Ameriprise Financial, Inc. — Fiscal 2018 Form 10-K Summary
Business context and reporting period
Ameriprise Financial is a diversified financial services holding company operating through Advice & Wealth Management, Asset Management, Annuities, Protection, and Corporate & Other segments. The filing covers the fiscal year ended December 31, 2018, with quarterly data provided for the fourth quarter. The company had approximately 10,000 advisors, 14,000 employees, and $822.7 billion of assets under management and administration at year-end.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total net revenues | $12.835 billion | $12.132 billion | 6% |
| Pretax income | $2.484 billion | $2.214 billion | 12% |
| Net income | $2.098 billion | $1.480 billion | 42% |
| Diluted EPS | $14.20 | $9.44 | 50% |
| Effective tax rate | 15.5% | 33.1% | Down |
| Operating cash flow | $2.597 billion | $1.523 billion | Up $1.074 billion |
| Total assets | $137.216 billion | $147.480 billion | Down 7% |
| Long-term debt | $2.867 billion | $2.891 billion | Down $24 million |
| Cash and cash equivalents, excluding CIEs | $2.9 billion | $2.5 billion | Up $0.4 billion |
Net margin was approximately 16.3% of total net revenues and pretax margin was approximately 19.4%. Adjusted operating earnings increased to $2.135 billion, or $14.45 per diluted share, from $1.603 billion, or $10.23 per diluted share. Adjusted operating return on equity excluding accumulated other comprehensive income was 36.6%, compared with 26.9%.
- Management and financial advice fees increased 6% to $6.776 billion.
- Distribution fees increased 7% to $1.877 billion.
- Net investment income increased 6% to $1.596 billion.
- Total expenses increased 4% to $10.351 billion; amortization of deferred acquisition costs increased 21% to $322 million.
- Cash used in investing activities was $587 million, while cash used in financing activities was $1.263 billion.
- Dividends paid totaled $516 million, and the company repurchased 11.3 million shares for approximately $1.6 billion at an average price of $139.82 per share.
Segment performance
| Segment | 2018 adjusted operating earnings | 2017 | Change |
|---|---|---|---|
| Advice & Wealth Management | $1.389 billion | $1.163 billion | 19% |
| Asset Management | $728 million | $740 million | Down 2% |
| Annuities | $465 million | $710 million | Down 35% |
| Protection | $243 million | $216 million | 13% |
| Corporate & Other | $(294) million | $(426) million | Loss narrowed |
Material changes versus the prior comparable period
- Total assets under management and administration declined 8% to $822.7 billion. Asset Management AUM fell 13% to $430.7 billion because of market depreciation, net outflows, fund distributions, and foreign currency effects. Advice & Wealth Management AUM increased 1% to $249.9 billion, supported by $21.1 billion of wrap-account net inflows.
- Asset Management experienced $21.2 billion of net outflows and reduced earnings because of cumulative outflows, CLO unwinds, and $12 million of Brexit-related costs.
- Annuities earnings declined materially. Variable annuity account values fell 10% to $72.0 billion, including $3.3 billion of net outflows; fixed deferred annuity balances fell 7% to $8.7 billion. Management expects the fixed deferred annuity book to gradually run off and related earnings to trend lower.
- Protection earnings improved due to favorable unlocking impacts and lower catastrophe losses, although the company began a strategic review of its auto and home business.
- The effective tax rate declined primarily because the 2017 period included a $286 million Tax Cuts and Jobs Act-related expense.
- Other comprehensive income declined by $519 million in 2018, primarily from unrealized securities losses, compared with $29 million of other comprehensive income in 2017.
Guidance, outlook, commentary, risks, and unusual items
Management’s multi-year financial targets are 6%–8% adjusted operating total net revenue growth, 12%–15% adjusted operating earnings-per-diluted-share growth, and 19%–23% adjusted operating return on equity excluding AOCI. These are long-term targets rather than specific 2019 guidance.
- Third-quarter 2018 “unlocking” of insurance and annuity assumptions produced a $53 million pretax unfavorable impact, including $113 million of additional benefits and claims expense partly offset by $78 million of other revenue and a $33 million DAC benefit.
- The closed-block long-term-care business generated a $51 million loss-recognition charge. Management continues to pursue premium-rate increases; the filing states that cumulative increases through year-end were 140% for nursing-home indemnity policies and 66% for comprehensive reimbursement policies.
- The company’s variable annuity guarantees remain sensitive to equity markets, interest rates, volatility, policyholder behavior, and the company’s nonperformance-risk spread. A hypothetical 10% equity-price decline was estimated to reduce pretax income by $213 million net of hedges; a hypothetical 100-basis-point interest-rate increase was estimated to increase pretax income by $541 million.
- Low interest rates continue to pressure investment spreads, fixed annuity earnings, insurance profitability, reserve levels, and hedging costs. The company also faces market, credit, liquidity, reinsurance, catastrophe, mortality, morbidity, persistency, cybersecurity, operational, litigation, regulatory, tax, Brexit, and foreign-currency risks.
- The company is converting Ameriprise National Trust Bank into a federal savings bank, which will expand potential banking products but add OCC, FDIC, Federal Reserve, capital, liquidity, and Volcker Rule requirements.
- The company had an unsecured revolving credit facility of up to $750 million, expandable to $1 billion subject to approvals, with no borrowings outstanding and $1 million of letters of credit at year-end. It was in compliance with its covenants.
- Insurance subsidiaries maintained capital well above company-action-level RBC requirements. RiverSource Life had $3.382 billion of statutory capital versus a $675 million company-action-level requirement.
- The filing reports ongoing legal and regulatory inquiries and proceedings but does not provide a clear aggregate maximum loss exposure. Management states that material losses are accrued when probable and reasonably estimable.
Most important facts for investors to verify
- Whether Asset Management net outflows persist and whether they further reduce fee revenue and segment profitability.
- The pace of runoff and earnings decline in fixed deferred annuities, as well as the sensitivity of variable annuity guarantees to market movements and policyholder behavior.
- The adequacy of long-term-care reserves, future premium-rate approvals, morbidity experience, and Genworth reinsurance recoverables.
- The company’s ability to sustain capital distributions while meeting insurance, banking, broker-dealer, and rating-agency capital requirements.
- Progress and costs associated with the Ameriprise Bank conversion, Brexit-related operating changes, and evolving fiduciary, privacy, cybersecurity, insurance, and asset-management regulation.
- Future cash requirements under approximately $65.3 billion of disclosed contractual commitments, including $2.875 billion of long-term debt payments, $51.389 billion of insurance and annuity obligations, and $7.892 billion of investment certificate obligations.
- Whether reported adjusted operating results remain representative of recurring performance, given the effects of unlocking, market impacts, nonperformance-risk adjustments, LTC loss recognition, and other excluded items.