Ameriprise Financial, Inc. — 2Q 2017 Form 10-Q Summary
Business context and reporting period
Ameriprise Financial is a diversified financial-services company providing financial advice, wealth management, asset management, annuities, insurance and related banking services. The unaudited filing covers the three and six months ended June 30, 2017, compared with the corresponding 2016 periods. The company reported $834.7 billion of assets under management and administration at June 30, 2017, including $669.5 billion of assets under management and $165.2 billion under administration.
Key financial metrics
| Metric | Three months ended June 30, 2017 | Three months ended June 30, 2016 | Six months ended June 30, 2017 | Six months ended June 30, 2016 |
|---|---|---|---|---|
| Total revenues | $2,997 million | $2,879 million | $5,908 million | $5,653 million |
| Total net revenues | $2,985 million | $2,871 million | $5,886 million | $5,636 million |
| Pretax income | $511 million | $410 million | $986 million | $885 million |
| Net income | $393 million | $335 million | $796 million | $699 million |
| Diluted EPS | $2.50 | $1.97 | $5.01 | $4.06 |
| Operating earnings per diluted share | $2.80 | $2.23 | $5.50 | $4.40 |
| Cash dividends declared per share | $0.83 | $0.75 | $1.58 | $1.42 |
- Net income increased 17% in the quarter and 14% year to date. Diluted EPS increased 27% and 23%, respectively, aided by earnings growth and lower share count.
- Approximate net margin was 13.2% for the quarter and 13.5% year to date; approximate pretax margin was 17.1% and 16.8%, respectively.
- Operating earnings increased to $441 million in the quarter and $873 million year to date, compared with $379 million and $757 million, respectively.
- Trailing twelve-month operating return on equity excluding AOCI was 25.2%, compared with 24.0% in the prior-year period; GAAP return on equity excluding AOCI was 23.0%.
- Net cash provided by operating activities was $736 million for the first six months, down from $1.517 billion in 2016. Investing activities provided $227 million, while financing activities used $866 million.
- Cash, cash equivalents and restricted cash totaled $5.510 billion at June 30, 2017, including $2.392 billion of cash and cash equivalents. Cash and cash equivalents excluding consolidated investment entities were approximately $2.4 billion.
- Total assets were $143.144 billion, compared with $139.821 billion at December 31, 2016. Separate account assets increased to $83.661 billion from $80.210 billion.
- Long-term debt was $2.908 billion and short-term borrowings were $200 million. Total company debt was approximately $3.108 billion, excluding $2.308 billion of debt of consolidated CLOs.
- The company had no borrowings under its $500 million unsecured revolving credit facility, which expires in May 2020, and was in compliance with its covenants.
Material changes versus comparable periods
- Management and financial advice fees increased 8% in both the quarter and first half, primarily reflecting higher assets under management. Total AUM increased 7% year over year to $669.5 billion.
- Advice & Wealth Management operating earnings increased 32% in the quarter and 27% year to date, supported by wrap-account net inflows and market appreciation. Wrap-account assets reached $222.3 billion, with $4.5 billion of quarterly net inflows.
- Asset Management operating earnings increased 19% in the quarter and 10% year to date despite net outflows. Global managed assets increased 3% year over year to $472.6 billion, but net outflows were $8.7 billion in the quarter and $14.4 billion year to date.
- Annuities operating earnings declined 3% in the quarter but increased 4% year to date. Lower investment yields and variable-annuity lapses remained pressures, while equity-market appreciation supported results. Fixed-annuity account balances declined 7% year over year to $9.6 billion.
- Protection operating earnings increased 34% in the quarter and 8% year to date. Lower non-catastrophe auto and home losses and new quota-share reinsurance arrangements offset higher catastrophe losses.
- Distribution fees declined 4% in the quarter and 1% year to date, partly because of the transition of advisory accounts to share classes without 12b-1 fees. Management estimated the transition reduced second-quarter revenue by approximately $54 million and first-half revenue by approximately $84 million.
- Net investment income increased 5% in the quarter and 11% year to date, aided by net realized investment gains of $21 million in the quarter and $38 million year to date, versus $5 million and an $11 million loss in the comparable periods.
- General and administrative expense declined 3% in the quarter and was essentially flat year to date. The prior-year periods included a $23 million legacy hedge-fund legal matter expense.
- Share repurchases totaled $709 million for the first six months, covering 5.7 million shares at an average price of $125.41. The company had $220 million remaining under the prior authorization and received an additional $2.5 billion authorization through June 30, 2019.
Guidance, outlook, commentary and risks
- 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 AOCI of 19% to 23%.
- Management expects low interest rates to continue pressuring spread income, portfolio reinvestment yields and fixed-annuity earnings. The fixed-annuity book is expected to gradually run off while new sales remain limited.
- Variable-annuity guarantees and related hedges create significant earnings sensitivity. A hypothetical 10% equity-price decline was estimated to reduce pretax income by $508 million after hedge impacts; a hypothetical 100-basis-point rate increase was estimated to increase pretax income by $274 million. These are scenarios, not forecasts.
- The company reported a $143 million year-to-date expense from the market impact on variable-annuity guaranteed benefits, net of hedges and related amortization, compared with a $41 million expense in 2016. Changes in nonperformance credit spreads also materially affected results.
- A zero spread over the LIBOR swap curve, based on June 30 credit spreads, would reduce net income by approximately $246 million after related offsets and taxes, according to management’s sensitivity.
- The Department of Labor fiduciary rule remained uncertain. The company implemented policies for the first phase and continued preparing for the second phase while evaluating possible delay, rescission or revision.
- Catastrophe losses, net of reinsurance, were $44 million in the quarter and $69 million year to date. New quota-share and aggregate excess-of-loss arrangements were intended to reduce retained property-loss exposure.
- The company closed its acquisition of Investment Professionals, Inc. on July 1, 2017. The acquisition added approximately 200 advisors and $8 billion of assets and was expected to affect third-quarter results.
- Regulatory, litigation and reputational risks remain elevated. The company disclosed numerous regulatory inquiries and proceedings, including an English High Court matter involving its Threadneedle affiliate with alleged damages of $106 million; the company could not reasonably estimate a potential loss.
- The company’s securities portfolio had $129 million of gross unrealized losses at June 30, 2017, compared with $225 million at year-end 2016. Management attributed the losses primarily to interest-rate and credit-spread movements.
Important facts for investors to verify
- Reconcile GAAP earnings with operating earnings, particularly the effects of variable-annuity guarantees, hedges, nonperformance spreads and realized investment gains.
- Monitor Asset Management net outflows, including continuing former-parent-related outflows and fee-rate pressure.
- Assess the sustainability of Advice & Wealth Management growth, wrap-account inflows and the revenue impact of eliminating 12b-1 fees.
- Review sensitivity to interest rates, equity markets, volatility, credit spreads, policyholder behavior and annuity lapses.
- Evaluate insurance capital and dividend capacity, including the reliance of the holding company on subsidiary dividends and regulatory capital requirements.
- Track litigation, regulatory examinations, fiduciary-rule developments and the unresolved Threadneedle proceeding.
- Confirm the effect, integration costs and financial contribution of the Investment Professionals acquisition in subsequent filings.
- Review operating cash flow, share repurchases, dividend commitments and the company’s ability to maintain liquidity while funding subsidiaries and insurance obligations.