Ameriprise Financial, Inc. — Q2 2013 Form 10-Q Summary
Business context and reporting period
Ameriprise is a diversified financial services company providing financial planning, wealth management, asset management, annuity, insurance and related services. The unaudited filing covers the three and six months ended June 30, 2013, with comparisons to the corresponding 2012 periods. The company reported more than $703 billion of assets under management and administration and more than 9,700 advisors at June 30, 2013.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total net revenues | $2.749 billion | $2.514 billion | $5.440 billion | $5.075 billion |
| Income before tax | $402 million | $299 million | $889 million | $621 million |
| Net income attributable to Ameriprise | $321 million | $223 million | $656 million | $467 million |
| Diluted EPS | $1.54 | $0.99 | $3.12 | $2.04 |
| Operating earnings | $352 million | $254 million | $690 million | $589 million |
| Operating diluted EPS | $1.69 | $1.13 | $3.28 | $2.58 |
| Operating cash flow | Not separately reported for the quarter | $(93) million | $468 million |
Q2 net income attributable to Ameriprise increased 44%, while six-month net income increased 40%. Net income attributable to Ameriprise as a percentage of net revenues was approximately 11.7% in Q2 2013 versus 8.9% in Q2 2012, and 12.1% for the first six months versus 9.2% in the prior-year period.
- Management and financial advice fees increased 12% in Q2 and 11% for the six months, primarily from higher average assets and pricing adjustments.
- Distribution fees increased 13% in Q2 and 11% for the six months.
- Net investment income declined 4% in Q2 and 6% for the six months because of low interest rates and the sale of the former bank investment portfolio.
- Operating earnings increased 39% in Q2 and 17% for the six months. Segment operating earnings increased in Advice & Wealth Management and Asset Management, but declined in Annuities and Protection.
- Assets under management increased 6% year over year to $577.7 billion; total assets under management and administration increased 7% to $703.2 billion.
Financial position, debt and liquidity
- Total assets were $137.3 billion at June 30, 2013, compared with $134.7 billion at December 31, 2012. Shareholders’ equity attributable to Ameriprise was $8.3 billion, down from $9.1 billion, primarily reflecting other comprehensive losses and share repurchases.
- Cash and cash equivalents were $2.3 billion, versus $2.4 billion at year-end 2012. The company had a $500 million unsecured revolving credit facility, with no borrowings outstanding and $2 million of letters of credit.
- Ameriprise long-term debt was $2.352 billion and short-term borrowings were $501 million. Including debt of consolidated investment entities, total reported debt was $8.150 billion; CIE debt is non-recourse to the company.
- The company was in compliance with debt covenants and stated that operating cash flows, cash balances and available credit were sufficient for operating liquidity needs.
- Six-month investing cash flow was $690 million, while financing cash flow was $(618) million. Financing uses included $197 million of dividends paid and $807 million of common-stock repurchases.
Material changes versus the prior comparable period
- The January 2013 conversion of Ameriprise Bank, FSB to a limited-powers national trust bank ended deposit-taking and credit-originating activities, released approximately $375 million of capital and is expected to reduce 2013 earnings by approximately $60 million. Management expects share repurchases to offset the enterprise-level EPS effect by year-end.
- Six-month operating cash flow changed from $468 million provided to $93 million used, primarily because of a $636 million negative impact from consolidated investment entities.
- Advice & Wealth Management operating earnings increased 38% for the six months, and Asset Management operating earnings increased 31%. Annuities operating earnings declined 8%, Protection declined 4%, and the Corporate & Other operating loss increased to $166 million from $132 million.
- Managed asset net outflows remained a concern: $2.1 billion in Q2 and $7.8 billion for the first half, although this improved from $6.6 billion and $11.3 billion, respectively, in the prior-year periods.
- Accumulated other comprehensive income declined to $625 million from $1.194 billion at year-end, driven largely by net unrealized securities losses. Six-month other comprehensive loss was $610 million.
Guidance, outlook, commentary, risks and unusual items
- Management’s longer-term 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 AOCI of 15% to 18%. Trailing-twelve-month operating ROE excluding AOCI was 17.9% at June 30, 2013.
- Management expects continued earnings pressure from low short-term interest rates, including spread compression and possible impacts on DAC, DSIC and reserves. The low-rate environment reduced pretax earnings by approximately $36 million in Q2 and $59 million for the first six months versus the prior-year periods.
- Asset management outflows, particularly from legacy or former-parent-affiliated assets, are expected to continue for the foreseeable future; the impact is difficult to quantify because timing, volume and asset mix are uncertain.
- Q2 included a $30 million gain on the sale of Threadneedle’s strategic investment in Cofunds and a $19 million benefit from a CDO unwind. These items contributed to Asset Management results and are not necessarily recurring.
- The effective tax rate was 29.6% for Q2 and 27.1% for the six months, compared with 42.8% and 32.4%, respectively, in 2012. The comparison benefited from a $32 million prior-period tax correction recorded in Q2 2012.
- Variable annuity guarantees, derivatives and fair-value adjustments remain material sources of earnings volatility. The company reported a $45 million six-month expense from the market impact on variable annuity guaranteed living benefits, versus a $129 million expense in the prior-year period.
- Management estimates that a hypothetical 10% equity-market decline would have a net pretax impact of approximately $(361) million, while a hypothetical 100-basis-point parallel increase in interest rates would have a net pretax impact of approximately $172 million. These are scenario analyses, not forecasts.
- The company faces elevated legal and regulatory activity, including inquiries involving product sales and disclosures, advisor supervision, information security and unclaimed-property practices. Two putative class actions disclosed in the filing had no reasonably estimable loss range at the reporting date.
- Gross unrecognized tax benefits were $135 million at June 30, 2013; management estimated that approximately $98 million could decrease during the following 12 months.
Most important facts for investors to verify
- Whether operating earnings growth is sustainable after excluding the Cofunds gain, CDO unwind benefit, prior-year tax correction and other market-related adjustments.
- The pace, composition and profitability of continued Asset Management outflows and the retention of Advice & Wealth Management client assets.
- Sensitivity of earnings, capital and liquidity to interest rates, equity markets, credit spreads, policyholder behavior and variable annuity guarantee performance.
- Capital and dividend capacity at regulated subsidiaries, including restrictions on upstreaming dividends to the holding company.
- Progress and financial effects of the former bank transition, including the expected $60 million 2013 earnings reduction and capital redeployment.
- Potential outcomes and reserves associated with regulatory inquiries, litigation, guaranty-fund assessments and unrecognized tax benefits.