AMERIPRISE FINANCIAL INC quarterly report, Q2 FY2011

Ameriprise Financial, Inc. — 2Q 2011 Form 10-Q Summary

Business context and reporting period

Ameriprise provides financial planning, advice, asset management, annuity, insurance, banking and brokerage products primarily to mass-affluent and affluent clients. The filing covers the unaudited three and six months ended June 30, 2011, compared with the corresponding 2010 periods. The company had more than 9,600 branded advisors and reported total assets under management and administration of $670.2 billion, including $559.7 billion of AUM and $110.5 billion of AUA.

Securities America was classified as discontinued operations and held for sale in the second quarter. Prior periods were reclassified accordingly.

Financial performance and key metrics

Metric	Three months ended June 30		Six months ended June 30
	2011	2010	2011	2010
Total revenues	$2.634 billion	$2.482 billion	$5.179 billion	$4.661 billion
Total net revenues	$2.623 billion	$2.462 billion	$5.155 billion	$4.620 billion
Income from continuing operations	$285 million	$396 million	$579 million	$690 million
Net income attributable to Ameriprise	$309 million	$259 million	$550 million	$473 million
Diluted EPS from continuing operations	$1.25	$0.97	$2.46	$1.77
Diluted EPS	$1.23	$0.98	$2.16	$1.78
Operating diluted EPS	$1.31	$1.03	$2.63	$1.87

Second-quarter net income attributable to Ameriprise increased 19% and six-month net income increased 16%. Continuing-operations income attributable to Ameriprise increased 22% in the quarter and 33% year to date. Approximate net-income margins on reported net revenues were 11.8% versus 10.5% in the second quarter and 10.7% versus 10.2% for the first six months.

• Management and financial advice fees increased 29% to $1.172 billion in the quarter and 41% to $2.309 billion year to date.
• Distribution fees increased 7% to $416 million in the quarter and 14% to $813 million year to date.
• Net investment income declined 24% to $498 million in the quarter and 19% to $1.013 billion year to date, primarily due to lower CIE valuation gains and lower investment income on fixed maturity securities.
• Total expenses increased 11% to $2.224 billion in the quarter and 15% to $4.369 billion year to date. Distribution expenses and general and administrative expenses were the principal drivers.
• The reported effective tax rate on continuing operations was 28.7% in the quarter and 26.4% year to date, compared with 14.3% and 15.8%, respectively, in 2010.
• Reported operating cash flow for the first six months was $658 million, down from $1.398 billion. Investing cash flow used $596 million, while financing cash flow used $374 million.

Financial condition, debt and liquidity

• Total assets were $135.138 billion at June 30, 2011, up from $131.214 billion at December 31, 2010.
• Cash and cash equivalents were $2.528 billion, compared with $2.838 billion at year-end 2010. Management also reported approximately $500 million of unsecured revolving credit capacity, with $1 million of letters of credit outstanding and no borrowings under the facility.
• Long-term debt was $2.332 billion and short-term borrowings were $505 million, for total company debt of $2.837 billion, compared with $2.714 billion at year-end.
• Consolidated investment entities added $7.098 billion of assets and $5.919 billion of liabilities. Their debt is non-recourse to Ameriprise; management states that the related assets are client assets and are unavailable for general corporate use.
• Ameriprise repurchased 12.5 million shares for $761 million during the first six months, and had $2.2 billion remaining under authorized repurchase programs at June 30. It paid $103 million in common dividends, or $0.41 per share.
• Subsidiaries paid $841 million of dividends or returned capital to the parent, including $600 million from RiverSource Life. Subsidiary dividends remain subject to regulatory and capital constraints.

