Business context and reporting period
Ameriprise Financial, Inc. filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. The company provides financial planning, advice, asset management, insurance, annuity, banking and related services through Advice & Wealth Management, Asset Management, Retirement & Protection Solutions, and Corporate & Other. Assets under management and administration were approximately $998.6 billion at September 30, 2020.
The period reflects continued COVID-19 disruption, market volatility, historically low interest rates and the October 2019 sale of Ameriprise Auto & Home Insurance. The company also changed from five to four reportable segments and revised prior-period segment amounts for comparability.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Total revenues | $3.013 billion | $3.351 billion | $8.769 billion | $9.786 billion |
| Net revenues | $3.003 billion | $3.317 billion | $8.716 billion | $9.680 billion |
| Pretax income (loss) | $(184) million | $641 million | $1.641 billion | $1.698 billion |
| Net income (loss) | $(140) million | $543 million | $1.357 billion | $1.430 billion |
| Diluted EPS | $(1.14) | $4.04 | $10.73 | $10.40 |
| Adjusted operating earnings | $184 million | $554 million | $1.211 billion | $1.639 billion |
GAAP net margin was approximately negative 4.7% in the third quarter and 15.6% for the nine months. Adjusted operating earnings per diluted share were $1.47 in the quarter and $9.57 for the nine months, compared with $4.12 and $11.92, respectively, in the prior-year periods.
- Management and financial advice fees increased 6% in the quarter and 4% year to date, supported by higher average equity markets and wrap-account growth.
- Distribution fees declined 17% in the quarter and 15% year to date, primarily because lower short-term interest rates reduced fees on brokerage cash.
- Net investment income declined 16% in the quarter and 17% year to date, reflecting lower rates, lower certificate balances and other investment effects.
- Benefits, claims, losses and settlement expenses increased 86% in the quarter but decreased 55% year to date, with significant quarter-to-quarter volatility from variable-annuity guarantees, unlocking and the prior-year Auto & Home business.
- Cash and cash equivalents excluding consolidated investment entities and other restricted cash were $7.441 billion at September 30, 2020, compared with $3.709 billion at December 31, 2019.
- Net cash provided by operating activities was $5.639 billion for the nine months, versus $2.574 billion in the prior-year period. Investing activities used $2.421 billion and financing activities provided $793 million.
- Long-term debt was $2.833 billion and short-term borrowings were $200 million at September 30, 2020. The company had no borrowings under its $750 million unsecured revolving credit facility and remained in compliance with its covenants.
- Total assets were $158.687 billion and total equity was $6.067 billion at September 30, 2020.
Material changes versus the prior comparable period
- Third-quarter net loss was $140 million compared with net income of $543 million. The principal drivers were $454 million of unfavorable unlocking and long-term-care loss recognition, a $427 million unfavorable market impact from variable-annuity guaranteed benefits, and approximately $116 million of adverse impact from lower short-term rates in Advice & Wealth Management.
- The third-quarter results included $353 million of benefits and claims expense from LTC unlocking and other unlocking effects, plus $100 million of DAC amortization related to valuation-assumption changes.
- Advice & Wealth Management adjusted operating earnings declined 19% to $320 million in the quarter and 14% to $969 million year to date, primarily because of lower earnings on brokerage cash.
- Asset Management adjusted operating earnings increased 14% to $198 million in the quarter and 3% to $496 million year to date, aided by market appreciation and expense management.
- Retirement & Protection Solutions reported an adjusted operating loss of $89 million in the quarter and adjusted operating earnings of $300 million year to date, down 45% from the prior-year period.
- Corporate & Other reported an adjusted operating loss of $202 million in the quarter and $309 million year to date. The segment includes closed blocks of long-term-care, fixed-annuity and fixed-indexed-annuity business.
- The company sold Ameriprise Auto & Home Insurance on October 1, 2019, reducing premiums and related expenses in 2020.
- The company repaid $750 million of senior notes at maturity in March 2020 and issued $500 million of 3.0% senior notes due 2025 in April 2020.
- During the first nine months, the company repurchased 6.3 million shares for approximately $956 million and paid $386 million of dividends. Remaining share-repurchase authorization was approximately $2.7 billion at September 30, 2020.
- Assets under management increased 9% year over year to $800.9 billion, while total assets under management and administration increased 8% to $998.6 billion. Advice & Wealth Management wrap-account assets increased 7% during the quarter to $340.0 billion.
Guidance, outlook, commentary and risks
Management did not provide specific quarterly or annual earnings guidance in the filing. Its stated longer-term financial targets are adjusted operating earnings per diluted share growth of 12% to 15% and adjusted operating return on equity excluding AOCI of more than 30%. Trailing-twelve-month adjusted operating ROE excluding AOCI was 29.6% at September 30, 2020, compared with 37.7% a year earlier.
- Management expects COVID-19, low interest rates, equity-market volatility and changing client behavior to continue affecting revenue, asset values, fees, insurance assumptions, reserves and operating results.
- Low rates are compressing spread income and may increase reserves or alter DAC and DSIC amortization assumptions. The company stated that continued reinvestment at lower yields could reduce future earnings.
- A hypothetical 10% equity-market decline was estimated to reduce pretax income by $88 million net of hedges as of September 30, 2020. A hypothetical 100-basis-point parallel rate increase was estimated to reduce pretax income by $38 million net of hedges. These are sensitivity scenarios, not forecasts.
- The company’s variable-annuity guarantee exposure remains sensitive to equity markets, interest rates, volatility, policyholder behavior and nonperformance-risk assumptions. The fair value of GMWB and GMAB embedded-derivative liabilities was $2.943 billion at September 30, 2020.
- Management estimated parent-company liquidity of approximately $2.8 billion, including cash, unencumbered liquid securities, an affiliate line of credit and part of the committed credit facility. The parent had $1.6 billion of cash, cash equivalents and unencumbered liquid securities.
- S&P Global lowered the company’s issuer credit and senior unsecured debt rating from A with a negative outlook to A- with a stable outlook on November 3, 2020. Management did not expect a material impact on liquidity or access to capital.
- Legal, regulatory and tax matters remain ongoing. The company reported elevated regulatory activity, IRS audits for 2016–2018, various state examinations and a UK tax review. It also disclosed $111 million of gross unrecognized tax benefits at September 30, 2020.
- The company faces potential guaranty-fund assessments, reinsurance counterparty risk involving Genworth Life Insurance Company, credit and market losses, cybersecurity and operational risks, regulatory changes, litigation, rating downgrades and possible deviations from morbidity, mortality, persistency and lapse assumptions.
Most important facts for investors to verify
- Whether the large third-quarter loss from LTC and actuarial unlocking is nonrecurring or signals further reserve pressure, particularly under sustained low interest rates.
- The sensitivity of variable-annuity guarantees and earnings to equity prices, interest rates, volatility, policyholder behavior and nonperformance spreads.
- Whether fee growth from Advice & Wealth Management and Asset Management can offset continued rate-related pressure on brokerage cash, certificates and spread income.
- The sustainability of capital returns, including the $1.04 quarterly dividend announced for November 2020 and the remaining $2.7 billion repurchase authorization, given subsidiary dividend restrictions and regulatory capital needs.
- Changes in credit quality, unrealized losses, allowance levels and reinvestment yields in the company’s $40.737 billion investment portfolio.
- The effects of COVID-19, future market volatility, regulatory proceedings, tax examinations, the S&P rating downgrade and any developments involving LTC reinsurance protections.
- The distinction between GAAP results and adjusted operating measures, particularly the exclusions for market impacts, unlocking, hedging, realized investment gains and losses, and consolidated investment entities.