Ameriprise Financial, Inc. 2016 Q1 Form 10-Q Summary
Business context and reporting period
Ameriprise Financial is a diversified financial services company providing financial planning, advice, asset management, insurance, annuities, brokerage and banking services. The filing covers the unaudited three months ended March 31, 2016, compared primarily with the three months ended March 31, 2015. The company reported more than $772 billion of assets under management and administration at March 31, 2016.
Operating segments were Advice & Wealth Management, Asset Management, Annuities, Protection, and Corporate & Other. Effective January 1, 2016, the company adopted new consolidation guidance and deconsolidated several collateralized loan obligations and all previously consolidated property funds.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenues | $2.774 billion | $3.060 billion | Down 9% |
| Total net revenues | $2.765 billion | $3.053 billion | Down 9% |
| Pretax income | $475 million | $618 million | Down 23% |
| Net income | $364 million | $479 million | Down 24% |
| Net income attributable to Ameriprise | $364 million | $393 million | Down 7% |
| Diluted EPS | $2.09 | $2.08 | Up $0.01 |
| Operating earnings | $378 million | $412 million | Down 8% |
| Operating diluted EPS | $2.17 | $2.18 | Down $0.01 |
| Effective tax rate | 23.3% | 22.5% | Up 0.8 points |
Net income attributable to Ameriprise benefited from the absence of $86 million of noncontrolling-interest income attributable to consolidated investment entities in the prior-year period. Diluted share count fell to 174.4 million from 189.1 million, supporting diluted EPS despite lower earnings.
Management's stated long-term financial targets were 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 19% to 23%. Trailing twelve-month operating ROE excluding AOCI was 24.2%, compared with 23.1% in the prior-year period.
Revenue, profitability and segment performance
- Management and financial advice fees decreased 6% to $1.386 billion, primarily because average assets under management declined.
- Distribution fees decreased 7% to $435 million, reflecting market depreciation and lower client activity.
- Net investment income decreased 32% to $331 million, affected by lower consolidated investment-entity income, a $40 million loss from investment hedges, lower fixed-maturity income and an $11 million loss on the sale of consumer loans.
- Premiums increased 4% to $368 million, supported by Protection results.
- Total expenses declined 6% to $2.290 billion. Lower distribution, benefits, interest and general and administrative expenses were partly offset by a 47% increase in DAC amortization to $110 million.
- Advice & Wealth Management operating earnings declined 2% to $205 million; operating margin was 17.1% in both periods.
- Asset Management operating earnings declined 22% to $149 million, primarily because of net outflows, market depreciation and foreign-exchange effects.
- Annuities operating earnings declined 28% to $124 million, reflecting lower account balances, lower asset earnings and unfavorable DAC, DSIC and reserve effects from actual versus expected market performance.
- Protection operating earnings increased 35% to $69 million, principally because the prior-year period included a $32 million long-term-care reserve increase. Higher catastrophe losses partly offset the improvement.
Assets, liquidity, cash flow and debt
| Balance-sheet item | March 31, 2016 | December 31, 2015 |
|---|---|---|
| Total assets | $140.250 billion | $145.319 billion |
| Cash and cash equivalents, excluding CIE cash | $2.649 billion | $2.357 billion |
| Investments | $34.643 billion | $34.144 billion |
| Separate account assets | $80.182 billion | $80.349 billion |
| Ameriprise shareholders' equity | $7.093 billion | $7.217 billion |
| Long-term debt | $2.683 billion | $2.692 billion |
| Short-term borrowings | $200 million | $200 million |
- Operating cash flow was $621 million, down from $913 million. Investing activities generated $2 million, down from $182 million. Financing activities used $319 million, compared with $905 million used in the prior-year period.
- The company had an undrawn unsecured revolving credit facility of up to $500 million, expandable to $750 million subject to approval, with $1 million of letters of credit outstanding.
- The company was in compliance with applicable debt covenants. It repurchased $16 million of junior subordinated notes during the quarter and announced plans to redeem the remaining $229 million of notes due 2066 on June 1, 2016.
- Quarterly dividends declared increased to $0.67 per share from $0.58. The company repurchased 5.1 million shares for $451 million, or an average of $87.84 per share, and had $2.2 billion remaining under its repurchase authorization at March 31, 2016.
