Ameriprise Financial, Inc. 2014 Form 10-K Summary
Business context and reporting period
Ameriprise Financial is a diversified financial services holding company operating through Advice & Wealth Management, Asset Management, Annuities, Protection, and Corporate & Other segments. The filing covers the fiscal year ended December 31, 2014, including fourth-quarter results. The company served clients through approximately 9,700 advisors and reported $806.2 billion of assets under management and administration at year-end.
Financial performance and key metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total net revenues | $12.268 billion | $11.199 billion | 10% |
| Income from continuing operations | $2.002 billion | $1.478 billion | 35% |
| Net income attributable to Ameriprise | $1.619 billion | $1.334 billion | 21% |
| Diluted EPS | $8.30 | $6.44 | 29% |
| Operating earnings per diluted share | $8.52 | $7.05 | 21% |
| Net cash from operating activities | $2.399 billion | $1.364 billion | Increase of $1.035 billion |
| Cash and cash equivalents | $2.638 billion | $2.632 billion | Flat |
| Long-term debt | $3.062 billion | $2.720 billion | Increase of $342 million |
| Total assets | $148.810 billion | $144.576 billion | 3% |
Reported net income included $2 million of after-tax losses from discontinued operations. Operating earnings, a non-GAAP measure, were $1.662 billion, or $8.52 per diluted share. Operating return on equity excluding accumulated other comprehensive income was 23.0%, compared with 19.7% in 2013. The filing does not present a single consolidated operating margin; based on reported figures, GAAP income from continuing operations before tax was approximately 20.7% of net revenues, compared with approximately 17.6% in 2013.
- Management and financial advice fees increased 11% to $5.810 billion, primarily due to higher average managed assets.
- Distribution fees increased 7% to $1.894 billion.
- Net investment income declined 8% to $1.741 billion, principally because of lower interest rates.
- Premiums increased 8% to $1.385 billion, driven largely by Auto & Home policy growth.
- Other revenues increased 42% to $1.466 billion, including a substantial contribution from consolidated investment entities.
- Total expenses increased 5% to $9.721 billion. Amortization of deferred acquisition costs increased 77% to $367 million.
- Assets under management increased 4% to $658.6 billion, while total assets under administration increased 8% to $147.6 billion.
- Operating earnings by segment were $792 million for Advice & Wealth Management, $788 million for Asset Management, $633 million for Annuities, $246 million for Protection, and a $230 million loss for Corporate & Other.
Fourth-quarter 2014
Fourth-quarter net revenues were $3.089 billion, compared with $2.946 billion in the fourth quarter of 2013. Income from continuing operations before tax was $558 million, compared with $479 million, and net income attributable to Ameriprise was $425 million, compared with $296 million. Diluted EPS was $2.22, compared with $1.46.
Material changes versus the prior comparable period
- Advice & Wealth Management operating earnings increased 34% to $792 million, supported by $14.2 billion of wrap-account net inflows and market appreciation. Its operating margin increased to 16.5% from 13.8%.
- Asset Management operating earnings increased 14% to $788 million. Managed assets increased only 1% to $505.6 billion at year-end, but average managed assets increased 7%; net flows improved to a $2.1 billion inflow from a $6.6 billion outflow.
- Annuities operating earnings were essentially flat at $633 million. Variable annuity account balances rose 2% to $77.0 billion, while fixed annuity balances declined 8% to $12.1 billion due to elevated surrenders.
- Protection operating earnings declined 27% to $246 million. Auto & Home loss expenses increased substantially, including $66 million of catastrophe losses versus $42 million in 2013, a $30 million increase to prior accident-year reserves, and a later $60 million increase to estimated 2014 losses and IBNR.
- The company completed repricing of its $4.1 billion five-year fixed-annuity guarantee block, reducing spread compression, but the low-interest-rate environment continued to pressure investment income and reserves.
- Share repurchases totaled 11.8 million shares during 2014 at an average price of $116.69. The company paid $435 million of shareholder dividends and had approximately $1.8 billion remaining under its repurchase authorization at year-end.
Liquidity, debt and capital
Ameriprise reported $2.6 billion of cash and cash equivalents, no borrowings under its $500 million revolving credit facility, and compliance with applicable debt covenants. The company issued $550 million of senior notes due 2024 and redeemed $200 million of senior notes due 2039. It expected to use cash on hand to repay $350 million of senior notes due in November 2015. Short-term borrowings declined to $200 million from $500 million, primarily because FHLB advances declined to $150 million from $450 million.
The parent company received $1.9 billion of dividends or capital returns from subsidiaries and contributed $31 million to subsidiaries during 2014. Insurance subsidiaries maintained capital materially above regulatory action levels; RiverSource Life reported total adjusted capital of $3.6 billion, or 607% of company-action-level RBC.
Guidance, outlook, commentary and risks
- Management’s long-term financial targets were 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 expected continued benefits from demographic demand for retirement advice, advisor productivity, wrap-account growth, and global asset-management capabilities.
- Management expected continued outflows of certain low-margin assets associated with former parent-company distribution relationships, although the timing and magnitude were uncertain.
- Persistently low interest rates were expected to pressure investment yields, spread income, guaranteed-benefit reserves, and DAC and DSIC amortization.
- A hypothetical 10% decline in equity prices was estimated to reduce pretax income by $435 million after hedge effects; a hypothetical 100-basis-point increase in interest rates was estimated to increase pretax income by $89 million. These are sensitivity scenarios, not forecasts.
- Key risks include equity and interest-rate volatility, variable-annuity guarantees, insurance and catastrophe claims, reinsurance counterparty exposure, investment and credit losses, regulatory change, litigation, cybersecurity, operational disruptions, competition, and restrictions on subsidiary dividends.
- Pending legal and regulatory matters included an ERISA class action concerning the company’s 401(k) plan, a REIT-related class action, a California insurance claims-handling proceeding, and litigation involving a Threadneedle affiliate. The filing states that potential losses could not be reasonably estimated for these matters.
Most important facts for investors to verify
- Reconcile GAAP earnings of $8.30 diluted EPS with operating earnings of $8.52, including variable-annuity market effects, realized gains, CIE consolidation, and assumption unlocking.
- Assess sensitivity to low interest rates, reinvestment yields, fixed-annuity surrenders, and guaranteed minimum benefit reserves.
- Review Auto & Home loss-reserve development, catastrophe exposure, and management’s expectation for 2015 accident-year loss trends.
- Evaluate the sustainability and quality of AUM growth, distinguishing market appreciation from net client inflows and identifying ongoing low-margin outflows.
- Confirm parent-company liquidity, the planned 2015 debt repayment, subsidiary dividend capacity, and regulatory capital requirements.
- Review the status and potential exposure of pending litigation, regulatory inquiries, reinsurance recoverables, and the $1.8 billion Genworth-related long-term-care reinsurance exposure.
- Verify the effect of share repurchases and dividends on per-share growth, capital flexibility, and future shareholder returns.