Ameriprise Financial, Inc. — 2019 Q2 Form 10-Q Summary
Business context and reporting period
Ameriprise Financial is a diversified financial services company providing financial advice, wealth management, asset management, annuity, insurance, banking and related products. This unaudited Form 10-Q covers the three and six months ended June 30, 2019, with comparisons to the corresponding 2018 periods.
- Assets under management and administration were $915.9 billion, up 3% year over year.
- Total AUM was $729.0 billion; Advice & Wealth Management AUM rose 13% to $289.9 billion, while Asset Management AUM declined 3% to $468.3 billion.
- The company completed the conversion of Ameriprise National Trust Bank to Ameriprise Bank, FSB in May 2019 and became a savings and loan holding company.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Change |
|---|---|---|---|
| Total revenues | $3.282 billion | $3.216 billion | +2% |
| Total net revenues | $3.245 billion | $3.196 billion | +2% |
| Pretax income | $587 million | $548 million | +7% |
| Net income | $492 million | $462 million | +6% |
| Diluted EPS | $3.57 | $3.10 | +15% |
| Adjusted operating earnings | $560 million | $530 million | +6% |
| Adjusted operating diluted EPS | $4.06 | $3.56 | +14% |
Q2 net income margin was approximately 15.2% of net revenues, compared with approximately 14.5% in the prior-year quarter. The effective tax rate was 16.1%, versus 15.7%.
| Metric | Six months 2019 | Six months 2018 | Change |
|---|---|---|---|
| Total net revenues | $6.363 billion | $6.364 billion | Flat |
| Pretax income | $1.057 billion | $1.244 billion | -15% |
| Net income | $887 million | $1.056 billion | -16% |
| Diluted EPS | $6.38 | $7.02 | -9% |
| Adjusted operating earnings | $1.085 billion | $1.088 billion | Flat |
| Adjusted operating diluted EPS | $7.80 | $7.23 | +8% |
Cash flow, liquidity and capital
- Six-month operating cash flow was $1.152 billion, compared with $498 million in 2018.
- Investing cash flow was an outflow of $1.629 billion, versus an inflow of $279 million, primarily reflecting purchases of available-for-sale securities and the fixed-annuity reinsurance arrangement.
- Financing cash flow was an inflow of $1.496 billion, driven largely by $2.205 billion of net banking-deposit inflows and $497 million of debt issuance.
- Cash and cash equivalents, excluding consolidated investment entities, were $4.302 billion at June 30, 2019, compared with $2.931 billion at year-end 2018. Cash including restricted amounts was $6.738 billion.
- Total debt was $3.305 billion, including $3.104 billion of long-term debt and $201 million of short-term borrowings. The company issued $500 million of 3.0% senior notes due 2022 and repaid $300 million of 7.3% notes at maturity.
- The company had no borrowings under its $750 million unsecured revolving credit facility, $1 million of letters of credit outstanding and was in compliance with its covenants.
- Six-month dividends paid were $261 million, and share repurchases totaled 5.8 million shares for $791 million. The remaining repurchase authorization was approximately $2.2 billion at June 30, 2019.
Material changes versus the prior comparable period
- Advice & Wealth Management: Q2 adjusted operating earnings increased 7% to $376 million; wrap account assets rose 13% year over year to $292.0 billion, supported by $4.8 billion of quarterly net inflows and market appreciation.
- Asset Management: Q2 adjusted operating earnings declined 10% to $164 million, and six-month earnings declined 18% to $310 million, primarily because of cumulative net outflows. Six-month net flows were negative $9.2 billion.
- Annuities: Q2 adjusted operating earnings increased 6% to $129 million. Variable annuity sales declined 16% year over year in the quarter, while variable annuity net outflows and low interest rates continued to pressure the business.
- Market-sensitive items: Six-month pretax results included a $202 million expense from the market impact on variable annuity guaranteed benefits, compared with an $85 million expense in 2018, and a $77 million expense from IUL benefits, compared with a $5 million benefit in 2018.
- Sale of Ameriprise Auto & Home: The business was classified as held for sale. The transaction is expected to generate $1.05 billion of gross cash proceeds, or approximately $950 million after an affinity-partner payment, subject to adjustments and closing conditions. Closing was expected in the fourth quarter of 2019.
- Reinsurance: In the first quarter, the company reinsured approximately 20% of its in-force fixed annuity account balances, generating approximately $200 million of excess capital and creating a $1.6 billion reinsurance deposit receivable.
- Shareholders’ equity: Total equity increased to $6.030 billion from $5.588 billion at December 31, 2018, aided by $560 million of after-tax other comprehensive income, primarily unrealized securities gains.
Guidance, outlook, commentary and risks
Management reiterated multi-year financial targets of 6%–8% adjusted operating total net revenue growth, 12%–15% adjusted operating earnings per diluted share growth and 19%–23% adjusted operating return on equity excluding AOCI. Trailing twelve-month adjusted operating ROE excluding AOCI was 37.1% at June 30, 2019.
- Management expects the low interest-rate environment to continue pressuring spread income, reinvestment yields, reserves and certain DAC and DSIC assumptions. The fixed deferred annuity book is expected to run off gradually.
- The company planned to introduce additional bank products, including credit cards, mortgages and pledge lending, later in 2019 and in 2020.
- Brexit and European geopolitical uncertainty could adversely affect Asset Management flows and foreign-currency translation.
- Equity-market declines could reduce asset-based fees and increase guaranteed-benefit and DAC-related volatility. Management estimated that a hypothetical 10% equity-price decline would reduce pretax income by approximately $176 million, while a hypothetical 100-basis-point rate increase would increase pretax income by approximately $39 million; actual results may differ materially.
- Legal and regulatory activity remains elevated, including matters involving product sales, advisor supervision, insurance and annuity claims, client information security, trading monitoring and transaction systems. The filing does not provide a clear aggregate potential loss amount.
- The company is exposed to insurance guarantee, credit, counterparty, liquidity, cybersecurity, operational, tax, accounting-standard and regulatory risks.
Important facts for investors to verify
- Whether the Ameriprise Auto & Home sale closed on the expected timeline and the final net proceeds and any post-closing adjustments.
- Whether Asset Management net outflows continued and whether Advice & Wealth Management inflows offset pressure in other businesses.
- The sensitivity of earnings and statutory capital to interest rates, equity markets, volatility, policyholder behavior and hedge effectiveness.
- The development of variable annuity guaranteed-benefit liabilities, including the increase in GMWB liabilities to $1.297 billion from $875 million at year-end 2018.
- The capital and liquidity effects of bank expansion, debt issuance, dividends, share repurchases and subsidiary dividend restrictions.
- Potential outcomes of pending legal, regulatory and tax matters, including the company’s estimate that gross unrecognized tax benefits could decrease by $50 million to $60 million over the following 12 months.
- Progress toward adoption of new long-duration insurance-contract and expected-credit-loss accounting standards, whose ultimate effects were still under evaluation.