Ameriprise Financial, Inc. — 2018 Q3 Form 10-Q Summary
Business context and reporting period
Ameriprise Financial is a diversified financial services company providing financial planning, wealth management, asset management, annuities, insurance and related products. This unaudited Form 10-Q covers the three and nine months ended September 30, 2018, with comparisons to the prior-year periods. The company reported $913.5 billion of assets under management and administration at September 30, 2018, up 5% from $869.5 billion a year earlier.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total revenues | $3.316 billion | $3.026 billion | $9.716 billion | $8.986 billion |
| Total net revenues | $3.292 billion | $3.014 billion | $9.656 billion | $8.952 billion |
| Pretax income | $588 million | $633 million | $1.832 billion | $1.619 billion |
| Net income | $503 million | $507 million | $1.559 billion | $1.303 billion |
| Diluted EPS | $3.43 | $3.26 | $10.45 | $8.27 |
| Adjusted operating earnings | $548 million | $552 million | $1.647 billion | $1.425 billion |
| Adjusted operating diluted EPS | $3.74 | $3.55 | $11.04 | $9.04 |
GAAP net margin was approximately 15.3% in the third quarter and 16.1% for the first nine months. Pretax margin was approximately 17.9% and 19.0%, respectively. The effective tax rate declined to 14.4% in the quarter and 14.9% year to date, compared with 19.9% and 19.5% in the comparable 2017 periods, primarily reflecting the lower federal tax rate and tax benefits.
- Management and financial advice fees increased 6% in the quarter and 9% year to date.
- Distribution fees increased 8% in the quarter and 8% year to date.
- Benefits, claims, losses and settlement expenses increased 54% in the quarter and 12% year to date.
- Operating cash flow was $1.109 billion for the first nine months, compared with $1.179 billion in 2017.
- Cash, cash equivalents and restricted cash totaled $4.697 billion at September 30, 2018, down from $5.144 billion at December 31, 2017.
Balance sheet, debt and liquidity
- Total assets were $145.191 billion, compared with $147.480 billion at December 31, 2017. Shareholders’ equity was $5.618 billion, compared with $5.995 billion.
- Long-term debt was $2.870 billion and short-term borrowings were $201 million. Total company debt was $3.071 billion, modestly below $3.091 billion at year-end 2017.
- The company had no borrowings under its $750 million unsecured revolving credit facility, which expires in October 2022, and had $1 million of letters of credit outstanding. Management stated that the company was in compliance with all covenants.
- Net cash used in investing activities was $349 million and net cash used in financing activities was $1.204 billion for the first nine months. Financing outflows included $380 million of dividends and $1.192 billion of share repurchases.
- The company repurchased 7.7 million shares for approximately $1.1 billion during the first nine months. $944 million remained under the authorized repurchase program at September 30, 2018.
Material changes versus the prior comparable periods
- First-nine-month net income increased 20%, while adjusted operating earnings increased 16%. However, third-quarter net income declined 1% and adjusted operating earnings declined 1%.
- Advice & Wealth Management was the strongest operating contributor: third-quarter adjusted operating earnings increased 19% to $355 million, and nine-month earnings increased 22% to $1.021 billion. Wrap account assets grew to $272.2 billion, supported by $5.7 billion of quarterly net inflows and market appreciation.
- Asset Management earnings declined 3% in the quarter but increased 8% year to date. Managed assets were $485.4 billion, with $7.3 billion of quarterly net outflows and $16.5 billion of year-to-date net outflows.
- Annuities adjusted operating earnings declined 46% in the quarter and 26% year to date, primarily due to actuarial assumption changes, lower investment income, variable annuity net outflows and related reserve and DAC effects.
- Protection earnings increased 11% in the quarter and 4% year to date, primarily reflecting unlocking impacts and favorable disability income claims, partly offset by insurance claims, low interest rates and a $10 million reinsurance-contract cost modification.
Guidance, outlook, commentary and unusual items
- Management’s stated multi-year financial targets are 6% to 8% average adjusted operating total net revenue growth, 12% to 15% adjusted operating diluted EPS growth and 19% to 23% adjusted operating return on equity excluding AOCI. The filing does not provide specific quarterly or full-year 2018 earnings guidance.
- Third-quarter results included actuarial “unlocking” from updated market inputs, mortality, surrender, utilization and other insurance and annuity assumptions. The net pretax impact was unfavorable by approximately $53 million, including a $113 million expense in benefits and claims, a $78 million favorable impact in other revenues and a $33 million benefit from DAC amortization.
- The annual long-term-care reserve review produced $51 million of loss recognition in the third quarter, compared with $57 million in the prior-year quarter. Management cited unfavorable morbidity experience, partially offset by actual and expected premium increases.
- Low interest rates remain a structural risk to spread income, reinvestment yields, fixed annuity earnings and insurance reserves. Management expects the fixed deferred annuity book to continue running off and related earnings to trend downward.
- Market sensitivity disclosures estimate a $524 million adverse pretax impact from a hypothetical 10% equity-price decline and a $455 million favorable impact from a hypothetical 100-basis-point parallel increase in interest rates. These are scenarios, not forecasts.
- The company adopted the new revenue recognition standard retrospectively and adopted updated financial-instrument accounting in 2018. The filing states that these adoptions did not materially affect consolidated financial condition or results beyond presentation and related disclosures.
- The company is evaluating future accounting changes, particularly the long-duration insurance-contract standard, which could materially affect insurance liabilities, market-risk benefits, DAC and disclosures when adopted.
- Legal, regulatory and arbitration matters remain elevated, including inquiries involving product distribution, advisor supervision, claims administration, client information security, trading monitoring and transaction controls. The filing does not identify a specific material loss amount.
Most important facts for investors to verify
- Whether Advice & Wealth Management inflows and margin gains can offset continued Asset Management outflows.
- The sustainability and cash-flow effects of recurring actuarial unlocking, long-term-care reserve charges and variable annuity guarantee valuation changes.
- Exposure to equity markets, interest rates, credit spreads, foreign exchange, policyholder behavior and hedge effectiveness.
- The adequacy of statutory capital and the ability of regulated subsidiaries to continue upstreaming dividends to the holding company.
- The potential financial impact of pending legal, regulatory, tax and accounting matters, including the future long-duration insurance-contract standard.
- Progress under the $2.5 billion share-repurchase authorization, remaining liquidity and debt maturities.