Ameriprise Financial, Inc. 2018 Q1 Form 10-Q Summary
Business context and reporting period
Ameriprise Financial is a diversified financial services company providing financial planning, advice, asset management, annuity, insurance and related products. This unaudited Form 10-Q covers the three months ended March 31, 2018, with comparisons to the three months ended March 31, 2017. The company reported $887.2 billion of assets under management and administration at March 31, 2018.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenues | $3.184 billion | $2.936 billion | 8% |
| Total net revenues | $3.168 billion | $2.926 billion | 8% |
| Pretax income | $696 million | $475 million | 47% |
| Net income | $594 million | $403 million | 47% |
| Diluted EPS | $3.91 | $2.52 | 55% |
| Adjusted operating earnings | $563 million | $432 million | 30% |
| Adjusted operating diluted EPS | $3.70 | $2.70 | 37% |
| Cash dividends declared per share | $0.83 | $0.75 | 11% |
- Net income margin was approximately 18.8% of net revenues, compared with 13.8% in the prior-year quarter. Pretax margin was approximately 22.0%, compared with 16.2%.
- Management and financial advice fees increased 12% to $1.669 billion, while distribution fees increased 6% to $468 million.
- Expenses increased only 1% to $2.472 billion. Distribution expenses rose 10% and deferred acquisition cost amortization rose 28%, partly offset by lower interest credited to fixed accounts and lower benefits, claims, losses and settlement expenses.
- Effective tax rate was 14.7%, compared with 15.2%. The 2017 period included a $20 million benefit from an out-of-period tax reserve correction.
- Net cash used in operating activities was $208 million, compared with $6 million of operating cash provided in Q1 2017. Investing activities provided $87 million and financing activities used $564 million.
- Cash, cash equivalents and restricted cash totaled $4.471 billion at March 31, 2018, down from $5.144 billion at December 31, 2017. Cash and cash equivalents excluding consolidated investment entities were $2.1 billion.
- Total assets were $144.762 billion and total equity was $5.840 billion at March 31, 2018.
- Total debt was $3.082 billion, including $2.881 billion of long-term debt and $201 million of short-term borrowings. The company had no borrowings under its $750 million unsecured revolving credit facility and was in compliance with its covenants.
- Available-for-sale securities totaled $30.319 billion. Gross unrealized losses increased to $308 million from $126 million at year-end, primarily due to higher interest rates and wider credit spreads.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by higher average assets under management, wrap-account net inflows, market appreciation, higher short-term interest rates and a positive foreign-currency impact.
- Adjusted operating earnings increased in Advice & Wealth Management to $316 million from $248 million and in Asset Management to $195 million from $150 million. Protection increased to $70 million from $63 million.
- Annuities adjusted operating earnings declined to $132 million from $139 million, primarily due to lower investment income and less favorable market-related impacts on DAC, DSIC and reserves.
- Asset Management AUM increased to $485.3 billion from $467.0 billion year over year, but the segment experienced $7.7 billion of net outflows in Q1 2018. Outflows were concentrated among institutional clients and certain equity and high-yield products.
- Advice & Wealth Management wrap-account assets increased 18% year over year to $251.0 billion, including $5.7 billion of first-quarter net inflows.
- Variable annuity account balances increased 3% year over year to $78.7 billion, while variable annuity net outflows were $3.7 billion in Q1.
- Other comprehensive loss was $233 million, principally reflecting a $262 million after-tax decline in net unrealized securities gains. Total comprehensive income was $361 million, compared with $422 million in Q1 2017.
- The company repurchased 2.4 million shares for $387 million during the quarter and had $1.7 billion remaining under its repurchase authorization at March 31, 2018. It paid $125 million of shareholder dividends.
- The company retrospectively adopted the new revenue recognition standard. The adoption increased 2017 revenue and expenses by $25 million each and did not change 2017 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 return on equity excluding AOCI of 19% to 23%. The filing does not provide specific full-year 2018 guidance.
- Management expects the fixed deferred annuity book to gradually run off under the current low-interest-rate environment, with related earnings trending downward. Low rates may also compress spreads, reduce reinvestment yields and increase reserves or alter DAC and DSIC amortization.
- At March 31, 2018, management estimated a pretax income impact of approximately negative $526 million from a hypothetical 10% equity-price decline and positive $381 million from a hypothetical 100-basis-point parallel increase in interest rates. These are scenario analyses, not forecasts.
- Key risks include equity, interest-rate, credit and foreign-exchange volatility; investment-management underperformance and net outflows; variable annuity and insurance guarantee exposures; mortality, morbidity, persistency and claims experience; liquidity and credit-counterparty risk; cybersecurity and operational failures; competition; and regulatory or legal changes.
- The company faces elevated regulatory activity and proceedings involving product sales, advisor supervision, insurance and annuity claims, client information security, trading controls, advertising and product disclosures. Potential losses cannot generally be estimated for many matters.
- Fiduciary-rule uncertainty remained significant following the Fifth Circuit’s decision vacating the Department of Labor regulations, proposed SEC standards and potential state fiduciary rules.
- Unrecognized tax benefits were $83 million at March 31, 2018. Management estimated that gross unrecognized tax benefits could decrease by $40 million to $50 million over the next 12 months due primarily to audit resolutions and statute expirations.
- The company stated that operating cash flows, available cash and revolver capacity should be sufficient for operating liquidity needs. Dividend capacity remains dependent on distributions from regulated subsidiaries.
Important facts for investors to verify
- Reconcile GAAP net income and diluted EPS with adjusted operating earnings and adjusted operating EPS, particularly the effects of variable annuity guarantees, IUL benefits, hedges, realized investment gains and restructuring charges.
- Monitor Asset Management net flows, fund performance and the sustainability of Advice & Wealth Management wrap-account inflows.
- Assess sensitivity to interest rates, equity markets, credit spreads, policyholder behavior and the effectiveness of the variable annuity hedging program.
- Review the quality and duration of the $30.3 billion available-for-sale portfolio, including the $308 million of unrealized losses and exposure to mortgage-backed, corporate and below-investment-grade securities.
- Evaluate liquidity and capital at the holding company and regulated subsidiaries, including the reliance on subsidiary dividends and the $1.7 billion remaining share repurchase authorization.
- Follow pending litigation, regulatory examinations, fiduciary-rule developments, tax audits and cybersecurity or operational risks; the filing does not provide a clear aggregate potential loss estimate for legal and regulatory matters.