ameriprise acquired Investment Professionals, Inc. on July 1, 2017, adding 215 advisors and approximately $8 billion of client assets. The company announced the acquisition of Lionstone Investments, which closed November 1, 2017 and added approximately $6 billion of assets under management.
The company repurchased 8.0 million shares for approximately $1.0 billion during the first nine months and had $2.4 billion remaining under its repurchase authorization at September 30, 2017.

Guidance, Outlook, Commentary and Risks

Management’s multi-year financial targets are operating total net revenue growth of 6% to 8%, operating diluted EPS growth of 12% to 15% and operating return on equity excluding AOCI of 19% to 23%. These are targets, not quarterly guidance.
Management expects the fixed deferred annuity book to gradually run off and earnings from that business to trend down because of low interest rates, lower reinvestment yields and limited new sales.
Management expects continued outflows of primarily low-margin former parent-related assets in Asset Management, but the timing, volume and mix remain uncertain.
Market sensitivity is significant. A hypothetical 10% equity-price decline was estimated to reduce pretax income by approximately $501 million after hedging. A hypothetical 100-basis-point parallel interest-rate increase was estimated to increase pretax income by approximately $167 million. These scenarios are not forecasts.
Variable annuity guarantees, embedded derivatives, contractholder behavior, nonperformance spreads, mortality, morbidity, persistency and market volatility create substantial earnings and capital volatility. A move of the nonperformance spread to zero was estimated to reduce net income by approximately $213 million after tax, based on September 30, 2017 conditions.
Regulatory and legal exposure remains elevated, including SEC, FINRA, insurance, state, U.K. and other regulatory inquiries; fiduciary-rule changes; unclaimed-property investigations; and a U.K. lawsuit involving Threadneedle for which the company could not estimate a loss range.
The company identified no material changes to the risk factors in its 2016 Form 10-K. It stated that disclosure controls were effective and that no material changes occurred in internal control over financial reporting.

Important Facts for Investors to Verify

Determine how much of the earnings increase is recurring versus attributable to unlocking, market movements, nonperformance-risk adjustments and other excluded operating items.
Track Asset Management net outflows, especially former parent-related assets, and the effect of the 12b-1 fee transition on future revenue and expenses.
Evaluate long-term-care morbidity assumptions, the $57 million Q3 reserve charge and potential future reserve strengthening.
Review variable annuity guarantee exposure, hedging effectiveness, embedded-derivative valuations and sensitivity to equity markets, interest rates and volatility.
Assess liquidity and capital at regulated insurance subsidiaries, restrictions on subsidiary dividends, collateral requirements and the company’s share-repurchase pace.
Monitor pending litigation, regulatory examinations, fiduciary-rule developments and the Threadneedle proceeding, for which ultimate exposure remains uncertain.
Review the planned 2018 adoption of the revenue-recognition standard, including the expected gross-up of revenue and expenses by approximately $95 million to $120 million.