AMERIPRISE FINANCIAL INC annual report, FY2010

Business Context and Reporting Period

Ameriprise Financial, Inc. is a diversified financial services holding company serving mass-affluent and affluent clients through financial planning, advice, asset management, annuities, protection products, banking and brokerage services. The filing is the Form 10-K for the fiscal year ended December 31, 2010; quarterly data includes the fourth quarter of 2010.

The company operated through Advice & Wealth Management, Asset Management, Annuities, Protection and Corporate & Other. It had more than 11,400 affiliated advisors, a 93% client retention rate and $672.7 billion of owned, managed and administered assets at year-end, up 47% from $457.8 billion in 2009.

Financial Results and Key Metrics

Metric	2010	2009	Change
Total net revenues	$9.976 billion	$7.805 billion	+28%
Pretax income	$1.594 billion	$920 million	+73%
Net income	$1.260 billion	$737 million	+71%
Net income attributable to Ameriprise	$1.097 billion	$722 million	+52%
Diluted EPS	$4.18	$2.95	+42%
Cash dividends paid per share	$0.71	$0.68	+4%
Net cash from operating activities	$2.035 billion	$(1.318) billion	Improved $3.353 billion

GAAP pretax margin was approximately 16.0%, and net income attributable to Ameriprise margin was approximately 11.0%. Operating net revenues increased 24% to $9.581 billion and operating net income attributable to Ameriprise increased 53% to $1.148 billion, excluding selected realized gains or losses, integration and restructuring charges and consolidated investment entity effects.

Management and financial advice fees increased 46% to $3.961 billion, primarily from higher managed assets, market appreciation, net inflows and the Columbia Management acquisition.
Distribution fees increased 20% to $1.708 billion.
Net investment income increased 16% to $2.313 billion, including a $275 million gain from changes in consolidated investment entity assets and liabilities.
Premiums increased 7% to $1.179 billion, helped by higher Auto and Home volumes and immediate annuity sales.
Benefits, claims, losses and settlement expenses increased 31% to $1.757 billion, while general and administrative expense increased 14% to $2.868 billion.

Liquidity, Capital and Debt

Cash and cash equivalents were $2.861 billion at December 31, 2010, compared with $3.097 billion in 2009.
The company had a $500 million unsecured revolving credit facility, expandable to $750 million subject to approval; there were no borrowings and $1 million of letters of credit outstanding.
Long-term debt was $2.317 billion, compared with $1.868 billion in 2009. Short-term borrowings were $397 million, consisting primarily of repurchase agreements.
Ameriprise issued $750 million of 5.30% senior notes due 2020 and retired $340 million of debt maturing in November 2010.
Net cash used in investing activities was $922 million, including the $866 million cash payment for the Columbia Management acquisition. Net cash used in financing activities was $1.343 billion.
The company repurchased 13.1 million shares for approximately $573 million during 2010, with $927 million remaining under the authorization at year-end.
Insurance subsidiaries maintained capital substantially above regulatory requirements. RiverSource Life had $3.813 billion of statutory capital versus $652 million of company-action-level RBC, or 585% of the requirement.

Material Changes Versus the Prior Comparable Period

On April 30, 2010, Ameriprise acquired the long-term asset management business of Columbia Management from Bank of America. The transaction substantially increased scale and expanded retail and institutional distribution.
Asset Management managed assets increased 88% to approximately $456.8 billion, including $355.5 billion under the Columbia brand and $105.6 billion at Threadneedle. Columbia assets included $118.1 billion of acquisition-related assets.
Wrap account assets increased 19% to $112.7 billion, supported by $8.5 billion of net inflows and $9.3 billion of market appreciation.
Advice & Wealth Management operating pretax income increased to $307 million from $45 million, while Asset Management operating pretax income increased to $410 million from $93 million.
Annuities operating pretax income increased 6% to $639 million. Protection operating pretax income declined 14% to $403 million, driven by higher claims, valuation changes and Auto and Home losses.
Cash flow from operations shifted from a $1.318 billion outflow in 2009 to a $2.035 billion inflow in 2010, primarily because of changes in derivative cash collateral and higher fee revenue.
Effective January 1, 2010, new variable-interest-entity guidance resulted in consolidation of approximately $5.5 billion of client assets and $5.1 billion of liabilities, with a $473 million increase in appropriated retained earnings. Management stated that the underlying economics of the business were unchanged.