Assets under management and administration
Total assets under management and administration declined 5% to $772.7 billion from $814.8 billion a year earlier. Assets under management declined 6% to $623.6 billion, while assets under administration declined 1% to $149.1 billion.
- Advice & Wealth Management AUM increased 2% to $182.3 billion, supported by wrap-account net inflows.
- Asset Management AUM decreased 8% to $464.1 billion, driven by net outflows, market depreciation and adverse foreign-currency translation.
- Global managed-asset net outflows were $7.5 billion in the quarter, including $4.3 billion of former-parent-related outflows. Management expects primarily low-margin former-parent-related outflows to continue for the foreseeable future.
Material changes, outlook and unusual items
- Adoption of ASU 2015-02 reduced reported assets by approximately $6.2 billion, liabilities by $4.9 billion and equity by $1.3 billion through the deconsolidation of certain CLOs and property funds. The change also eliminated noncontrolling interests from the consolidated balance sheet.
- The company sold $271 million of consumer loans for $260 million of cash proceeds and recognized an $11 million loss.
- Variable-annuity guarantee liabilities increased materially. The GMWB and GMAB embedded-derivative liability was $1.515 billion at March 31, 2016, compared with $851 million at year-end, reflecting market and valuation effects.
- Catastrophe losses were $23 million, more than half related to Texas wind and hailstorms, compared with $12 million in the prior-year quarter.
- Management stated that the low-interest-rate environment continues to pressure spread income, reinvestment yields and fixed-annuity earnings. The fixed-annuity book is expected to gradually run off, with earnings trending lower.
- A hypothetical 10% equity-market decline was estimated to reduce pretax income by $491 million after hedging, while a hypothetical 100-basis-point parallel increase in interest rates was estimated to increase pretax income by $272 million. These are sensitivity scenarios, not forecasts.
- The Department of Labor's final fiduciary rule, published April 8, 2016, may affect retirement-account advice, compensation, product design, distribution practices and compliance costs. Management was still evaluating the impact.
- On April 27, 2016, the company announced a quarterly dividend of $0.75 per share, payable May 20, 2016.
Risks, contingencies and controls
- Results are sensitive to equity prices, interest rates, credit spreads, market volatility, foreign exchange, asset flows, investment performance, policyholder behavior, mortality, morbidity and insurance claims.
- Derivative and embedded-derivative valuations use significant assumptions regarding contractholder behavior, volatility, surrender rates, withdrawal utilization and the company's nonperformance spread. A move to zero nonperformance spread was estimated to reduce net income by approximately $348 million after tax, based on March 31, 2016 spreads.
- The company faces ongoing regulatory examinations and inquiries involving product sales, advisor supervision, insurance and annuity claims, client information security, trading activity, transaction-monitoring systems and unclaimed-property practices. Potential losses generally cannot be estimated for matters in early stages.
- A lawsuit involving Threadneedle affiliates alleges approximately $120 million of harm in connection with a former employee's alleged fraud-related conduct. The company stated that any potential loss could not reasonably be estimated.
- Gross unrecognized tax benefits were $124 million at March 31, 2016; management estimated that $50 million to $60 million could decrease over the following 12 months, primarily from resolution of IRS examinations.
- Management concluded that disclosure controls and procedures were effective at a reasonable level of assurance and reported no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile GAAP earnings with operating earnings and assess the recurring impact of market-sensitive items, hedge results, CIE deconsolidation and nonperformance-risk adjustments.
- Track Asset Management net flows, former-parent-related redemptions, AUM levels and fee rates, as these directly affect asset-based revenue.
- Evaluate the sustainability of capital returns, including the planned redemption of the remaining junior subordinated notes and the $2.2 billion share-repurchase authorization.
- Monitor variable-annuity guarantee liabilities, hedge effectiveness and the sensitivity of earnings and capital to equity, interest-rate and volatility movements.
- Assess the effects of low interest rates on spread compression, reinvestment yields, fixed-annuity runoff and insurance reserves.
- Follow implementation of the Department of Labor fiduciary rule and any related changes to compensation, distribution, product economics and compliance costs.
- Review developments in regulatory inquiries, litigation, tax examinations and insurance statutory-capital requirements.