Ameriprise Financial, Inc. — 2016 Q3 Form 10-Q Summary
Business context and reporting period
Ameriprise Financial is a diversified financial services company providing advice, wealth management, asset management, annuities and protection products. This unaudited Form 10-Q covers the three and nine months ended September 30, 2016, compared with the respective 2015 periods.
Assets under management and administration were $795.6 billion at September 30, 2016, up 4% from $765.8 billion a year earlier. The company reported five operating segments: Advice & Wealth Management, Asset Management, Annuities, Protection, and Corporate & Other.
Financial performance and key metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total net revenues | $2,998 million | $2,886 million | $8,634 million | $9,067 million |
| Pretax income | $238 million | $463 million | $1,123 million | $1,696 million |
| Net income attributable to Ameriprise | $215 million | $397 million | $914 million | $1,205 million |
| Diluted EPS | $1.30 | $2.17 | $5.37 | $6.48 |
| Operating earnings | $227 million | $429 million | $984 million | $1,275 million |
| Operating earnings per diluted share | $1.37 | $2.35 | $5.78 | $6.85 |
| Cash dividends declared per share | $0.75 | $0.67 | $2.17 | $1.92 |
Reported net margin was approximately 7.2% in the third quarter and 10.6% for the first nine months. Pretax margins were approximately 7.9% and 13.0%, respectively. The filing emphasizes that operating measures are non-GAAP and should not be viewed as substitutes for GAAP results.
- Segment operating earnings: Advice & Wealth Management produced $231 million in Q3 and $657 million for the nine months; Asset Management produced $155 million and $452 million; Annuities reported a $68 million loss and $202 million of income; Protection produced $11 million and $117 million; Corporate & Other reported a $72 million and $198 million loss.
- Cash flow: Operating cash flow was $1.705 billion for the first nine months, compared with $1.903 billion in 2015. Investing activities used $366 million and financing activities used $568 million.
- Liquidity: Cash and cash equivalents, excluding consolidated investment entities, were $3.075 billion at September 30, 2016, compared with $2.357 billion at December 31, 2015.
- Debt: Corporate long-term debt was $2.934 billion and short-term borrowings were $200 million. Total corporate debt was $3.134 billion, compared with $2.892 billion at year-end 2015. Consolidated investment entity debt was $2.710 billion.
- Equity returns: Trailing twelve-month operating return on equity excluding AOCI was 21.5%, compared with 24.0% a year earlier.
- Capital return: The company repurchased 13.7 million shares for $1.3 billion during the first nine months and paid $368 million in shareholder dividends. Approximately $1.3 billion remained under the repurchase authorization at September 30, 2016.
Material changes versus the prior comparable period
- Third-quarter net revenues increased 4%, but pretax income fell 49% and net income attributable to Ameriprise fell 46%. For the first nine months, net revenues decreased 5%, pretax income decreased 34%, and attributable net income decreased 24%.
- The principal earnings pressure was the annual insurance and annuity assumption review, or “unlocking.” Q3 2016 unlocking reduced pretax results by approximately $219 million, compared with a $48 million benefit in Q3 2015. The impact primarily reflected continued low interest rates, living-benefit persistency, and model and market-input changes.
- Annuities operating earnings declined sharply because of the unfavorable unlocking impact and lower investment yields. Fixed annuity account balances declined 7% year over year to approximately $10.2 billion, and management expects the fixed annuity book to continue gradually running off.
- Asset Management operating earnings decreased 14% in Q3 and 20% for the nine months, primarily due to net outflows, lower average assets under management and foreign currency effects. Nine-month segment net outflows were $16.5 billion.
- Advice & Wealth Management operating earnings increased 5% in Q3 and 1% for the nine months, supported by wrap-account inflows and market appreciation. Wrap assets ended the quarter at $197.5 billion, up 14% year over year.
- Protection operating earnings decreased 56% in Q3 and 21% for the nine months. Results reflected higher catastrophe losses, auto and home losses, and long-term-care reserve pressure.
- Effective January 1, 2016, adoption of consolidation guidance deconsolidated several CLOs and all previously consolidated property funds, reducing reported assets by approximately $6.2 billion, liabilities by $4.9 billion and equity by $1.3 billion. Comparability with 2015 is therefore affected.
- The company acquired Emerging Global Advisors, LLC on September 1, 2016, adding approximately $1.0 billion of assets under management.
Guidance, outlook, management commentary, risks and unusual items
- Management’s stated long-term financial targets are operating total net revenue growth of 6% to 8%, operating diluted EPS growth of 12% to 15%, and operating ROE excluding AOCI of 19% to 23%.
- Management expects continued pressure from the low interest-rate environment, including spread compression, lower reinvestment yields, higher insurance reserves and adverse DAC and DSIC amortization effects.
- In Q3 2016, the company recorded a $29 million increase in long-term-care reserves as an out-of-period correction related to its claim utilization assumption. The company stated that the prior-period impact was not material.
- The closed long-term-care business generated a $31 million loss-recognition impact, consisting of $58 million of DAC amortization partly offset by a $27 million release of a deferred reinsurance liability.
- Catastrophe losses were $29 million in Q3 and $89 million for the first nine months, compared with $8 million and $65 million, respectively, in the prior-year periods.
- The company issued $500 million of unsecured senior notes due 2026 and redeemed the remaining $229 million of junior subordinated notes due 2066. It had no borrowings under its $500 million unsecured revolving credit facility and was in compliance with its covenants.
- The Department of Labor fiduciary rule is expected to require operational, compliance and product changes. The company incurred $19 million of related expense during the first nine months and $7 million in the third quarter.
- Material market sensitivities include interest rates, equity prices, credit spreads, foreign currency and volatility. Management estimated that a 10% equity-price decline would have a net pretax impact of approximately negative $479 million, while a 100-basis-point parallel rate increase would have a net pretax impact of approximately positive $280 million, based on assumptions in the filing.
- Legal and regulatory matters remain elevated. A U.K. proceeding involving Threadneedle relates to alleged liability for a former employee’s conduct and claimed damages of $120 million; the company stated that any potential loss could not reasonably be estimated.
- Management identified no material changes to previously disclosed risk factors. Disclosure controls were considered effective as of September 30, 2016.
Most important facts for an investor to verify
- Whether the adverse Q3 unlocking impact, especially from low rates and living-benefit assumptions, is recurring or largely non-recurring.
- The adequacy of annuity, variable-annuity guarantee and closed long-term-care reserves under continued low rates, changing persistency, morbidity and market volatility.
- The sustainability of Asset Management flows, including ongoing former-parent-related outflows, and their effect on fee revenue and margins.
- Actual statutory capital, subsidiary dividend capacity and the effect of regulatory restrictions on holding-company liquidity.
- Future capital allocation among share repurchases, dividends, debt repayment and acquisitions.
- Potential exposure from legal, regulatory, fiduciary-rule, reinsurance and tax matters, including the unresolved Threadneedle litigation.
- The effect of 2016 CLO and property-fund deconsolidation on period-over-period comparisons and reported debt, assets, revenue and earnings.