Business Context and Reporting Period
Ameriprise Financial, Inc. filed its Form 10-K for the fiscal year ended December 31, 2017. The company is a diversified financial-services holding company operating through Advice & Wealth Management, Asset Management, Annuities, Protection, and Corporate & Other. It reported $897.0 billion of assets under management and administration at year-end, served primarily mass-affluent and affluent clients, and had approximately 9,900 advisors and more than 13,000 employees.
Financial Performance and Key Metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total net revenues | $12.027 billion | $11.696 billion | +3% |
| Pretax income | $2.214 billion | $1.592 billion | +39% |
| Net income | $1.480 billion | $1.314 billion | +13% |
| Diluted EPS | $9.44 | $7.81 | +21% |
| Operating earnings | $1.603 billion | $1.427 billion | +12% |
| Operating earnings per diluted share | $10.23 | $8.48 | +21% |
| Operating return on equity, excluding AOCI | 26.9% | 22.2% | +4.7 points |
GAAP pretax margin was approximately 18.4% and net margin was approximately 12.3%. The effective tax rate was 33.1%, compared with 17.4% in 2016, primarily because of a $286 million tax expense associated with the Tax Cuts and Jobs Act, including deferred-tax remeasurement, foreign provisions, and tax-contingency remeasurement.
- Management and financial advice fees increased 11% to $6.392 billion, primarily reflecting higher average assets under management, market appreciation, wrap-account inflows, and higher performance fees.
- Distribution fees declined 1% to $1.770 billion, principally because advisory accounts transitioned to share classes without 12b-1 fees.
- Net investment income decreased 4% to $1.509 billion, including a $51 million impairment of affordable-housing partnerships related to tax reform.
- Benefits, claims, losses, and settlement expenses declined 16% to $2.233 billion, while deferred acquisition cost amortization declined 36% to $267 million.
- Operating earnings rose 28% in Advice & Wealth Management to $1.163 billion, 19% in Asset Management to $740 million, and substantially in Annuities to $710 million from $329 million. Protection operating earnings declined 18% to $216 million, and the Corporate & Other operating loss widened to $426 million.
Cash Flow, Balance Sheet, Debt, and Liquidity
- Net cash provided by operating activities was $1.701 billion, down from $2.353 billion, mainly because of higher income taxes paid and lower cash from brokerage deposits.
- Investing activities used $199 million, compared with $805 million used in 2016.
- Financing activities used $1.785 billion, including $1.485 billion of common-share repurchases and $491 million of shareholder dividends.
- Cash and cash equivalents, excluding consolidated investment entities, were $2.5 billion at December 31, 2017, compared with $2.3 billion a year earlier.
- Total assets were $147.470 billion and shareholders’ equity was $5.998 billion. Separate-account assets and liabilities were each $87.368 billion.
- Long-term debt was $2.891 billion and short-term borrowings were $200 million. Senior notes mature from 2019 through 2026, with $314 million due in 2019 and $761 million due in 2020.
- Ameriprise had an undrawn unsecured revolving credit facility of $750 million, expandable to $1 billion subject to approvals, expiring in October 2022. The company was in compliance with its covenants and had $1 million of outstanding letters of credit.
- Insurance subsidiaries maintained capital materially above regulatory company-action levels. RiverSource Life had $2.451 billion of statutory capital versus a $562 million RBC requirement, or 437% of the company-action level.
Material Changes Versus the Prior Comparable Period
- Total AUM and AUA increased $109.6 billion, or 14%, to $897.0 billion. AUM rose 13% to $714.3 billion and AUA rose 16% to $182.7 billion.
- Advice & Wealth Management wrap-account assets increased 23% to $248.2 billion, supported by $19.5 billion of net flows and $27.6 billion of market appreciation and other changes.
- Asset Management managed assets increased 9% to $494.6 billion, but the segment experienced $16.7 billion of net outflows, including $15.2 billion from former-parent-related assets.