Guidance, Outlook, Commentary and Unusual Items

Management’s multi-year financial targets were net operating 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 12% to 15%.
Columbia Management integration was expected to be completed in 2011. Pretax integration costs were $100 million in 2010 and $107 million cumulatively; total costs were expected to reach $130 million to $160 million through 2011. Annualized gross expense synergies were expected to reach $150 million to $190 million in 2012.
The 2010 annual valuation review produced an $88 million pretax benefit, including benefits from persistency improvements and extended annuity amortization periods, partly offset by lower assumed investment returns and model changes.
In the fourth quarter, the company discontinued new sales of RiverSource variable annuities through third-party channels to improve the risk and return profile of the business. Third-party variable and fixed annuity cash sales in 2010 totaled $1.0 billion.
Variable annuity exposure remained significant: total variable annuity contract value was $62.6 billion; GMWB and GMAB reserves were $337 million and $104 million, respectively. A hypothetical 10% equity decline was estimated to reduce pretax income by $326 million after hedging, while a 100-basis-point rate increase was estimated to produce an $11 million net pretax benefit.
Protection results included $11 million of Phoenix hail catastrophe losses and a $16 million reserve increase for higher auto liability claims.
The company recorded an additional approximately $40 million legal reserve after year-end relating to claims associated with Medical Capital and Provident Shale private-placement investments sold by Securities America.

Principal Risks and Contingencies

Results are highly sensitive to equity markets, interest rates, credit spreads, foreign exchange rates, asset flows and investment performance.
Variable annuity guarantees, including GMWB, GMAB and GMDB provisions, create exposure to market declines, policyholder behavior, hedging effectiveness and counterparty performance.
Insurance profitability depends on mortality, morbidity, lapse, surrender, persistency and long-term-care claims assumptions. Reserve or DAC assumption changes could materially affect earnings.
Credit, reinsurance and investment risks include below-investment-grade securities, mortgage-backed securities, counterparty defaults and $1.4 billion of reinsurance exposure to Genworth under long-term-care arrangements.
Regulatory change, including implementation of the Dodd-Frank Act, potential changes to Rule 12b-1 fees and fiduciary standards, may increase costs or reduce revenues.
Legal and regulatory proceedings include the Gallus mutual-fund fee litigation and substantial class actions and FINRA arbitrations involving approximately $400 million of defaulted Medical Capital and Provident Shale investments sold by Securities America.
Total contractual commitments were $58.183 billion, including $47.335 billion of insurance and annuity obligations, $2.264 billion of long-term debt, $2.470 billion of interest on debt and $2.1 billion of loan funding commitments not included in the contractual-commitments table.

Most Important Facts for Investors to Verify

Reconcile GAAP earnings with operating earnings and isolate the effects of consolidated investment entities, realized investment gains or losses, valuation assumption changes and integration costs.
Assess whether Columbia Management’s asset flows, investment performance, integration costs and projected synergies support the company’s stated growth targets.
Review sensitivity of earnings, DAC, reserves and capital to equity-market declines, interest-rate changes, policyholder behavior and hedging results.
Monitor capital and dividend capacity at RiverSource Life, Ameriprise Bank, Ameriprise Certificate Company and broker-dealer subsidiaries.
Track resolution, settlement costs and potential additional reserves related to the Medical Capital and Provident Shale matters and other regulatory inquiries.
Verify the sustainability of operating cash flow after considering derivative collateral movements, policyholder flows, share repurchases, acquisitions and debt maturities.