Ameriprise Financial Inc. 10-Q Summary: Period Ended September 30, 2008
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Ameriprise Financial, Inc., a diversified financial services firm providing financial planning, asset management, annuities, and protection products. The report covers the three and nine months ended September 30, 2008. The company operates through five segments: Advice & Wealth Management, Asset Management, Annuities, Protection, and Corporate & Other. The reporting period coincides with significant global credit market turmoil and equity market declines.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 | Three Months Ended Sep 30, 2007 | Nine Months Ended Sep 30, 2007 |
|---|---|---|---|---|
| Total Net Revenues | $1,641 million | $5,620 million | $2,111 million | $6,296 million |
| Net Income (Loss) | $(70) million | $331 million | $198 million | $559 million |
| Diluted EPS | $(0.32) | $1.46 | $0.83 | $2.32 |
| Total Assets | $99,150 million | N/A | N/A | $109,230 million (Dec 31, 2007) |
| Cash and Cash Equivalents | $4,043 million | N/A | N/A | $3,836 million (Dec 31, 2007) |
| Debt | $2,080 million | N/A | N/A | $2,018 million (Dec 31, 2007) |
| Shareholders' Equity | $6,717 million | N/A | N/A | $7,810 million (Dec 31, 2007) |
Operating Cash Flow (Nine Months): Net cash provided by operating activities was $261 million in 2008, compared to $382 million in 2007.
Material Changes vs. Prior Period
- Revenue Decline: Net revenues decreased 22% ($470 million) in the quarter and 11% ($676 million) for the nine months compared to the prior year. The primary driver was an 88% drop in net investment income due to realized losses on securities.
- Net Loss in Q3: The company reported a net loss of $70 million for the quarter, reversing a profit of $198 million in the same period in 2007. This was driven by credit market losses, including $313 million in other-than-temporary impairments (primarily Lehman Brothers and Washington Mutual securities) and $88 million in mark-to-market losses on Lehman Brothers securities held in money market funds.
- Asset Base Contraction: Owned, Managed, and Administered (OMA) assets declined 20% to $395.5 billion, driven by market declines and net outflows in RiverSource and Threadneedle funds.
- Valuation Adjustments: The company recorded a $106 million pretax benefit from an annual review of valuation assumptions and a conversion to a new actuarial valuation system for RiverSource Life products, which partially offset market-driven losses.
Guidance, Outlook, and Risks
Management Commentary: Management attributes the decline in results to the "unprecedented impacts of the 2008 credit market events." While GAAP results show a loss, management highlights "adjusted earnings" of $231 million for the quarter, excluding credit market losses and separation costs, which represents a slight decrease from the prior year's adjusted earnings of $237 million.
Outlook and Actions:
- Share Repurchases: The company temporarily suspended its stock repurchase program due to the current market environment, though $1.3 billion remains under authorization.
- Acquisitions: Three acquisitions were announced (J. & W. Seligman & Co., Brecek & Young Advisors, Inc., and H&R Block Financial Advisors) expected to close in Q4 2008.
- Liquidity: The company maintains substantial liquidity with $4 billion in cash and a $750 million unsecured revolving credit facility.
Risks and Contingencies:
- Market Risk: Significant exposure to equity price declines and interest rate fluctuations, particularly regarding variable annuity guaranteed benefits (GMWB, GMAB, GMDB).
- Credit Risk: Exposure to defaults in fixed maturity securities and consumer credit products. The company noted increased likelihood of other-than-temporary impairments in non-agency residential mortgage-backed securities.
- Legal Proceedings: Ongoing litigation includes a lawsuit against the Reserve Fund regarding the freezing of client assets and various regulatory inquiries regarding sales practices and suitability.
- Regulatory Risk: Potential changes to the Dividends Received Deduction (DRD) tax benefit for life insurance companies could materially impact future earnings.
Key Facts for Investor Verification
- Impairment Specifics: Verify the composition of the $313 million other-than-temporary impairment charge, specifically the exposure to Lehman Brothers and Washington Mutual securities.
- Money Market Fund Exposure: Confirm the status of the $3.2 billion in client assets and $128 million in company assets frozen in the Reserve Primary Fund and the extent of the $35 million guarantee provided to clients.
- Valuation Assumption Changes: Review the details of the $106 million benefit from the actuarial valuation system conversion and assumption updates to ensure sustainability of these gains.
- Asset Flows: Monitor net outflows in RiverSource and Threadneedle funds, which totaled $10.4 billion and $9.2 billion respectively for the nine-month period.
- Regulatory Capital: Verify that subsidiaries, particularly RiverSource Life, remain well above regulatory capital requirements despite market volatility.