AMERIPRISE FINANCIAL INC quarterly report, Q3 FY2010

Ameriprise Financial, Inc. — 2010 Q3 Form 10-Q Summary

Business Context and Reporting Period

Ameriprise provides financial planning, advice, asset management, annuity, insurance, banking and brokerage products primarily to mass-affluent and affluent clients. The filing covers the unaudited three and nine months ended September 30, 2010, compared with the corresponding 2009 periods.

Operating segments: Advice & Wealth Management, Asset Management, Annuities, Protection, and Corporate & Other.
Affiliated advisor network: 11,608 advisors and registered representatives at September 30, 2010.
Client retention was reported at 93%.

Financial Performance and Key Metrics

Metric	Q3 2010	Q3 2009	9M 2010	9M 2009
Total revenues	$2.465 billion	$1.979 billion	$7.354 billion	$5.649 billion
Total net revenues	$2.450 billion	$1.946 billion	$7.298 billion	$5.536 billion
Pretax income	$442 million	$340 million	$1.269 billion	$589 million
Net income	$312 million	$260 million	$1.006 billion	$463 million
Net income attributable to Ameriprise	$344 million	$260 million	$817 million	$485 million
Diluted EPS	$1.32	$1.00	$3.10	$2.04
Cash dividends per share	$0.18	$0.17	$0.53	$0.51

Q3 net-revenue margin was approximately 18.0%; pretax margin was approximately 18.0%; net income attributable to Ameriprise margin was approximately 14.0%.
Nine-month net-revenue margin was approximately 17.4%; pretax margin was approximately 17.4%; net income attributable to Ameriprise margin was approximately 11.2%.
Management and financial advice fees increased 51% in the nine-month period to $2.769 billion. Distribution fees increased 22% to $1.259 billion.
Nine-month benefits, claims, losses and settlement expenses increased 30% to $1.292 billion, while distribution expenses increased 37% to $1.757 billion.
Cash provided by operating activities was $1.915 billion in the first nine months of 2010, compared with cash used of $922 million in 2009.
Cash used in investing activities was $1.115 billion, including $866 million paid for the Columbia Management acquisition. Financing activities used $207 million.
Cash and cash equivalents were $3.685 billion at September 30, 2010, compared with $3.097 billion at December 31, 2009.
Total assets were $129.044 billion and total equity was $11.504 billion at September 30, 2010.
Long-term debt was $2.735 billion and short-term borrowings were $869 million. Total debt before consolidated investment entities was $3.604 billion.
The company had no borrowings under its new $500 million unsecured revolving credit facility; $1 million of letters of credit was outstanding.

Material Changes Versus the Prior Comparable Period

Q3 net income attributable to Ameriprise increased 32% to $344 million; nine-month net income increased 68% to $817 million.
Operating net income attributable to Ameriprise increased 31% in Q3 to $355 million and 68% for nine months to $861 million, excluding management-defined adjustments.
Asset Management benefited significantly from the Columbia Management acquisition and market appreciation. Managed assets increased to $444.9 billion from $236.0 billion a year earlier, while U.S. asset-management assets increased to $347.1 billion from $145.8 billion.
Wrap account assets increased 18% year over year to $105.3 billion. Nine-month wrap-account net inflows were $6.6 billion.
Protection pretax income declined 55% in Q3 to $65 million and 13% for nine months to $319 million, primarily due to valuation assumption changes and higher disability and long-term-care claims.
Q3 Advice & Wealth Management pretax income increased to $87 million from $12 million; Asset Management pretax income increased to $104 million from $10 million; Annuities pretax income was broadly stable at $264 million versus $268 million.
The company repurchased 9.3 million shares for $373 million during the first nine months and had $1.1 billion remaining under its $1.5 billion authorization at September 30, 2010.

Guidance, Outlook, Commentary, Risks and Unusual Items

Management’s multi-year financial targets are average net operating revenue growth of 6%–8%, operating diluted EPS growth of 12%–15%, and operating return on equity excluding accumulated other comprehensive income of 12%–15%.
The Columbia Management acquisition closed April 30, 2010 for $927 million. Integration costs were $76 million in the first nine months and $83 million cumulatively; total costs are expected to reach $130 million–$160 million through 2011. Management expects total gross expense synergies of $150 million–$190 million through 2011.
Third-quarter valuation assumption and model changes produced a net pretax benefit of $56 million, including a $32 million pretax charge related to insurance and annuity model revisions. The nine-month net benefit from valuation assumption and model changes was $89 million.
Management extended annuity DAC and DSIC projection periods to 30–50 years from 10–25 years and revised assumed asset-growth rates. A 100-basis-point decrease in assumptions was estimated to reduce pretax income by $56 million for equity returns, $29 million for fixed-income returns, or $33 million for near-term equity growth.
Effective January 1, 2010, new VIE consolidation guidance added approximately $5.5 billion of assets and $5.1 billion of liabilities and increased appropriated retained earnings by $473 million. Management states that these CDO liabilities are non-recourse to Ameriprise and that the underlying economics of the business did not change.
At September 30, 2010, a hypothetical 10% equity-price decline was estimated to reduce pretax income by $368 million after hedging; a hypothetical 100-basis-point interest-rate increase was estimated to reduce pretax income by $39 million. These are scenarios, not forecasts.
Variable-annuity guarantee exposure remains material. The net amount at risk was $1.655 billion for GMDB benefits, $641 million for GMWB benefits and $77 million for GMAB benefits. Gross notional hedges for GMWB and GMAB were $48.4 billion.
The investment portfolio included $33.586 billion of available-for-sale securities, with $458 million of gross unrealized losses and $33 million of credit-related other-than-temporary impairments recognized in the first nine months.
Material risks include equity, interest-rate, credit-spread, foreign-exchange and liquidity volatility; investment performance and asset flows; insurance mortality, morbidity and persistency assumptions; guarantee and hedging performance; counterparty and investment losses; regulatory and accounting changes; and integration execution.
Legal and regulatory matters include mutual-fund excessive-fee litigation, proceedings related to Medical Capital and Provident Shale private-placement sales, and elevated regulatory inquiries. The company states that potential losses cannot currently be estimated.
Management reported effective disclosure controls as of September 30, 2010 and no material changes in internal control over financial reporting.

Important Facts for Investors to Verify

Reconcile GAAP results with management’s operating measures, including the effects of CIE consolidation, valuation assumption changes, realized investment gains or losses and acquisition integration costs.
Assess sustainability of asset-based fee growth after separating market appreciation and the Columbia Management acquisition from underlying net flows.
Monitor variable-annuity guarantee liabilities, hedge effectiveness, nonperformance-spread changes and sensitivity to equity and interest-rate movements.
Review liquidity, debt maturities, collateralized repurchase agreements and restrictions on dividends from regulated subsidiaries.
Track Columbia Management integration costs, projected synergies and the impact of fund outflows or investment-performance changes.
Evaluate exposure to mortgage-backed securities, below-investment-grade securities, Level 3 valuations and future impairment losses.
Follow pending legal, regulatory and tax matters, including potential changes to the separate-account dividends-received deduction.
Consider the effect of the October 2010 DAC accounting standard, effective for periods beginning after December 15, 2011; the filing states that its impact was still under evaluation.