Ameriprise Financial, Inc. — Q1 2012 Form 10-Q Summary
Business context and reporting period
Ameriprise Financial is a diversified financial services company providing financial planning, wealth management, asset management, annuities, insurance, banking and related services. The unaudited report covers the three months ended March 31, 2012, with comparison to March 31, 2011. The company reported $674.9 billion of assets under management and administration and more than 9,700 affiliated advisors at quarter-end. Securities America was sold in the fourth quarter of 2011 and is presented as discontinued operations.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenues | $2.572 billion | $2.545 billion | 1% |
| Total net revenues | $2.561 billion | $2.532 billion | 1% |
| Income from continuing operations | $249 million | $294 million | (15%) |
| Net income attributable to Ameriprise | $244 million | $241 million | 1% |
| Diluted EPS | $1.05 | $0.94 | 11% |
| Diluted EPS from continuing operations | $1.06 | $1.21 | (12%) |
| Operating earnings per diluted share | $1.45 | $1.33 | 9% |
| Net cash provided by operating activities | $175 million | $15 million | +$160 million |
Total expenses increased 4% to $2.239 billion. Benefits, claims, losses and settlement expenses rose 28% to $492 million, while amortization of deferred acquisition costs declined 59% to $31 million. The effective tax rate on continuing operations was 22.6%, compared with 23.7% in the prior-year quarter.
At March 31, 2012, cash and cash equivalents were $2.312 billion, down from $2.781 billion at December 31, 2011. Total assets were $136.757 billion and total equity was $9.749 billion. Ameriprise long-term debt was $2.381 billion and short-term borrowings were $504 million; debt of consolidated investment entities was an additional $5.231 billion and is generally non-recourse to Ameriprise.
The company used $234 million in investing activities and $417 million in financing activities during the quarter, resulting in a $469 million decrease in cash. Financing uses included $292 million for share repurchases and $62 million of dividends paid. The company repurchased 5.4 million shares at an average price of $55.86 and had $1.2 billion remaining under its authorization.
Material changes versus the prior comparable period
- Net revenues increased modestly, supported by higher asset-based fees, premiums and consolidated investment-entity income, but were constrained by lower investment income from low interest rates.
- Income from continuing operations attributable to Ameriprise declined to $245 million from $312 million, primarily because the after-tax market impact of variable annuity guaranteed living benefits was a negative $74 million versus a negative $14 million in Q1 2011.
- Operating earnings increased to $335 million from $344 million on a total-dollar basis, but operating diluted EPS rose because weighted-average diluted shares declined to 231.7 million from 257.7 million.
- Annuities operating earnings increased 10% to $189 million, while Advice & Wealth Management declined 5% to $94 million, Asset Management declined 4% to $131 million, and Protection declined 4% to $107 million.
- Total assets under management increased 1% year over year to $563.5 billion, primarily from wrap-account net inflows and market appreciation. Total assets under management and administration increased 1% to $674.9 billion.
- Advice & Wealth Management wrap-account assets increased 10% to $113.1 billion. Asset Management assets declined 1% to $463.0 billion, reflecting Columbia outflows partly offset by Threadneedle growth.
- Variable annuity guaranteed-benefit liabilities declined substantially, including GMWB liabilities of $753 million at March 31, 2012 versus $1.377 billion at December 31, 2011, largely reflecting market movements and valuation effects.
Accounting, outlook, risks and unusual items
Effective January 1, 2012, Ameriprise retrospectively adopted new deferred acquisition cost accounting rules. Adoption reduced beginning retained earnings by $1.4 billion after tax, increased accumulated other comprehensive income by $113 million, and reduced beginning total equity by approximately $1.3 billion. Prior-period amounts were adjusted; reported per-share amounts for Q1 2011 did not change.
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 accumulated other comprehensive income of 15% to 18%. Management stated that earnings would continue to be negatively affected by the low-interest-rate environment during 2012, including spread compression and potential impacts on DAC and DSIC amortization and reserves.
Management estimated that a 100-basis-point decline in future fixed-income return assumptions could reduce current-period pretax income by approximately $27 million, while a 100-basis-point decline in near- and long-term equity return assumptions could reduce pretax income by approximately $43 million. A hypothetical 10% equity-market decline was estimated to have a net pretax impact of approximately negative $309 million; a 100-basis-point increase in interest rates was estimated to have a net pretax impact of approximately positive $92 million.
Liquidity included $2.3 billion of cash and cash equivalents and an unsecured revolving credit facility of up to $500 million, expandable to $750 million subject to approvals. No borrowings were outstanding under the facility; $2 million of letters of credit were outstanding. The company stated that operating cash flows, cash balances and revolver availability should be sufficient for operating liquidity needs.
Risks include equity, interest-rate, credit, foreign-exchange and market-volatility exposure; policyholder behavior and mortality, morbidity and persistency assumptions; variable-annuity guarantee valuation and hedging risk; investment and counterparty credit risk; regulatory capital and subsidiary dividend restrictions; elevated legal and regulatory activity; and potential changes in accounting, tax and financial-services regulation.
The company disclosed ongoing regulatory inquiries and examinations involving product sales, disclosures, trading practices, advisor supervision, information security and unclaimed-property practices. A putative ERISA class action concerning the company’s 401(k) plan was in an early procedural stage, with damages alleged to exceed $20 million; the company could not reasonably estimate any potential loss. A governmental insider-trading inquiry involving Seligman remained open, although the company stated that neither Ameriprise nor Seligman had been accused of wrongdoing and that neither was a target.
There were no material changes to contractual obligations or off-balance-sheet arrangements from the 2011 Form 10-K. Management concluded that disclosure controls and procedures were effective at a reasonable level of assurance as of March 31, 2012.
Important facts for investors to verify
- Reconcile GAAP results with management’s operating measures, particularly the exclusion of variable-annuity market impacts, integration charges, realized gains and losses, and consolidated investment entities.
- Assess sensitivity to sustained low interest rates, including spread compression, DAC and DSIC amortization, reserve changes and subsidiary investment income.
- Review the assumptions, hedging effectiveness and nonperformance-risk adjustments underlying variable-annuity GMWB and GMAB liabilities.
- Monitor asset flows and margins in Columbia, Threadneedle, wrap accounts and variable annuities, including the effect of fee changes and new product launches.
- Evaluate capital and liquidity at both the holding-company and regulated-subsidiary levels, including restrictions on subsidiary dividends and the remaining share-repurchase authorization.
- Follow the disclosed litigation, regulatory inquiries, tax audits and unrecognized tax benefits, including the potential for losses beyond amounts accrued.
- Consider the effect of the retrospective DAC accounting adoption when comparing 2012 balances and trends with previously filed periods.