- RiverSource variable-annuity account balances increased 7% to $80.3 billion, while fixed-deferred-annuity balances declined 7% to $9.3 billion. Management expects the fixed-deferred-annuity book to continue running off.
- Ameriprise acquired Investment Professionals, Inc. in July 2017, adding approximately 215 advisors and $8 billion of client assets, and acquired Lionstone Partners in November 2017, adding $5.4 billion of managed assets.
- The closed-block long-term-care business was transferred from Protection to Corporate & Other for segment reporting. A $57 million 2017 loss-recognition charge was recorded, primarily because of unfavorable morbidity experience.
- The third-quarter 2017 valuation “unlocking” produced a $104 million pretax benefit, compared with a $219 million pretax charge in 2016, primarily reflecting updated market inputs and living-benefit valuation changes.
- Ameriprise repurchased 9.9 million shares during 2017 at an average price of $135.58. Approximately $2.1 billion remained under the repurchase authorization at year-end. Quarterly dividends totaled $502 million, and the quarterly dividend was increased to $0.83 per share for payment in February 2018.
Guidance, Outlook, Commentary, Risks, and Unusual Items
Management’s stated long-term, on-average 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%. These are targets rather than period-specific guidance.
- Management expects benefits from tax reform over time through a lower corporate tax rate and greater free-cash-flow and capital-generation capacity, although the 2017 tax impact remained provisional in certain respects.
- Low interest rates continue to pressure investment yields, spread income, fixed-annuity economics, insurance reserves, hedging costs, and deferred-acquisition-cost assumptions. The fixed-deferred-annuity business is expected to decline gradually.
- A hypothetical 10% equity-market decline was estimated to reduce pretax income by approximately $551 million after hedges. A hypothetical 100-basis-point parallel increase in interest rates was estimated to increase pretax income by approximately $192 million. Actual results may differ materially.
- Major exposures include variable-annuity guaranteed benefits, long-term-care morbidity and persistency, insurance and reinsurance counterparty risk, credit and investment losses, market and foreign-exchange volatility, regulatory and fiduciary-rule changes, Brexit and European regulation, cybersecurity, operational failures, litigation, and competition.
- The company had $50.007 billion of projected gross insurance and annuity contractual payments, $6.400 billion of investment-certificate obligations, $2.888 billion of long-term-debt principal payments, and $315 million of operating-lease obligations. These projections depend on contractual, actuarial, interest-rate, lapse, mortality, and morbidity assumptions.
- Pending legal and regulatory matters include industry and company-specific inquiries involving product distribution, advisor supervision, insurance and annuity administration, client-data security, trading oversight, advertising, disclosures, and unclaimed-property practices. The filing states that the range of potential losses often cannot be reasonably estimated.
Most Important Facts for Investors to Verify
- Reconcile GAAP net income and EPS with operating earnings and determine how much of the improvement came from market movements, unlocking, reserve changes, and other adjustments.
- Assess the sustainability of Advice & Wealth Management inflows and the extent to which Asset Management outflows, active-management pressure, and fee compression may offset market appreciation.
- Review variable-annuity guarantee reserves, hedging effectiveness, contractholder behavior assumptions, and sensitivity to equity prices and interest rates.
- Evaluate long-term-care reserve adequacy, future premium-rate approvals, morbidity trends, and the collectability of the $2.3 billion of LTC-related reinsurance recoverables from Genworth-related arrangements.
- Confirm subsidiary statutory capital, dividend capacity, restrictions on upstreaming cash, and the effect of tax reform on insurance-company capital.
- Verify the provisional Tax Act accounting, including the $221 million deferred-tax remeasurement and $57 million foreign-tax provision, as well as the ongoing effective tax rate.
- Review debt maturities, derivative collateral and credit-contingent provisions, investment-portfolio quality, and the 4% below-investment-grade portion of fixed-maturity securities.
- For fourth-quarter analysis, note that quarterly net income was $181 million on $3.160 billion of net revenue and was significantly affected by the Tax Act; the filing does not present a separate quarterly operating-earnings reconciliation in the provided text.