AMERIPRISE FINANCIAL INC quarterly report, Q2 FY2015

Ameriprise Financial, Inc. — Form 10-Q Summary

Reporting period: Quarterly and six-month periods ended June 30, 2015, compared with the respective 2014 periods. The interim financial statements are unaudited and prepared under U.S. GAAP. Ameriprise provides financial advice, wealth management, asset management, annuity, insurance and related financial services. Assets under management and administration were $811.1 billion at June 30, 2015.

Financial performance and condition

Metric	Three months ended June 30, 2015	Three months ended June 30, 2014	Six months ended June 30, 2015	Six months ended June 30, 2014
Total net revenues	$3,128 million	$3,072 million	$6,181 million	$6,068 million
Income before tax	$615 million	$619 million	$1,233 million	$1,269 million
Net income	$476 million	$467 million	$955 million	$982 million
Net income attributable to Ameriprise	$415 million	$374 million	$808 million	$774 million
Diluted EPS	$2.23	$1.91	$4.30	$3.92
Cash dividends declared per share	$0.67	$0.58	$1.25	$1.10

Net revenue increased 2% in both the quarter and first half. Net income attributable to Ameriprise increased 11% for the quarter and 4% for the first half.
Approximate net-income-attributable margin was 13.3% for the quarter and 13.1% for the first half, versus 12.2% and 12.8%, respectively, in the prior-year periods.
Operating earnings were $434 million, or $2.33 diluted operating EPS, in the quarter and $846 million, or $4.51 diluted operating EPS, in the first half, compared with $408 million and $815 million, respectively, in the prior-year periods.
Operating return on equity excluding AOCI was 23.5% for the trailing twelve months ended June 30, 2015, compared with 21.7% a year earlier.

Balance sheet, cash flow and liquidity

Total assets were $148.8 billion at June 30, 2015, essentially unchanged from December 31, 2014. Ameriprise shareholders’ equity was $7.875 billion, compared with $8.124 billion at year-end.
Cash and cash equivalents were $2.570 billion, compared with $2.638 billion at December 31, 2014.
Operating cash flow for the first half was $1.532 billion, compared with $364 million in 2014. Investing activities used $182 million, versus $158 million provided in 2014, while financing activities used $1.421 billion, versus $1.027 billion.
Ameriprise debt consisted of $3.055 billion of long-term debt and $200 million of short-term borrowings. Consolidated investment entities had an additional $7.353 billion of debt, largely non-recourse CLO and property-fund debt.
The company had no borrowings under its $500 million unsecured revolving credit facility, with $1 million of letters of credit outstanding. The facility was extended to May 2020 and may be increased to $750 million subject to approval requirements.
Management intended to use cash on hand to repay approximately $350 million of senior notes due in November 2015 and stated that liquidity would be sufficient for operating needs.

Material changes versus the prior comparable period

Advice & Wealth Management: Second-quarter operating earnings increased 13% to $220 million; first-half operating earnings increased 15% to $430 million. Growth reflected wrap-account inflows and asset growth. Wrap assets reached $181.9 billion, up 8% year over year.
Asset Management: Second-quarter operating earnings decreased 1% to $197 million, while first-half operating earnings increased 2% to $388 million. Managed assets declined 3% year over year to $503.1 billion, with $7.8 billion of first-half net outflows. Management expects certain low-margin affiliated outflows to continue.
Annuities: Second-quarter operating earnings decreased 12% to $150 million; first-half operating earnings decreased 7% to $322 million. Fixed annuity balances declined 11% year over year to $11.2 billion because of low interest rates, limited sales and higher lapses. Variable annuity balances declined 1% to $77.1 billion.
Protection: Second-quarter operating earnings decreased 21% to $72 million; first-half operating earnings decreased 18% to $123 million. Auto and home policies in force increased 7%, but catastrophe losses increased to $48 million in the quarter and $57 million in the first half. A second-quarter $18 million long-term-care reserve release partly offset higher claims and losses.
Benefits, claims, losses and settlement expenses increased 7% in the quarter and 13% in the first half. Distribution expenses increased 3% and 4%, respectively, primarily because of higher advisor compensation.
Other comprehensive income was a loss of $138 million in the quarter and $152 million in the first half, primarily reflecting declines in net unrealized securities gains.
The company repurchased 6.0 million shares for $774 million during the first half and had approximately $1.0 billion remaining under its authorization at June 30, 2015. Shareholders’ equity was also affected by treasury-share purchases and accumulated other comprehensive income.

Guidance, outlook, risks and unusual items

Management’s multi-year financial targets were 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 rather than quarterly guidance.
Management cited continuing sensitivity to equity prices, interest rates, credit spreads, foreign exchange rates, investment performance, asset flows, policyholder behavior and insurance claims experience.
The low-interest-rate environment is causing spread compression, lower reinvestment yields and pressure on fixed annuity sales and balances. The company reported an average yield of approximately 2.9% on investment purchases during the first half.
A hypothetical 10% equity-market decline was estimated to reduce pretax income by $442 million after hedging. A hypothetical 100-basis-point parallel increase in interest rates was estimated to increase pretax income by $158 million after hedging. Actual results could differ materially.
Variable-annuity guarantees are economically hedged but remain exposed to hedge basis differences, volatility, policyholder behavior and unhedged nonperformance-credit-spread risk. The gross notional amount of derivatives supporting GMWB and GMAB provisions was $137.9 billion.
Management reported ongoing legal, regulatory and arbitration matters, including inquiries involving product sales, advisor supervision, insurance claims, client information security, UK systems and unclaimed-property practices. A lawsuit against the company’s Threadneedle affiliates alleged $120 million of harm; the company stated that any potential loss could not reasonably be estimated.
Unrecognized tax benefits were $224 million at June 30, 2015. Management estimated that gross unrecognized tax benefits could decrease by $170 million to $180 million over the following twelve months, primarily from expected resolution of IRS examinations.
Consolidated investment entities and VIEs materially affect reported assets, liabilities, revenue and earnings but are generally non-recourse or limited-recourse to Ameriprise. Cash held by these entities was not available for general corporate use.

Investor verification items

Reconcile GAAP results with management’s non-GAAP operating earnings and confirm the treatment of market impacts, CIEs, realized gains, hedging effects and restructuring charges.
Assess whether asset-management net outflows, including Columbia Acorn and legacy affiliated assets, persist and affect fee revenue and margins.
Monitor fixed-annuity runoff, reinvestment yields, guaranteed minimum rates and the effect of interest-rate changes on spread income.
Review variable-annuity guarantee reserves, hedge effectiveness, derivative notional amounts and sensitivity assumptions for equity prices, interest rates, volatility and policyholder behavior.
Evaluate the sustainability of auto and home loss ratios, catastrophe losses and long-term-care reserve assumptions following the 2015 reserve changes.
Confirm repayment of the senior notes due in November 2015, available liquidity, subsidiary dividend capacity and regulatory capital requirements.
Track legal and regulatory proceedings, tax examinations and any resulting changes in reserves, capital, liquidity or reputation.