Ameriprise Financial, Inc. — FY2020 Form 10-K Summary
Business context and reporting period
Ameriprise Financial is a diversified financial services holding company operating primarily through four segments: Advice & Wealth Management, Asset Management, Retirement & Protection Solutions, and Corporate & Other. Its principal offerings include financial planning, brokerage and banking services, asset management, annuities, life insurance and disability insurance.
The filing covers the fiscal year ended December 31, 2020, with comparisons to 2019 and 2018. The business was materially affected by the COVID-19 pandemic, market volatility and historically low interest rates. During 2020, the company changed its segment structure, moving fixed annuities and fixed indexed annuities to Corporate & Other as a closed block and combining annuity and protection operations into Retirement & Protection Solutions. Prior-period segment data was revised for comparability.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total net revenues | $11.899 billion | $12.967 billion | Down 8% |
| Pretax income | $1.831 billion | $2.232 billion | Down 18% |
| Net income | $1.534 billion | $1.893 billion | Down 19% |
| Diluted EPS | $12.20 | $13.92 | Down 12% |
| Adjusted operating earnings | $1.770 billion | $2.190 billion | Down 19% |
| Adjusted operating EPS | $14.08 | $16.10 | Down 13% |
| Cash flow from operating activities | $4.623 billion | $2.341 billion | Up $2.282 billion |
Net revenues reflected higher management and financial advice fees of $7.368 billion, up 5%, offset by lower distribution fees, net investment income and premiums, policy and contract charges. Total expenses declined 6% to $10.068 billion, but distribution expenses and deferred acquisition cost amortization increased. The effective tax rate was 16.2%, compared with 15.2% in 2019.
Assets under management and administration increased 13% to $1.102 trillion, including $886.0 billion of assets under management and $216.1 billion of assets under administration. Advice & Wealth Management AUM increased 20% to $376.8 billion, while Asset Management AUM increased 11% to $546.6 billion.
| Segment adjusted operating earnings | 2020 | 2019 | Change |
|---|---|---|---|
| Advice & Wealth Management | $1.321 billion | $1.509 billion | Down 12% |
| Asset Management | $697 million | $661 million | Up 5% |
| Retirement & Protection Solutions | $480 million | $724 million | Down 34% |
| Corporate & Other loss | $(369) million | $(286) million | Loss increased |
Balance sheet, debt and liquidity
- Total assets were $165.883 billion, compared with $151.828 billion at December 31, 2019.
- Shareholders’ equity was $5.867 billion, compared with $5.729 billion.
- Customer deposits increased to $17.641 billion from $14.430 billion, primarily due to growth in banking and brokerage deposits.
- Long-term debt was $2.831 billion and short-term borrowings were $200 million. Total debt, including short-term borrowings, was approximately $3.031 billion.
- The company issued $500 million of 3.0% senior notes due in 2025 and repaid $750 million of 5.3% senior notes at maturity.
- Consolidated cash and cash equivalents excluding consolidated investment entities and other restricted cash were $6.8 billion. Parent-company cash, cash equivalents and unencumbered liquid securities were $1.1 billion.
- Management estimated parent-company liquidity available in a volatile environment at $2.3 billion, including cash, liquid securities, affiliate credit and a portion of the committed facility.
- The company had an undrawn $750 million unsecured revolving credit facility, expiring in October 2022, and remained in compliance with its covenants.
- RiverSource Life and RiverSource Life of New York reported capital at 506% and 770% of their respective company-action-level RBC requirements.
Material changes versus the prior comparable period
- COVID-19 and low interest rates reduced spread income, brokerage cash revenues and investment income, while market appreciation and wrap-account inflows supported fee revenues.
- Unlocking and long-term-care loss recognition produced an unfavorable pretax impact of $454 million, compared with $16 million in 2019. The impact included $141 million from long-term-care unlocking and loss recognition.
- The company reduced its ultimate 10-year Treasury rate assumption from 5.0% to 3.5% and extended the grading period, contributing approximately $405 million of unfavorable non-cash impact from unlocking and long-term-care loss recognition.
- Retirement & Protection Solutions earnings declined substantially because of assumption updates, including interest-rate and policyholder-surrender assumptions, and higher benefits and claims expense.
- Variable annuity account balances increased 7% to $85.8 billion, but net outflows were $2.1 billion. Variable annuity sales increased 7% to $4.4 billion, with products without living-benefit guarantees representing 49% of sales versus 25% in 2019.
- Asset Management net flows improved to a $5.7 billion inflow from a $7.1 billion outflow in 2019.
- The company discontinued new sales of fixed annuities and fixed indexed annuities and moved those businesses to Corporate & Other as closed blocks.
- Ameriprise repurchased 8.4 million shares for approximately $1.3 billion and paid $512 million of common dividends. Approximately $2.3 billion remained under the repurchase authorization at year-end.
Guidance, outlook, risks and unusual items
Management’s long-term financial targets are adjusted operating earnings per diluted share growth of 12% to 15% and adjusted operating return on equity excluding AOCI of more than 30%. The filing does not provide specific 2021 earnings or revenue guidance.
Management stated that it successfully transitioned approximately 95% of its workforce to remote work, maintained elevated client-service capacity and continued a phased office reopening. It expects the shift in variable annuity sales toward products without living-benefit guarantees to continue over time.
- Key risks include COVID-19 developments, market declines, low or negative interest rates, spread compression, policyholder behavior, mortality and morbidity assumptions, and volatility in variable annuity guarantees.
- Long-term-care reserves were $5.722 billion at year-end, and the company remains exposed to adverse claims, persistency, investment-yield and regulatory-rate-increase experience. Approximately 50% of the closed-block LTC risk is ceded to Genworth-related reinsurers.
- Variable annuity GMWB and GMAB embedded derivatives had a combined net liability of $2.316 billion. A hypothetical 10% equity-market decline was estimated to reduce pretax income by $73 million after hedging, while a hypothetical 100-basis-point rate increase had an estimated net pretax impact of $2 million.
- The company estimates that eliminating the nonperformance-risk spread used in embedded-derivative valuations would reduce future net income by approximately $467 million, based on December 31, 2020 spreads.
- Brexit, the transition away from LIBOR, cybersecurity, regulatory and fiduciary requirements, reinsurance counterparty exposure, credit losses and legal proceedings remain material uncertainties.
- The company identified no material unresolved staff comments and reported effective disclosure controls and internal control over financial reporting. PwC issued unqualified opinions on the financial statements and internal controls.
- Critical audit matters included long-term-care reserve valuation, valuation of embedded derivatives in variable annuity riders and valuation of guarantees accounted for as insurance liabilities.
Important facts for investors to verify
- Reconcile GAAP net income and EPS with adjusted operating earnings and adjusted operating EPS, particularly the treatment of unlocking, LTC loss recognition, market impacts and mean reversion.
- Assess the sustainability of fee growth from $1.102 trillion of assets under management and administration under different market and net-flow scenarios.
- Review long-term-care reserve adequacy, premium-rate approvals, benefit reductions and Genworth reinsurance recoverability.
- Evaluate variable annuity guarantee exposure, hedge effectiveness and sensitivity to equity markets, interest rates, volatility and policyholder behavior.
- Confirm parent-company liquidity, subsidiary dividend capacity, regulatory capital requirements and restrictions on upstream distributions.
- Monitor the effect of continued low interest rates on investment yields, spread income, DAC amortization and insurance reserves.
- Review the status and potential financial exposure of legal, regulatory, tax, cybersecurity, LIBOR-transition and Brexit-related matters, for which the filing does not provide a single quantified aggregate loss estimate.