Ameriprise Financial, Inc. — 1Q 2014 Form 10-Q Summary
Business context and reporting period
Ameriprise Financial is a diversified financial services company providing financial planning, advice, asset management, annuities, insurance and related services through Advice & Wealth Management, Asset Management, Annuities, Protection and Corporate & Other segments. The filing covers the unaudited three months ended March 31, 2014, compared with the three months ended March 31, 2013.
Assets under management and administration were $782.8 billion, up 11% year over year, including $644.1 billion of assets under management and $138.7 billion of assets under administration. The company reported more than 9,700 advisors.
Key financial metrics
| Metric | 1Q 2014 | 1Q 2013 | Change |
|---|---|---|---|
| Total revenues | $3,003 million | $2,699 million | 11% |
| Total net revenues | $2,996 million | $2,691 million | 11% |
| Income before income taxes | $650 million | $487 million | 33% |
| Net income | $515 million | $365 million | 41% |
| Net income attributable to Ameriprise | $400 million | $335 million | 19% |
| Diluted EPS | $2.01 | $1.58 | 27% |
| Operating earnings per diluted share | $2.04 | $1.59 | 28% |
| Cash dividends declared per share | $0.52 | $0.45 | 16% |
Net income attributable to Ameriprise represented approximately 13.4% of total net revenues. The effective tax rate on continuing operations was 20.7%, compared with 25.0% in the prior-year period, principally reflecting a $17 million benefit related to completion of an IRS audit.
- Management and financial advice fees increased 11% to $1.386 billion, primarily from higher average assets under management.
- Distribution fees increased 10% to $476 million.
- Net investment income declined 4% to $471 million, reflecting lower interest rates and lower investment income on certain assets.
- Other revenues increased 53% to $340 million, including higher revenues from consolidated investment entities and variable annuity guarantee fees.
- Total expenses increased 6% to $2.346 billion. General and administrative expense was unchanged at $758 million.
- Operating earnings by segment were: Advice & Wealth Management $181 million, Asset Management $183 million, Annuities $176 million, Protection $59 million and Corporate & Other loss of $55 million.
Cash flow, balance sheet, debt and liquidity
| Metric | March 31, 2014 | December 31, 2013 |
|---|---|---|
| Total assets | $145.964 billion | $144.576 billion |
| Ameriprise shareholders’ equity | $8.344 billion | $8.192 billion |
| Cash and cash equivalents | $2.403 billion | $2.632 billion |
| Long-term debt | $2.719 billion | $2.720 billion |
| Short-term borrowings | $300 million | $500 million |
- Operating cash flow was $434 million, compared with cash used in operations of $466 million in 1Q 2013.
- Investing activities used $145 million, compared with $389 million provided in the prior-year period.
- Financing activities used $521 million, compared with $114 million used in the prior-year period.
- Cash and cash equivalents decreased $229 million during the quarter.
- The company had a $500 million unsecured revolving credit facility expiring in September 2018, with no borrowings outstanding and $2 million of letters of credit. The facility may be increased to $750 million subject to approval requirements.
- The company stated that operating cash flows, available cash and revolver capacity should be sufficient for operating liquidity needs. It was in compliance with applicable debt and credit-facility covenants.
Material changes versus the prior comparable period
- Profitability improved materially, with pretax income up 33%, net income up 41% and Ameriprise-attributable net income up 19%.
- Advice & Wealth Management operating earnings increased 39% to $181 million, supported by wrap-account growth, client activity and expense management.
- Asset Management operating earnings increased 33% to $183 million, although managed assets experienced $3.9 billion of net outflows during the quarter.
- Annuities operating earnings increased 24% to $176 million. Policyholders moved approximately $1.8 billion into managed-volatility funds, producing a reported $29 million earnings benefit.
- Protection operating earnings declined 43% to $59 million. Auto and home results were affected by approximately $20 million of severe-winter weather losses and a $30 million increase in auto liability reserves related to adverse development of prior accident-year bodily injury claims.
- The market impact on variable annuity guaranteed benefits was a $15 million pretax expense, compared with a $2 million expense in 1Q 2013.
- The company repurchased 3.2 million shares for $354 million under its repurchase program and paid $103 million of common-stock dividends.
- In April 2014, the board authorized an additional $2.5 billion of share repurchases through April 28, 2016. A quarterly dividend of $0.58 per share was announced for payment in May 2014.
Guidance, outlook, risks and unusual items
Management’s stated 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 accumulated other comprehensive income of 15% to 18%. The filing does not provide formal full-year 2014 earnings guidance.
- Management expects continued earnings pressure from low interest rates, including spread compression and declining reinvestment yields. Approximately $3.0 billion of the five-year guarantee block had been repriced, with approximately $1.1 billion expected to be repriced during the remainder of 2014.
- Management expects outflows of primarily low-margin assets associated with former parent-company relationships to continue for the foreseeable future. Threadneedle also faced outflows following departures of members of its U.S. Equities team, although management reported positive underlying flows excluding those departures.
- Interest-rate, equity-market, volatility, credit and foreign-exchange movements affect fee revenue, insurance spreads, deferred acquisition costs, variable annuity guarantees and hedging results. A hypothetical 10% equity-market decline was estimated to reduce pretax income by $443 million after hedge impacts; a hypothetical 100-basis-point rate increase was estimated to increase pretax income by $25 million. These are scenario estimates, not forecasts.
- Variable annuity guarantee hedges had gross notional amounts of $141.5 billion at March 31, 2014. Contractholder behavior, volatility, discount rates and the company’s nonperformance spread materially affect valuations.
- Legal and regulatory matters include an ERISA class action involving the company’s 401(k) plan and litigation concerning sales of an REIT product. The company could not reasonably estimate potential losses for these matters. Regulatory inquiries also involve product sales, advisor supervision, insurance claims, client information security and unclaimed-property practices.
- Discontinued operations, consisting primarily of Securities America, generated a $1 million after-tax loss in each comparative period.
- The company consolidated one new investment entity during the quarter. Debt of consolidated investment entities was $6.147 billion, generally non-recourse to Ameriprise, with creditors having recourse only to the entities’ assets.
Most important facts for investors to verify
- Whether growth in fee-based revenue and assets under management continues to offset asset-management net outflows and low-rate spread compression.
- The persistence and ultimate cost of auto and home insurance claims, severe-weather losses and adverse prior-year auto liability development.
- The sensitivity of earnings, capital and liquidity to equity markets, interest rates, volatility, policyholder behavior and variable annuity guarantee hedging results.
- The adequacy of insurance subsidiary capital and the ability to upstream dividends to the holding company, given regulatory restrictions.
- Developments in pending litigation, regulatory examinations, unrecognized tax benefits and guaranty-fund assessments.
- The pace, funding and capital impact of the expanded share-repurchase authorization and increased quarterly dividend.