AMERIPRISE FINANCIAL INC quarterly report, Q2 FY2010

Business Context and Reporting Period

Ameriprise Financial, Inc. provides financial planning, asset management, annuity, insurance, banking and brokerage products primarily to mass-affluent and affluent clients. This unaudited Form 10-Q covers the three and six months ended June 30, 2010, compared with the corresponding 2009 periods.

The company reported 11,684 affiliated financial advisors and registered representatives at June 30, 2010. Its principal operating segments are Advice & Wealth Management, Asset Management, Annuities, Protection and Corporate & Other.

Financial Performance and Position

Metric	Q2 2010	Q2 2009	Six months 2010	Six months 2009
Total revenues	$2.597 billion	$1.912 billion	$4.889 billion	$3.670 billion
Total net revenues	$2.577 billion	$1.874 billion	$4.848 billion	$3.590 billion
Pretax income	$466 million	$115 million	$827 million	$249 million
Net income attributable to Ameriprise	$259 million	$95 million	$473 million	$225 million
Diluted EPS	$0.98	$0.41	$1.78	$0.99
Operating net income attributable to Ameriprise	$291 million	$107 million	$506 million	$240 million

Q2 GAAP net margin was approximately 15.4%; six-month GAAP net margin was approximately 14.2%, calculated using net income attributable to Ameriprise divided by total revenues.
Operating net revenues increased 27% to $2.379 billion in Q2 and 26% to $4.518 billion for the six months. Operating pretax income increased to $377 million in Q2 from $142 million and to $658 million for the six months from $294 million.
Management and financial advice fees rose 59% on an operating basis in Q2 and 51% for the six months, primarily from higher asset levels, market appreciation, retail inflows and the Columbia Management acquisition.
Q2 segment pretax income was $85 million for Advice & Wealth Management, $56 million for Asset Management, $133 million for Annuities and $135 million for Protection. Corporate & Other reported a $82 million loss attributable to Ameriprise.
Cash flow from operating activities was $1.316 billion for the six months, compared with cash used of $1.546 billion in the prior-year period. Investing cash flow was a $206 million use, including $866 million paid for the Columbia Management acquisition. Financing cash flow was a $368 million use.
Cash and cash equivalents were $3.827 billion at June 30, 2010, compared with $3.097 billion at December 31, 2009. Total assets were $121.110 billion and total equity was $11.119 billion.
Long-term debt was $2.684 billion and short-term borrowings were $484 million at June 30, 2010, for total company debt of $3.168 billion. Consolidated investment entities also carried $5.296 billion of debt, generally non-recourse to Ameriprise.
The company had a $750 million unsecured revolving credit facility expiring in September 2010, with no borrowings and $2 million of letters of credit outstanding at June 30, 2010.

Material Changes Versus the Prior Comparable Period

Ameriprise acquired Columbia Management’s long-term asset management business from Bank of America on April 30, 2010, for $927 million. The acquisition contributed approximately two months of earnings and materially increased managed assets and asset-management revenue.
Total managed assets increased to $491.7 billion at June 30, 2010 from $285.0 billion a year earlier, primarily because of the acquisition and market appreciation. The company also reported $88.4 billion of administered assets.
Asset Management pretax operating income improved to $104 million in Q2 from a $3 million loss, although the segment experienced $4.6 billion of domestic and $1.1 billion of international net outflows during the quarter.
Annuities pretax operating income increased 50% to $129 million in Q2. Variable annuity ending balances rose 15% year over year to $54.0 billion, while fixed annuity balances rose 1% to $14.5 billion.
Benefits, claims, losses and settlement expenses fell 49% in Q2, mainly because the prior-year period included a substantially unfavorable mark-to-market impact from variable annuity living benefits.
Deferred acquisition cost amortization was $171 million in Q2 versus a $125 million benefit in Q2 2009, reflecting market effects and higher variable annuity gross profits. A second-quarter 2010 revision to DAC and deferred sales inducement cost calculations reduced amortization and benefits expense by $33 million and increased Ameriprise-attributable net income by $21 million.
The company adopted revised variable-interest-entity consolidation guidance on January 1, 2010. This added approximately $5.5 billion of assets and $5.1 billion of liabilities and increased appropriated retained earnings by $473 million, without changing the underlying economics of the business.
Ameriprise repurchased 5.7 million shares for $220 million during the first six months. The board authorized up to $1.5 billion of repurchases through the 2012 annual meeting, with $1.3 billion remaining at June 30.
Cash dividends paid increased to $91 million from $74 million. The board subsequently declared a quarterly dividend of $0.18 per share payable August 20, 2010.

Guidance, Outlook, Commentary, Risks and Unusual Items

Management’s multi-year financial targets are 6%–8% average net operating revenue growth, 12%–15% operating diluted EPS growth and 12%–15% operating return on equity excluding accumulated other comprehensive income.
Management expects total pretax integration costs for the Columbia Management acquisition of approximately $130 million to $160 million through 2011; $65 million had been incurred through June 30, 2010.
Management stated that operating cash flows, available cash and revolving-credit capacity should be sufficient to fund operating liquidity needs. Dividend capacity remains subject to subsidiary regulatory capital requirements and restrictions on subsidiary distributions.
Market sensitivity remained significant. Management estimated that a hypothetical 10% equity-market decline would reduce pretax income by approximately $328 million after hedging, while a 100-basis-point parallel increase in interest rates would reduce pretax income by approximately $44 million.
Variable annuity guarantees remain a major exposure. At June 30, 2010, net amounts at risk were $3.746 billion for GMDB, $1.733 billion for GMWB and $228 million for GMAB. The company economically hedges much, but not all, of these risks.
Investment risks include residential mortgage-backed and asset-backed securities, credit spreads, interest rates, defaults, liquidity and valuation assumptions. Available-for-sale securities had $569 million of gross unrealized losses at June 30, 2010, including $396 million related to residential mortgage-backed securities.
Legal and regulatory activity remained elevated, including matters involving mutual-fund fees, annuity and insurance sales practices, private-placement securities sold through Securities America, supervision of advisors, information security and suitability. The company stated that potential losses cannot currently be estimated and that an adverse outcome could materially affect results.
The Dodd-Frank Wall Street Reform and Consumer Protection Act and proposed changes to mutual-fund distribution-fee rules could affect the company’s products, regulatory obligations, capital, liquidity and operating costs; the ultimate impact was not yet determinable.
The company continued monitoring support requirements for certain money-market funds but had not provided a formal capital-support agreement or net asset value guarantee. The filing states that market conditions giving rise to prior support had significantly diminished.
The filing does not provide formal quarterly or full-year earnings guidance beyond the company’s longer-term financial targets.

Most Important Facts for Investors to Verify

Reconcile GAAP results with management’s operating results, particularly the effects of consolidated investment entities, integration costs, realized investment gains and losses, and the $21 million after-tax DAC/DSIC adjustment.
Assess the sustainability of revenue growth after separating Columbia Management acquisition effects and market appreciation from organic asset flows and fee growth.
Monitor domestic and international asset-management outflows, acquired-asset retention, investment performance and the integration costs and expected benefits of Columbia Management.
Review exposure to variable annuity guarantees, hedging effectiveness, nonperformance-spread assumptions and the sensitivity of earnings to equity and interest-rate movements.
Evaluate liquidity and capital after the acquisition, share repurchases, debt issuance, the September 2010 revolving-facility expiration and regulatory restrictions on subsidiary dividends.
Follow securities litigation, regulatory investigations, private-placement claims and potential changes to tax treatment, accounting standards and financial-services regulation.