Ameriprise Financial, Inc. — Q1 2017 Form 10-Q Summary
Business context and reporting period
Ameriprise is a diversified financial-services company providing financial advice, asset management, annuity, insurance, banking and related services. The filing covers the unaudited three months ended March 31, 2017, compared with the three months ended March 31, 2016. Assets under management and administration were $817.6 billion, up 6% year over year, including $654.4 billion of assets under management and $163.2 billion of assets under administration.
Financial performance and condition
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenues | $2.911 billion | $2.774 billion | Up 5% |
| Total net revenues | $2.901 billion | $2.765 billion | Up 5% |
| Pretax income | $475 million | $475 million | Flat |
| Net income | $403 million | $364 million | Up 11% |
| Diluted EPS | $2.52 | $2.09 | Up 21% |
| Operating earnings | $432 million | $378 million | Up 14% |
| Operating diluted EPS | $2.70 | $2.17 | Up 24% |
| Net cash from operating activities | $6 million | $616 million | Down $610 million |
GAAP net margin was approximately 13.9%, compared with 13.1% in the prior-year quarter; pretax margin was approximately 16.4% in both periods. Operating earnings benefited from market appreciation, wrap-account inflows and improved investment results, while reported pretax income was affected by market-related variable-annuity guarantee results.
- Management and financial advice fees increased 7% to $1.482 billion, primarily from market appreciation and wrap-account growth.
- Net investment income increased 18% to $391 million, including $17 million of net realized investment gains versus a $16 million net loss in Q1 2016.
- Premiums declined 8% to $339 million, primarily because of higher ceded premiums under new quota-share reinsurance arrangements.
- Total expenses increased 6% to $2.426 billion. Benefits, claims, losses and settlement expenses rose 18% to $567 million, while deferred acquisition cost amortization declined 35% to $72 million.
- Advice & Wealth Management operating earnings increased 21% to $248 million; Asset Management earnings were broadly flat at $150 million; Annuities increased 12% to $139 million; Protection declined 7% to $63 million; and Corporate & Other losses widened to $80 million from $49 million.
Liquidity, capital and debt
- Cash and cash equivalents excluding consolidated investment entities were $1.996 billion at March 31, 2017, down from $2.318 billion at December 31, 2016.
- Total assets were $140.857 billion and total equity was $6.227 billion at quarter-end.
- Ameriprise had $3.111 billion of corporate debt, consisting of $2.911 billion of long-term debt and $200 million of short-term borrowings. Debt of consolidated investment entities was an additional $2.341 billion and is non-recourse to the Company.
- The Company had an unsecured revolving credit facility of up to $500 million, expandable to $750 million subject to approvals. No borrowings were outstanding; $1 million of letters of credit reduced availability. The Company was in compliance with its covenants.
- Operating cash flow was only $6 million, principally reflecting higher income taxes paid and derivative-related cash outflows. Investing activities provided $211 million, while financing activities used $434 million.
- The Company paid $121 million in dividends and repurchased 2.9 million shares for $357 million during the quarter. The remaining authorization under the prior repurchase program was $572 million at March 31, 2017. In April 2017, the board authorized an additional $2.5 billion repurchase program through June 30, 2019, and increased the quarterly dividend to $0.83 per share.
Material changes versus the prior comparable period
- Net income increased despite flat pretax income because the effective tax rate fell to 15.2% from 23.3%. The reduction included a $28 million stock-compensation tax benefit and a $20 million out-of-period benefit from reversing a prior-year tax reserve.
- Reported variable-annuity guarantee results shifted materially: the market impact on variable-annuity guaranteed benefits was a $63 million expense versus a $17 million benefit in Q1 2016. The change included a $65 million unfavorable nonperformance-credit-spread impact versus a $219 million favorable impact in the prior year.
- Advice & Wealth Management wrap-account assets rose to $212.9 billion, supported by $3.9 billion of net inflows and $7.9 billion of market appreciation. Asset Management experienced $5.6 billion of net outflows, including $2.4 billion from former-parent-related assets.
- The Company completed its transition to advisory-account share classes without 12b-1 fees, reducing revenue by approximately $34 million and related advisor compensation by approximately $25 million in the quarter.
- The Company early adopted new restricted-cash and specified cash-flow classification guidance and adopted stock-compensation accounting changes on January 1, 2017.
- Long-term care business was moved from Protection to Corporate & Other for segment reporting; prior periods were restated.
Guidance, outlook, commentary and risks
- 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 return on equity excluding AOCI of 19% to 23%.
- Management expects low interest rates to continue compressing portfolio yields and spread income, with the fixed-annuity book expected to run off gradually. The Company reported $4.6 billion of securities and commercial mortgage loans potentially subject to reinvestment through March 31, 2019, with a weighted-average yield of 4.4%.
- Market sensitivity disclosures estimated a $502 million pretax adverse impact from a hypothetical 10% equity-price decline and a $453 million favorable impact from a hypothetical 100-basis-point parallel increase in interest rates. These are scenarios, not forecasts.
- Key risks include equity, interest-rate, credit and foreign-exchange volatility; variable-annuity guarantee and hedging performance; policyholder behavior and lapse assumptions; investment-management outflows and performance; regulatory and litigation exposure; liquidity and subsidiary-dividend restrictions; and changes to the Department of Labor fiduciary rule.
- The Company continued to face elevated regulatory inquiries involving product sales, advisor supervision, claims administration, client information security, trading monitoring, advertising and unclaimed-property practices.
- A lawsuit against Threadneedle affiliates in England alleges liability related to a former employee and claimed damages of $106 million. The Company stated that any loss could not reasonably be estimated because of the case’s procedural status and uncertain damages.
- In April 2017, Ameriprise announced an agreement to acquire Investment Professionals, Inc., an independent broker-dealer with approximately 200 advisors and $8 billion of assets as of December 31, 2016. Closing was expected in the third quarter of 2017.
Important facts for investors to verify
- Whether operating earnings and revenue growth remain within management’s stated targets as market conditions and asset flows change.
- The sustainability of the unusually low 15.2% effective tax rate and the extent to which tax benefits recur.
- Future variable-annuity guarantee results, hedge effectiveness, nonperformance-spread assumptions and policyholder lapse behavior.
- The effect of continued low rates on investment yields, fixed-annuity runoff, spread income and reinvestment returns.
- Asset-management outflows, particularly former-parent-related and low-margin assets, and their effect on fee revenue.
- Cash generation after dividends, share repurchases, capital contributions to subsidiaries and regulatory-capital requirements.
- Developments in the fiduciary rule, regulatory examinations and the Threadneedle litigation, including any potential financial exposure.