Material changes versus the prior comparable period

• Growth was led by asset-based fees, higher equity markets, net inflows in branded wrap accounts and the Columbia Management acquisition. Total AUM increased 15% to $559.7 billion, while total AUA increased 23% to $110.5 billion.
• Columbia and Threadneedle supported asset-management growth. Asset Management operating pretax income increased 40% to $146 million in the quarter and 124% to $282 million year to date. Columbia net outflows improved, while Threadneedle reported second-quarter net inflows.
• Advice & Wealth Management operating pretax income increased 26% to $108 million in the quarter and 51% to $207 million year to date. Branded client wrap assets rose 27% to $105.9 billion.
• Annuities operating pretax income increased 46% to $149 million in the quarter and 37% to $323 million year to date. Variable annuity fee income benefited from higher separate-account values, while fixed annuity balances remained under pressure.
• Protection operating pretax income declined 35% to $87 million in the quarter and 23% to $193 million year to date. Results reflected $15 million of catastrophe losses from storms, higher auto liability reserves, and higher universal-life claims and guarantee reserves.
• The Columbia Management integration generated approximately $30 million of net synergies in the quarter and $60 million year to date. Management expected $130 million of net synergies for 2011 and approximately $145 million annualized in 2012; pretax integration costs were $21 million in the quarter and $50 million year to date.
• The company repaid or reduced certain obligations and did not issue debt as contemplated by an earlier interest-rate hedge. A $27 million hedge gain was reclassified into second-quarter earnings.

Guidance, outlook, risks and unusual items

• Management’s stated multi-year financial targets are operating total net revenue growth of 6% to 8%, operating diluted EPS growth of 12% to 15%, and operating ROE excluding AOCI of 12% to 15%.
• Operating ROE excluding AOCI was 14.5% for the twelve months ended June 30, 2011, compared with 11.5% in the prior-year period. Reported ROE excluding AOCI was 12.8%, compared with 10.6%.
• Securities America generated a $75 million after-tax loss from discontinued operations in the first half, including a $77 million after-tax legal charge. Settlement agreements related to Medical Capital and Provident Royalties required total payments of $150 million, subject to stated conditions and court approval; the filing notes that final approval occurred August 4, 2011, after the quarter-end.
• Ameriprise and its subsidiaries face continuing litigation, arbitration, regulatory inquiries and examinations involving product sales, disclosures, advisory fees, supervision, trading practices, information security and other matters. The company cannot predict the ultimate resolution or potential loss range.
• Investment risks include credit-spread changes, mortgage-backed securities, interest rates, equity markets, derivatives, variable-annuity guarantees and insurance assumptions. The company held $33.348 billion of available-for-sale securities, including $5.938 billion classified as Level 3; net other-than-temporary impairment losses recognized in investment income were $18 million year to date.
• Variable-annuity guarantee liabilities and hedges remain sensitive to market movements. The gross notional amount of derivatives hedging GMWB and GMAB exposure was $67.9 billion at June 30. Management estimated that eliminating the nonperformance credit spread used in valuing certain liabilities would reduce net income by approximately $71 million, net of related effects.
• Gross unrecognized tax benefits were $167 million at June 30. Management estimated that such benefits could decrease by $130 million to $140 million over the following twelve months. Future tax treatment of the separate-account dividends-received deduction also remains uncertain.
• The company identified no material changes in contractual commitments, off-balance-sheet arrangements, market-risk disclosures or risk factors from the 2010 Form 10-K. Disclosure controls were considered effective at a reasonable level of assurance.

Important facts for investors to verify

• Reconcile GAAP earnings with management’s operating earnings, including the effects of CIE consolidation, discontinued operations, variable-annuity market impacts, DAC/DSIC amortization, integration costs and realized investment gains or losses.
• Assess the sustainability of fee growth given the dependence on equity-market levels, client asset flows, Columbia integration benefits and investment-management performance.
• Monitor Protection-segment loss trends, catastrophe experience, auto liability reserves and universal-life guarantee reserves.
• Review the Securities America divestiture, related settlement obligations and remaining litigation or arbitration exposure.
• Evaluate liquidity and capital at the parent and regulated subsidiaries, including restrictions on upstream dividends, the revolving credit facility expiration and the company’s share-repurchase pace.
• Track credit-spread, mortgage-backed-security, derivative and variable-annuity guarantee exposures, including the significant Level 3 valuations.