Ameriprise Financial, Inc. — Q1 2020 Form 10-Q Summary
Business context and reporting period
Ameriprise Financial is a diversified financial services company providing financial advice, wealth management, asset management, annuity, insurance and banking products. This unaudited Form 10-Q covers the three months ended March 31, 2020, during the initial COVID-19 pandemic-related market disruption. The company reported $839.1 billion of assets under management and administration at quarter-end, down 6% from $891.2 billion a year earlier.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenues | $3.026 billion | $3.153 billion | Down 4% |
| Total net revenues | $3.001 billion | $3.118 billion | Down 4% |
| Pretax income | $2.351 billion | $470 million | Up $1.881 billion |
| Net income | $2.036 billion | $395 million | Up $1.641 billion |
| Diluted EPS | $15.88 | $2.82 | Up materially |
| Adjusted operating earnings | $694 million | $525 million | Up 32% |
| Adjusted operating EPS | $5.41 | $3.75 | Up 44% |
| Operating cash flow | $4.893 billion | $172 million | Increase of $4.721 billion |
Reported net income and pretax income were heavily affected by market-related valuation items, particularly a $1.689 billion favorable market impact on variable annuity guaranteed benefits and a $91 million favorable impact on indexed universal life benefits. These items are excluded from adjusted operating earnings.
- Revenue mix: Management and financial advice fees rose 9% to $1.770 billion, while distribution fees declined 3% to $464 million, net investment income declined 17% to $328 million, premiums declined 75% to $91 million, and other revenues rose 34% to $373 million.
- Expenses: Distribution expenses increased 11% to $995 million. Benefits, claims, losses and settlement expenses were a benefit of $1.747 billion versus expense of $670 million in the prior year, principally reflecting market impacts on variable annuity guarantees. DAC amortization increased to $512 million from $16 million.
- Margins: Consolidated net-income margin was approximately 67.8%, compared with 12.7% in Q1 2019; this comparison is not representative of underlying operating performance because of the unusually large market-related items. Advice & Wealth Management adjusted operating margin was 22.3%, versus 22.5%.
- Liquidity: Cash and cash equivalents excluding consolidated investment entities and other restricted cash were $8.7 billion at March 31, 2020, versus $3.7 billion at year-end 2019. Cash including restricted amounts was $11.677 billion.
- Debt: Corporate long-term debt was $2.344 billion and short-term borrowings were $200 million at March 31, 2020. The company repaid $750 million of senior notes due March 2020. On April 2, 2020, it issued $500 million of 3.0% unsecured senior notes due 2025.
- Capital returns: The company paid $126 million of dividends and repurchased 2.512 million shares for $386 million during the quarter. Repurchases were paused in mid-March; $724 million remained under the authorization at March 31, 2020. A quarterly dividend of $1.04 per share was announced on May 6, 2020.
Material changes versus the prior comparable period
- Adjusted operating earnings increased to $694 million from $525 million, driven principally by higher average equity markets, increased client activity and lower expenses.
- Advice & Wealth Management adjusted operating earnings increased 8% to $378 million, while Asset Management increased 8% to $157 million.
- Annuities adjusted operating earnings declined 26% to $95 million because of volatile markets, low interest rates, lower investment income and continuing fixed-annuity runoff. Protection earnings declined 3% to $72 million.
- Corporate & Other adjusted operating loss improved to $50 million from $63 million, primarily because of the 2019 sale of Ameriprise Auto & Home Insurance.
- AUM declined 5% to $671.4 billion and AUA declined 9% to $167.7 billion. Asset Management AUM fell 7% to $426.2 billion, reflecting market depreciation, net outflows and foreign exchange effects.
- Separate account assets declined to $75.305 billion from $87.488 billion at December 31, 2019, largely reflecting market depreciation.
- The fair value liability for GMWB and GMAB embedded derivatives increased to $3.276 billion from $763 million at year-end, while the variable annuity GMWB reserve increased to $3.899 billion from $1.462 billion.
- Other comprehensive loss was $557 million, primarily from $524 million of after-tax unrealized securities losses and $33 million of foreign currency translation losses.
- The company adopted the current expected credit loss standard on January 1, 2020. The adoption reduced retained earnings by $9 million and increased credit loss allowances; management stated that the overall adoption impact was not material.
- The company recorded a $19 million out-of-period correction related to performance fees. Management stated that the correction was not material to prior-period financial statements.
Guidance, outlook, commentary, risks and unusual items
- Management maintains long-term financial targets of 12% to 15% average adjusted operating EPS growth and adjusted operating ROE excluding AOCI above 30%. No specific quarterly or full-year earnings guidance was provided in the filing.
- COVID-19 created significant uncertainty and adversely affected market values, client activity, fee income, credit reserves, actuarial assumptions, liquidity and operating conditions. The company implemented work-from-home procedures and reported continued service during the quarter.
- Management expects sustained low interest rates to pressure spread income, reinvestment yields and earnings in interest-sensitive products. The fixed deferred annuity book is expected to gradually run off, with related earnings trending lower.
- A hypothetical 10% equity decline was estimated to reduce pretax income by $81 million, including an estimated $208 million negative impact on pretax adjusted operating income. A hypothetical 100-basis-point rate increase was estimated to reduce pretax income by $336 million. Actual results may differ materially.
- The favorable first-quarter valuation effect from a 145-basis-point widening in the estimated nonperformance spread was significant. Management estimated that moving the spread to zero would reduce future net income by approximately $1.8 billion, net of related adjustments and tax, based on March 31, 2020 conditions.
- Investment securities had $714 million of gross unrealized losses at March 31, 2020, including $13 million attributed to credit-related factors. The allowance for credit losses on available-for-sale securities was $13 million.
- The company faces legal, regulatory, litigation, reinsurance, counterparty, credit, cybersecurity, operational and market risks. The filing states that adverse outcomes in legal or regulatory matters could materially affect financial condition, results, liquidity or reputation, although amounts were not clearly estimable for many matters.
- The company reported effective disclosure controls as of March 31, 2020 and no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether subsequent COVID-19 market conditions reverse the unusually large Q1 2020 favorable valuation impact on variable annuity and IUL guarantees.
- Changes in GMWB and GMAB liabilities, hedge effectiveness, nonperformance spreads and statutory capital under later market scenarios.
- Trends in AUM, AUA, client flows, asset-based fees and distribution fees as market levels and client activity change.
- The sustainability of the $694 million of adjusted operating earnings and the relevance of the $5.41 adjusted operating EPS after excluding market-sensitive items.
- Credit deterioration, unrealized losses and allowance requirements in corporate debt, mortgage-backed securities, syndicated loans and other investments.
- Liquidity and capital at the holding company and regulated subsidiaries, including restrictions on subsidiary dividends and the use of the revolving credit facility.
- The timing and extent of any resumption of share repurchases and the effect of the April 2, 2020 debt issuance on leverage and interest expense.
- Potential effects of regulatory matters, litigation, reinsurance counterparties and the company’s long-term care exposure.