Ameriprise Financial, Inc. — Form 10-Q Summary
Business context and reporting period
Ameriprise Financial is a diversified financial services company providing financial advice, wealth and asset management, annuities, protection products and related services. The unaudited filing covers the quarter and nine months ended September 30, 2014, with comparisons to the corresponding 2013 periods. The company reported more than $796 billion of assets under management and administration and more than 9,600 advisors at quarter-end.
Financial performance and key metrics
| Metric | Q3 2014 | Q3 2013 | Change |
|---|---|---|---|
| Total net revenues | $3.111 billion | $2.813 billion | 11% |
| Income from continuing operations before tax | $720 million | $602 million | 20% |
| Net income | $565 million | $449 million | 26% |
| Net income attributable to Ameriprise | $420 million | $382 million | 10% |
| Diluted EPS | $2.17 | $1.86 | 17% |
| Cash dividend per share | $0.58 | $0.52 | 12% |
| Metric | Nine months 2014 | Nine months 2013 | Change |
|---|---|---|---|
| Total net revenues | $9.179 billion | $8.253 billion | 11% |
| Income from continuing operations before tax | $1.989 billion | $1.491 billion | 33% |
| Net income attributable to Ameriprise | $1.194 billion | $1.038 billion | 15% |
| Diluted EPS | $6.08 | $4.97 | 22% |
| Operating earnings | $1.222 billion | $1.082 billion | 13% |
Q3 pretax margin was approximately 23.1% versus 21.4% in the prior-year quarter; net income attributable to Ameriprise represented approximately 13.5% of net revenues versus 13.6%. For the nine months, pretax margin was approximately 21.7% versus 18.1%.
- Management and financial advice fees increased 13% in Q3 and 12% year to date, primarily from higher average assets under management.
- Distribution fees increased 5% in Q3 and 7% year to date.
- Net investment income declined 13% in Q3 and 7% year to date, primarily because of lower interest rates and lower income from consolidated investment entities.
- Premiums increased 8% in Q3 and year to date, supported by growth in auto and home policies.
- Other revenues increased 59% in Q3 and 55% year to date, substantially reflecting higher revenues from consolidated investment entities and variable-annuity guarantee fees.
- Operating earnings by segment for the nine months were $580 million for Advice & Wealth Management, $590 million for Asset Management, $474 million for Annuities, $216 million for Protection and a $183 million Corporate & Other loss.
Cash flow, balance sheet, debt and liquidity
- Net cash provided by operating activities was $1.981 billion for the first nine months of 2014, compared with $1.106 billion in 2013.
- Net cash used in investing activities was $172 million, compared with $143 million in the prior-year period.
- Net cash used in financing activities was $1.558 billion, compared with $207 million, driven by greater policyholder and certificate outflows, debt repayment, reduced short-term borrowings, dividends and share repurchases.
- Cash and cash equivalents were $2.876 billion at September 30, 2014, compared with $2.632 billion at December 31, 2013.
- Total assets were $147.193 billion and total equity was $9.340 billion at quarter-end.
- Ameriprise long-term debt was $3.059 billion and short-term borrowings were $200 million. Consolidated investment entities had an additional $6.394 billion of debt, which is generally non-recourse to Ameriprise.
- The company issued $550 million of unsecured senior notes due 2024 and redeemed $200 million of senior notes due 2039 during 2014. It had no borrowings under its $500 million revolving credit facility and was in compliance with applicable covenants.
- The company repurchased 9.1 million shares for approximately $1.0 billion during the first nine months and had $2.1 billion remaining under its repurchase authorization at September 30.
Material changes versus the prior comparable period
- Advice & Wealth Management operating earnings increased 35% in Q3 and 34% year to date, supported by wrap-account growth and expense management. Nine-month wrap assets increased 10% to $169.2 billion.
- Asset Management operating earnings increased 21% in Q3 and 17% year to date. Managed assets increased 5% year over year to $504.8 billion, although Q3 net outflows were $4.1 billion and nine-month net outflows were $3.6 billion.
- Annuities operating earnings fell 38% in Q3 but increased 4% year to date. Results were affected by assumption “unlocking,” higher deferred acquisition cost amortization and low interest rates. Fixed annuity balances declined and variable annuity balances increased.
- Protection operating earnings declined 3% in Q3 and 18% year to date. Auto and home claim expenses increased, catastrophe losses were $56 million versus $35 million, and the company recorded a $30 million increase in auto liability reserves in the first quarter.
- Amortization of deferred acquisition costs was a $116 million expense in Q3 2014 versus a $14 million benefit in Q3 2013, primarily due to the annual insurance and annuity assumption review.
- Net income attributable to noncontrolling interests increased to $145 million in Q3 from $67 million and to $353 million year to date from $57 million, reducing the portion of consolidated earnings attributable to Ameriprise shareholders.
Outlook, management commentary, risks and unusual items
- Management’s longer-term financial targets are operating total net revenue growth of 6% to 8%, operating diluted EPS growth of 12% to 15% and operating return on equity excluding accumulated other comprehensive income of 19% to 23%.
- Management expects low interest rates to continue pressuring spread income, reinvestment yields, reserves and DAC/DSIC amortization. Approximately 98% of the $4.1 billion five-year guarantee block had been repriced by September 30.
- Management expects outflows of primarily low-margin assets associated with former Columbia and Threadneedle parent-company relationships to continue, although the timing, volume and mix are uncertain.
- A hypothetical 10% equity-market decline was estimated to reduce pretax income by approximately $443 million after hedging. A hypothetical 100-basis-point interest-rate increase was estimated to increase pretax income by approximately $58 million. These are scenario estimates, not forecasts.
- Variable annuity guarantees and related derivatives create significant earnings sensitivity to equity markets, interest rates, volatility, policyholder behavior and nonperformance spreads. The gross notional amount of derivatives supporting GMWB and GMAB exposures was $135.8 billion.
- The company filed an application with the IRS to change its tax accounting method for hedging variable annuity guaranteed minimum benefits. If accepted, the change could materially affect current and deferred tax balances.
- Legal and regulatory matters include a certified ERISA class action scheduled for trial in April 2015, ongoing REIT-related litigation and regulatory inquiries involving product sales, supervision, claims administration, client information and other practices. The company cannot reasonably estimate potential losses for certain matters.
- The filing reports no material changes to previously disclosed risk factors. Disclosure controls were considered effective as of September 30, 2014.
Important facts for investors to verify
- Reconcile GAAP earnings and EPS with operating earnings and understand the effects excluded from management’s non-GAAP measures.
- Monitor the sustainability of advice-fee growth given market dependence, wrap-account flows and continued asset-management outflows.
- Evaluate exposure to prolonged low interest rates, spread compression, reinvestment yields and future assumption unlocking.
- Review the sensitivity of variable annuity guarantees and hedges to equity, interest-rate and volatility changes, including unhedged nonperformance risk.
- Assess protection-business reserve adequacy, catastrophe losses and auto liability development.
- Track debt issuance, debt maturities, collateralized borrowings, subsidiary dividend capacity and regulatory capital requirements.
- Review the status and potential exposure of litigation, regulatory investigations and the pending IRS accounting-method application.