AMERIPRISE FINANCIAL INC quarterly report, Q2 FY2018

Ameriprise Financial, Inc. — Q2 2018 Form 10-Q Summary

Business context and reporting period

Ameriprise is a diversified financial services company providing financial planning, wealth management, asset management, annuities, insurance and related products. The unaudited filing covers the three and six months ended June 30, 2018, with comparative periods ended June 30, 2017. The company reported $890.9 billion of assets under management and administration at June 30, 2018.

Key financial metrics

Metric	Q2 2018	Q2 2017	Six months 2018	Six months 2017
Total revenues	$3.216 billion	$3.024 billion	$6.400 billion	$5.960 billion
Total net revenues	$3.196 billion	$3.012 billion	$6.364 billion	$5.938 billion
Pretax income	$548 million	$511 million	$1.244 billion	$986 million
Net income	$462 million	$393 million	$1.056 billion	$796 million
Diluted EPS	$3.10	$2.50	$7.02	$5.01
Cash dividends declared per share	$0.90	$0.83	$1.73	$1.58

Q2 net revenue increased 6%; pretax income increased 7%; net income increased 18%. Six-month net revenue increased 7%; pretax income increased 26%; net income increased 33%.
Calculated Q2 pretax and net margins were approximately 17.1% and 14.5%, respectively. Six-month margins were approximately 19.5% and 16.6%.
Adjusted operating earnings were $536 million, or $3.60 per diluted share, in Q2 and $1.099 billion, or $7.30 per diluted share, for the six months, compared with $441 million and $873 million, respectively, in the prior-year periods.
Adjusted operating return on equity excluding AOCI was 31.1% for the trailing twelve months ended June 30, 2018, compared with 25.2% in the prior-year period.
Assets under management were $710.6 billion, up 6% year over year; assets under administration were $180.3 billion, up 9%. Total AUM and AUA increased 7% to $890.9 billion.
Cash and cash equivalents excluding consolidated investment entities were $2.4 billion at June 30, 2018. Total cash, cash equivalents and restricted cash under the cash flow presentation was $4.774 billion.
Long-term debt was $2.875 billion and short-term borrowings were $201 million. Total company debt was approximately $3.076 billion. The company had no borrowings under its $750 million unsecured revolving credit facility and was in compliance with its covenants.
Operating cash flow was $561 million for the first six months, compared with $736 million in 2017. Investing activities provided $216 million; financing activities used $1.147 billion.
Shareholders’ equity was $5.632 billion at June 30, 2018, compared with $5.995 billion at December 31, 2017, primarily reflecting share repurchases, dividends and accumulated other comprehensive losses.

Material changes versus the prior comparable period

Advice & Wealth Management adjusted operating earnings increased 20% in Q2 and 24% for the first six months, supported by wrap-account inflows, market appreciation and higher brokerage cash earnings. Six-month wrap-account net flows were $10.9 billion.
Asset Management adjusted operating earnings increased 4% in Q2 and 16% for the first six months. However, segment net flows remained negative: $1.7 billion in Q2 and $9.4 billion for the first six months, driven partly by institutional reallocations, former-parent-related outflows and CLO redemptions.
Annuities adjusted operating earnings declined 9% in Q2 and 7% for the first six months. Lower investment income, fixed annuity runoff and market-related impacts contributed to the decline. Fixed deferred annuity balances declined 7% year over year to approximately $9.0 billion.
Protection adjusted operating earnings declined 12% in Q2 but increased 1% for the first six months. Higher auto policies in force and non-catastrophe loss experience increased expenses; catastrophe losses were $40 million in Q2 and $54 million year to date.
The effective tax rate declined to 15.7% in Q2 and 15.2% for the first six months, from 23.1% and 19.3%, respectively, primarily due to the lower federal corporate tax rate under the Tax Cuts and Jobs Act. The first six months of 2017 also included a $20 million out-of-period tax benefit.
Other comprehensive loss was $174 million in Q2 and $407 million for the first six months, principally due to unrealized securities losses and foreign currency translation.
The company repurchased 5.3 million shares for $787 million during the first six months and had approximately $1.3 billion remaining under its repurchase authorization at June 30, 2018. It paid $257 million of dividends during the period.
The company retrospectively adopted the new revenue recognition standard on January 1, 2018. The adoption increased reported 2017 revenue and expense by $27 million for Q2 and $52 million for the first six months, without changing prior-period net income.

Guidance, outlook, commentary and risks

Management’s multi-year financial targets are adjusted operating total net revenue growth of 6% to 8%, adjusted operating diluted EPS growth of 12% to 15%, and adjusted operating ROE excluding AOCI of 19% to 23%.
Management expects the fixed deferred annuity book to gradually run off and related earnings to trend downward in the current interest-rate environment. Persistently low rates may compress spreads, reduce reinvestment yields and increase reserves or DAC/DSIC sensitivity.
Management identified significant sensitivity to market movements. A hypothetical 10% equity-market decline was estimated to reduce pretax income by approximately $533 million after hedging; a hypothetical 100-basis-point parallel rate increase was estimated to increase pretax income by approximately $379 million. These are scenario analyses, not forecasts.
Variable annuity guarantees remain a material exposure. The filing reports $46.178 billion of GMWB contract value, with $239 million of net amount at risk, and $77.524 billion of GMDB contract value, with $165 million of net amount at risk.
The closed-block long-term-care business remains a contingency. Net future policy benefits and claim reserves were approximately $2.3 billion across the two principal blocks; management plans its customary annual assumption and loss-recognition review in the third quarter.
Legal, regulatory and arbitration matters include inquiries concerning product distribution, advisor supervision, insurance and annuity claims, client information security, trading supervision, performance advertising and transaction-monitoring controls. The company states that potential losses generally cannot yet be predicted or estimated reliably.
Regulatory and fiduciary-rule uncertainty continues following the vacatur of the Department of Labor fiduciary rule and proposed or developing SEC, state and professional fiduciary standards.
Additional risks include investment-management underperformance, asset outflows, credit and counterparty losses, cybersecurity and technology failures, foreign exchange exposure, Brexit-related uncertainty, changes in capital requirements and deviations from insurance morbidity, mortality, persistency and claims assumptions.

Most important facts for investors to verify

Reconcile GAAP net income and EPS with adjusted operating earnings and assess the effect of market-related exclusions and integration charges.
Monitor Asset Management net outflows, particularly institutional and former-parent-related flows, and determine whether market appreciation is masking underlying retention trends.
Evaluate the sustainability of Advice & Wealth Management growth, including wrap-account net flows, advisor productivity and the effects of acquisitions.
Assess annuity guarantee, hedging and nonperformance-spread sensitivity under changing equity, interest-rate and volatility conditions.
Review long-term-care reserve adequacy, future rate approvals, reinsurance protection and the results of the third-quarter assumption review.
Verify liquidity available at the holding company versus regulated subsidiaries, dividend restrictions, statutory capital and the capacity to fund dividends and share repurchases.
Follow outstanding legal, regulatory, tax and fiduciary matters, including the $85 million gross unrecognized tax benefit and estimated $40 million to $50 million potential reduction over the next twelve months.