Ameriprise Financial, Inc. — 2011 Q1 Form 10-Q
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 months ended March 31, 2011, compared with the same period in 2010. The company had more than 9,600 affiliated advisors and 242.3 million common shares outstanding at April 22, 2011.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenues | $2.667 billion | $2.292 billion | +16% |
| Total net revenues | $2.654 billion | $2.271 billion | +17% |
| Pretax income | $271 million | $361 million | -25% |
| Net income | $223 million | $296 million | -25% |
| Net income attributable to Ameriprise | $241 million | $214 million | +13% |
| Diluted EPS | $0.94 | $0.81 | +16% |
| Operating net income attributable to Ameriprise | $270 million | $226 million | +19% |
| Operating diluted EPS | The filing text does not provide a clear value. | The filing text does not provide a clear value. |
GAAP net income attributable to Ameriprise benefited from a $100 million unfavorable year-over-year change in income attributable to noncontrolling interests, which was a loss of $18 million in 2011 versus income of $82 million in 2010. GAAP pretax margin was approximately 10.2% of net revenues and net income attributable to Ameriprise margin was approximately 9.1%.
- Management and financial advice fees increased 53% to $1.184 billion, primarily from the Columbia Management acquisition, market appreciation and branded wrap-account inflows.
- Distribution fees increased 19% to $467 million.
- Net investment income declined 13% to $515 million; operating net investment income declined 4% to $487 million.
- General and administrative expense increased 43% to $885 million, including the Securities America legal charge and higher Columbia-related costs.
- Cash flow from operating activities was $15 million, versus $119 million in Q1 2010. Investing activities used $73 million, and financing activities used $347 million.
- Cash and cash equivalents were $2.460 billion at March 31, 2011, compared with $2.861 billion at December 31, 2010.
- Long-term debt was $2.298 billion and short-term borrowings were $497 million at March 31, 2011. Consolidated investment entities had an additional $5.712 billion of debt, generally non-recourse to Ameriprise.
- Total assets were $133.832 billion and total equity was $11.189 billion at March 31, 2011.
- Total assets under management increased 69% to $570.9 billion; total assets under management and administration increased 50% to $692.6 billion.
Material changes versus the prior comparable period
- Operating results improved, with operating net revenues up 22% and operating net income attributable to Ameriprise up 19%, despite lower reported GAAP pretax income.
- The Columbia Management acquisition substantially increased Asset Management scale. Asset Management AUM rose 89% to $465.4 billion, and segment operating pretax income increased to $136 million from $22 million.
- Advice & Wealth Management operating pretax income increased 94% to $99 million, supported by higher asset-based and distribution fees.
- Annuities operating pretax income increased 30% to $174 million. The company discontinued new variable-annuity sales through non-Ameriprise channels in late 2010.
- Protection operating pretax income declined 10% to $106 million, primarily because of higher claims and reserves.
- The company repurchased 6.5 million shares for $395 million, or an average of $61.17 per share, and had $531 million remaining under its authorization. The quarterly dividend increased to $0.23 per share after quarter-end from $0.18 paid during Q1.
- Net cash declined $401 million, compared with a $1.719 billion increase in Q1 2010, principally because 2010 included $744 million of debt issuance proceeds and 2011 included substantially higher share repurchases.
Guidance, outlook, commentary 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 accumulated other comprehensive income of 12% to 15%, measured on an average-over-time basis.
- Columbia Management integration costs were $29 million in Q1 and $136 million cumulatively. Management expected total costs to modestly exceed the previously stated $130 million to $160 million range. Net expense synergies were approximately $31 million in Q1, with annualized synergies expected to reach the upper end of the $130 million to $150 million range in 2012.
- Securities America settlement agreements announced April 15, 2011 require total payments of $150 million, including $40 million previously recorded in 2010. Ameriprise recognized a $118 million pretax Q1 2011 expense. The settlements were subject to claimant participation and court approval, with a final approval hearing expected July 25, 2011.
- Management began seeking a buyer for Securities America and expected the business to qualify for discontinued-operations presentation beginning in Q2 2011, including reclassification of prior periods.
- Liquidity included $2.5 billion of cash and cash equivalents and an undrawn unsecured revolving credit facility of up to $500 million, with $1 million of letters of credit outstanding. Management stated that operating cash flows, cash balances and available revolver capacity should fund operating liquidity needs.
- Key risks include equity, interest-rate, credit and foreign-exchange volatility; investment and insurance guarantee performance; regulatory capital and subsidiary dividend restrictions; litigation and regulatory proceedings; counterparty and derivative risk; and the ability to complete Columbia integration and the Securities America sale.
- The company reported $118 million of gross unrecognized tax benefits at March 31, 2011? The filing reports $164 million of gross unrecognized tax benefits; approximately $37 million, net of federal tax benefits, would affect the effective tax rate if recognized. Management estimated gross unrecognized benefits could decrease by $65 million to $70 million over the next 12 months.
Most important facts for investors to verify
- Reconcile GAAP versus operating results, particularly the effect of the $118 million Securities America charge, consolidated investment entities, annuity guarantee valuation and Columbia integration costs.
- Confirm the timing, conditions and accounting treatment of the Securities America settlements and any subsequent discontinued-operations presentation.
- Assess whether Columbia Management asset flows, investment performance, integration expenses and projected synergies support the stated growth targets.
- Monitor liquidity, subsidiary dividend capacity, regulatory capital, short-term repurchase-agreement borrowings and the September 2011 revolver expiration.
- Evaluate exposure to variable-annuity guarantees, including $59.7 billion of gross derivative notional hedging GMWB and GMAB provisions and $190 million of related embedded-derivative liabilities.
- Review credit and valuation risk in the investment portfolio, including $33.0 billion of available-for-sale securities, $4.3 billion of non-agency mortgage- and asset-backed securities, and $495 million of gross unrealized losses.
- Track ongoing legal, regulatory and arbitration matters, including Medical Capital and Provident Royalties claims, the Gallus excessive-fee litigation and regulatory inquiries.