Business Context and Reporting Period
Ameriprise Financial, Inc. is a diversified financial services holding company serving mass-affluent and affluent clients through financial planning, advice, asset management, annuities, protection products, banking and brokerage services. The filing is the Form 10-K for the fiscal year ended December 31, 2010; quarterly data includes the fourth quarter of 2010.
The company operated through Advice & Wealth Management, Asset Management, Annuities, Protection and Corporate & Other. It had more than 11,400 affiliated advisors, a 93% client retention rate and $672.7 billion of owned, managed and administered assets at year-end, up 47% from $457.8 billion in 2009.
Financial Results and Key Metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Total net revenues | $9.976 billion | $7.805 billion | +28% |
| Pretax income | $1.594 billion | $920 million | +73% |
| Net income | $1.260 billion | $737 million | +71% |
| Net income attributable to Ameriprise | $1.097 billion | $722 million | +52% |
| Diluted EPS | $4.18 | $2.95 | +42% |
| Cash dividends paid per share | $0.71 | $0.68 | +4% |
| Net cash from operating activities | $2.035 billion | $(1.318) billion | Improved $3.353 billion |
GAAP pretax margin was approximately 16.0%, and net income attributable to Ameriprise margin was approximately 11.0%. Operating net revenues increased 24% to $9.581 billion and operating net income attributable to Ameriprise increased 53% to $1.148 billion, excluding selected realized gains or losses, integration and restructuring charges and consolidated investment entity effects.
- Management and financial advice fees increased 46% to $3.961 billion, primarily from higher managed assets, market appreciation, net inflows and the Columbia Management acquisition.
- Distribution fees increased 20% to $1.708 billion.
- Net investment income increased 16% to $2.313 billion, including a $275 million gain from changes in consolidated investment entity assets and liabilities.
- Premiums increased 7% to $1.179 billion, helped by higher Auto and Home volumes and immediate annuity sales.
- Benefits, claims, losses and settlement expenses increased 31% to $1.757 billion, while general and administrative expense increased 14% to $2.868 billion.
Liquidity, Capital and Debt
- Cash and cash equivalents were $2.861 billion at December 31, 2010, compared with $3.097 billion in 2009.
- The company had a $500 million unsecured revolving credit facility, expandable to $750 million subject to approval; there were no borrowings and $1 million of letters of credit outstanding.
- Long-term debt was $2.317 billion, compared with $1.868 billion in 2009. Short-term borrowings were $397 million, consisting primarily of repurchase agreements.
- Ameriprise issued $750 million of 5.30% senior notes due 2020 and retired $340 million of debt maturing in November 2010.
- Net cash used in investing activities was $922 million, including the $866 million cash payment for the Columbia Management acquisition. Net cash used in financing activities was $1.343 billion.
- The company repurchased 13.1 million shares for approximately $573 million during 2010, with $927 million remaining under the authorization at year-end.
- Insurance subsidiaries maintained capital substantially above regulatory requirements. RiverSource Life had $3.813 billion of statutory capital versus $652 million of company-action-level RBC, or 585% of the requirement.
Material Changes Versus the Prior Comparable Period
- On April 30, 2010, Ameriprise acquired the long-term asset management business of Columbia Management from Bank of America. The transaction substantially increased scale and expanded retail and institutional distribution.
- Asset Management managed assets increased 88% to approximately $456.8 billion, including $355.5 billion under the Columbia brand and $105.6 billion at Threadneedle. Columbia assets included $118.1 billion of acquisition-related assets.
- Wrap account assets increased 19% to $112.7 billion, supported by $8.5 billion of net inflows and $9.3 billion of market appreciation.
- Advice & Wealth Management operating pretax income increased to $307 million from $45 million, while Asset Management operating pretax income increased to $410 million from $93 million.
- Annuities operating pretax income increased 6% to $639 million. Protection operating pretax income declined 14% to $403 million, driven by higher claims, valuation changes and Auto and Home losses.
