AMERIPRISE FINANCIAL INC quarterly report, Q2 FY2020

Ameriprise Financial, Inc. — Q2 2020 Form 10-Q Summary

Business context and reporting period

Ameriprise Financial is a diversified financial services company providing financial advice, wealth and asset management, annuities, insurance, banking and related services. The unaudited filing covers the three and six months ended June 30, 2020, compared with the same 2019 periods. Management reported $946.8 billion of assets under management and administration at June 30, 2020.

Results were materially affected by COVID-19, financial-market volatility, lower interest rates and changes in client activity. The company continued substantially remote operations and began a phased reopening of offices.

Key financial metrics

Metric	Q2 2020	Q2 2019	Six months 2020	Six months 2019
Total revenues	$2.730 billion	$3.282 billion	$5.756 billion	$6.435 billion
Total net revenues	$2.712 billion	$3.245 billion	$5.713 billion	$6.363 billion
Pretax income (loss)	$(526) million	$587 million	$1.825 billion	$1.057 billion
Net income (loss)	$(539) million	$492 million	$1.497 billion	$887 million
Diluted EPS	$(4.31)	$3.57	$11.77	$6.38
Adjusted operating earnings	$333 million	$560 million	$1.027 billion	$1.085 billion
Adjusted operating EPS	$2.64	$4.06	$8.07	$7.80
Net cash from operating activities	Not separately provided	Not separately provided	$4.703 billion	$1.152 billion

Q2 net income margin was approximately negative 19.9% of net revenues; the six-month net income margin was approximately 26.2%. These margins were heavily affected by fair-value changes in variable annuity and indexed universal life guarantees.

Balance sheet, debt and liquidity

Total assets were $154.902 billion at June 30, 2020, compared with $151.828 billion at December 31, 2019.
Cash and cash equivalents, excluding consolidated investment entities and other restricted cash, were $7.654 billion, up from $3.709 billion at year-end. Cash including restricted amounts was $10.119 billion.
Customer deposits increased to $16.070 billion from $14.430 billion.
Long-term debt was $2.835 billion and short-term borrowings were $200 million. Total company debt excluding consolidated investment entity debt was approximately $3.035 billion.
The company issued $500 million of 3.0% unsecured senior notes due 2025 and repaid $750 million of 5.3% senior notes at maturity during the first quarter.
The company had no borrowings under its $750 million unsecured revolving credit facility and had $1 million of letters of credit outstanding. Management estimated parent-company liquidity of $2.7 billion and stated that liquidity and capital resources remained strong.
Shareholders’ equity was $6.500 billion, compared with $5.729 billion at December 31, 2019.

Material changes versus the prior comparable periods

Q2 net revenues declined 16%, primarily because of lower distribution fees, net investment income and premiums. Distribution fees fell 23%, in part because of lower short-term interest rates and reduced transaction activity.
Q2 pretax results shifted from $587 million of income to a $526 million loss. The principal driver was a $988 million unfavorable market impact from variable annuity guaranteed benefits, compared with a $60 million expense in the prior-year quarter, including a significant unfavorable nonperformance-credit-spread adjustment.
Q2 also included a $122 million unfavorable market impact on indexed universal life benefits, compared with $26 million in the prior-year quarter.
Q2 adjusted operating earnings declined 41% to $333 million, although reported GAAP results were more severely affected by market-sensitive items.
For the six months, net income increased 69% to $1.497 billion, largely because the variable annuity guaranteed-benefit market impact was a $701 million benefit versus a $202 million expense in the prior-year period.
The sale of Ameriprise Auto & Home Insurance, completed October 1, 2019, reduced premiums and related expenses in 2020 comparisons.
Assets under management increased 4% year over year to $759.1 billion, while total assets under management and administration increased 3% to $946.8 billion. Advice and Wealth Management wrap assets benefited from $11.0 billion of six-month net inflows, offset by $10.9 billion of market depreciation and other effects.
Six-month adjusted operating earnings declined 4% to $1.027 billion. Advice & Wealth Management and Asset Management earnings declined, Annuities declined modestly, and Protection increased slightly.

Guidance, outlook, commentary and unusual items

Management’s long-term financial targets are adjusted operating diluted EPS growth of 12% to 15% and adjusted operating return on equity excluding AOCI of more than 30%. The filing does not provide specific 2020 quarterly or full-year earnings guidance.
Management expects continued sensitivity to COVID-19, equity markets, interest rates, credit spreads, client behavior, asset flows and volatility. A prolonged low-rate environment could compress spreads and increase reserves and DAC amortization.
Management estimated that a 125- to 150-basis-point reduction in long-term interest-rate assumptions, together with a two- to three-year extension of the grading period, could reduce adjusted operating earnings after tax by $200 million to $300 million, primarily through long-term-care reserves and DAC amortization.
The company disclosed that eliminating the June 30, 2020 nonperformance credit spread would reduce future net income by approximately $777 million after tax, based on then-current spreads.
At June 30, 2020, the fair value of GMWB and GMAB embedded derivative liabilities was $3.129 billion, compared with $763 million at December 31, 2019. This increase was a major source of earnings volatility.
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.
Commercial mortgage loan modifications related to COVID-19 involved 93 loans with an unpaid balance of $369 million. The modifications primarily consisted of short-term forbearance and interest-only payments and were not classified as troubled debt restructurings.
The company repurchased 4.3 million shares for $637 million during the first six months and had $473 million remaining under its repurchase authorization at June 30. It temporarily paused repurchases in mid-March and resumed them in early May.
The company announced a quarterly dividend of $1.04 per share on July 29, 2020, payable August 21, 2020.

Principal risks and contingencies

COVID-19 could further reduce asset values, client activity, fees, investment income and liquidity, while increasing credit, mortality, morbidity, reserve and counterparty risks.
Equity-price, interest-rate, volatility, credit-spread and foreign-exchange movements can materially affect asset-based fees, DAC and DSIC, insurance guarantees and hedging results. The filing’s sensitivity analysis estimated a $114 million pretax loss from a 10% equity-price decline and a $45 million pretax loss from a 100-basis-point rate increase, although actual results may differ substantially.
Long-term-care insurance, variable annuity guarantees, reinsurance counterparties and derivative counterparties remain significant exposure areas.
The company is subject to ongoing regulatory inquiries, examinations, arbitration and litigation involving sales practices, supervision, insurance and annuity claims, cybersecurity, trading and transaction monitoring. Potential losses are not clearly quantifiable for many matters.
The company had $102 million of gross unrecognized tax benefits at June 30, 2020 and estimated that up to $10 million could decrease during the following 12 months.
Management reported effective disclosure controls as of June 30, 2020 and no material changes to internal control over financial reporting.

Facts investors should verify

Whether subsequent market movements materially changed variable annuity guarantee liabilities, nonperformance spreads and hedging results.
The sustainability of operating earnings excluding market-sensitive items, particularly the company’s ability to meet its 12%–15% adjusted EPS growth target.
Trends in advice, asset-management and annuity net flows, including the impact of COVID-19 and the continuing shift away from annuity products with living-benefit guarantees.
Interest-rate impacts on distribution fees, investment income, product spreads, reserves and DAC amortization.
The credit quality and performance of the investment portfolio, including commercial mortgage loans, below-investment-grade securities and COVID-19 loan modifications.
Parent-company liquidity, subsidiary dividend capacity, regulatory capital requirements and the remaining share-repurchase authorization.
Developments in long-term-care reserves, reinsurance protections and regulatory or legal proceedings.