- Cash flow from operations shifted from a $1.318 billion outflow in 2009 to a $2.035 billion inflow in 2010, primarily because of changes in derivative cash collateral and higher fee revenue.
- Effective January 1, 2010, new variable-interest-entity guidance resulted in consolidation of approximately $5.5 billion of client assets and $5.1 billion of liabilities, with a $473 million increase in appropriated retained earnings. Management stated that the underlying economics of the business were unchanged.
Guidance, Outlook, Commentary and Unusual Items
- Management’s multi-year financial targets were net operating 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 12% to 15%.
- Columbia Management integration was expected to be completed in 2011. Pretax integration costs were $100 million in 2010 and $107 million cumulatively; total costs were expected to reach $130 million to $160 million through 2011. Annualized gross expense synergies were expected to reach $150 million to $190 million in 2012.
- The 2010 annual valuation review produced an $88 million pretax benefit, including benefits from persistency improvements and extended annuity amortization periods, partly offset by lower assumed investment returns and model changes.
- In the fourth quarter, the company discontinued new sales of RiverSource variable annuities through third-party channels to improve the risk and return profile of the business. Third-party variable and fixed annuity cash sales in 2010 totaled $1.0 billion.
- Variable annuity exposure remained significant: total variable annuity contract value was $62.6 billion; GMWB and GMAB reserves were $337 million and $104 million, respectively. A hypothetical 10% equity decline was estimated to reduce pretax income by $326 million after hedging, while a 100-basis-point rate increase was estimated to produce an $11 million net pretax benefit.
- Protection results included $11 million of Phoenix hail catastrophe losses and a $16 million reserve increase for higher auto liability claims.
- The company recorded an additional approximately $40 million legal reserve after year-end relating to claims associated with Medical Capital and Provident Shale private-placement investments sold by Securities America.
Principal Risks and Contingencies
- Results are highly sensitive to equity markets, interest rates, credit spreads, foreign exchange rates, asset flows and investment performance.
- Variable annuity guarantees, including GMWB, GMAB and GMDB provisions, create exposure to market declines, policyholder behavior, hedging effectiveness and counterparty performance.
- Insurance profitability depends on mortality, morbidity, lapse, surrender, persistency and long-term-care claims assumptions. Reserve or DAC assumption changes could materially affect earnings.
- Credit, reinsurance and investment risks include below-investment-grade securities, mortgage-backed securities, counterparty defaults and $1.4 billion of reinsurance exposure to Genworth under long-term-care arrangements.
- Regulatory change, including implementation of the Dodd-Frank Act, potential changes to Rule 12b-1 fees and fiduciary standards, may increase costs or reduce revenues.
- Legal and regulatory proceedings include the Gallus mutual-fund fee litigation and substantial class actions and FINRA arbitrations involving approximately $400 million of defaulted Medical Capital and Provident Shale investments sold by Securities America.
- Total contractual commitments were $58.183 billion, including $47.335 billion of insurance and annuity obligations, $2.264 billion of long-term debt, $2.470 billion of interest on debt and $2.1 billion of loan funding commitments not included in the contractual-commitments table.
Most Important Facts for Investors to Verify
- Reconcile GAAP earnings with operating earnings and isolate the effects of consolidated investment entities, realized investment gains or losses, valuation assumption changes and integration costs.
- Assess whether Columbia Management’s asset flows, investment performance, integration costs and projected synergies support the company’s stated growth targets.
- Review sensitivity of earnings, DAC, reserves and capital to equity-market declines, interest-rate changes, policyholder behavior and hedging results.
- Monitor capital and dividend capacity at RiverSource Life, Ameriprise Bank, Ameriprise Certificate Company and broker-dealer subsidiaries.
- Track resolution, settlement costs and potential additional reserves related to the Medical Capital and Provident Shale matters and other regulatory inquiries.
- Verify the sustainability of operating cash flow after considering derivative collateral movements, policyholder flows, share repurchases, acquisitions and debt maturities.