Ameriprise Financial, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Ameriprise provides financial planning, advice, asset management, annuity, insurance, banking and brokerage services primarily to mass-affluent and affluent clients. The filing covers the unaudited three months ended March 31, 2010, with comparisons to the three months ended March 31, 2009. The company had 11,837 affiliated financial advisors and registered representatives at quarter-end.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Total revenues | $2,292 million | $1,758 million | +30% |
| Net revenues | $2,271 million | $1,716 million | +32% |
| Pretax income | $361 million | $134 million | +169% |
| Net income | $296 million | $116 million | +155% |
| Net income attributable to Ameriprise | $214 million | $130 million | +65% |
| Diluted EPS | $0.81 | $0.58 | +$0.23 |
| Operating cash flow | $131 million | $(572) million | +$703 million |
| Cash and cash equivalents | $4,816 million | $3,097 million at Dec. 31, 2009 | +$1,719 million |
| Debt before consolidated investment entities | $2,612 million | $1,868 million at Dec. 31, 2009 | +$744 million |
Ameriprise-attributable net margin was approximately 9.4% of net revenues, compared with approximately 7.6% in the prior-year quarter. GAAP pretax margin was approximately 15.9%. Excluding consolidated investment entities, net revenues were $2.144 billion and pretax income was $279 million.
Cash flow from investing activities was $839 million, compared with $(2.069) billion in Q1 2009. Financing activities provided $759 million, including $744 million of net proceeds from the March 2010 senior-note issuance. Dividends paid were $45 million, or $0.17 per common share.
Total assets were $122.377 billion at March 31, 2010, including $6.916 billion of consolidated investment-entity assets. Shareholders’ equity attributable to Ameriprise was $10.108 billion, and total equity was $10.700 billion.
Material Changes Versus the Prior Comparable Period
- Net revenues excluding consolidated investment entities increased 24% to $2.144 billion, driven by market appreciation, net inflows in wrap accounts and asset management, and higher investment income.
- Management and financial advice fees increased 40% to $774 million; distribution fees increased 26% to $391 million; and net investment income increased 41% to $590 million.
- Benefits, claims, losses and settlement expenses increased to $354 million from $100 million, primarily because Q1 2009 benefited from favorable mark-to-market effects on variable-annuity living benefits. Q1 2010 included a $23 million adverse mark-to-market impact, net of hedges and deferred sales inducement costs.
- Amortization of deferred acquisition costs declined 59% to $118 million, compared with $286 million, because of substantially less adverse market-related amortization.
- Advice & Wealth Management pretax income improved to $51 million from a $61 million loss. Asset Management improved to $18 million from an $8 million loss. Annuities declined to $120 million from $129 million, while Protection increased to $119 million from $112 million.
- Total owned, managed and administered assets increased 31% to $463.3 billion. Managed assets were $331.8 billion, including wrap account assets of $100.0 billion, up 47% year over year.
- The company adopted revised variable-interest-entity consolidation guidance on January 1, 2010. This increased assets by approximately $5.5 billion, liabilities by approximately $5.1 billion and appropriated retained earnings by $473 million, without changing the underlying economics of the business.
Guidance, Outlook, Commentary and Unusual Items
Management stated longer-term, on-average financial targets of 6% to 8% net-revenue growth excluding consolidated investment entities, 12% to 15% diluted EPS growth and 12% to 15% return on equity excluding consolidated investment entities. These are multi-year targets rather than specific Q2 or full-year guidance.
On April 30, 2010, after quarter-end, Ameriprise completed the approximately $1 billion all-cash acquisition of Columbia Management’s long-term asset-management business, funded with cash on hand. The company had incurred $12 million of pretax acquisition and integration costs through March 31 and expected total such costs of $130 million to $160 million through 2011.
Ameriprise issued $750 million of 5.30% senior notes due 2020 in March 2010. It also entered into swaps to convert approximately $1.4 billion of fixed-rate debt to floating-rate debt. A portion of the issuance proceeds was expected to fund repayment of $340 million of debt maturing in November 2010.
Liquidity was supported by $4.8 billion of cash and cash equivalents and an undrawn $750 million unsecured revolving credit facility, expandable to $1.0 billion, expiring in September 2010. Management expected to re-establish the facility before expiration and stated that operating cash flow, cash balances and available revolver capacity should fund operating liquidity needs.
Key unusual items included a $27 million increase in Threadneedle incentive-compensation expense, a $20 million benefit related to payments concerning the Reserve Funds matter, $30 million of credit-related other-than-temporary investment impairments, and the absence of the $50 million debt-repurchase gain recognized in Q1 2009.
Risks, Contingencies and Unusual Exposures
- Results remain sensitive to equity markets, credit spreads, interest rates, foreign exchange rates, investment performance, policyholder behavior and the valuation of deferred acquisition costs and variable-annuity guarantees.
- Variable-annuity guarantees and related hedges generated significant earnings volatility. Gross notional hedges for GMWB and GMAB exposure were $36.5 billion at March 31, 2010.
- The investment portfolio included $31.4 billion of available-for-sale securities, with $618 million of gross unrealized losses and $30 million of credit-related impairments recognized in Q1 2010.
- Legal and regulatory matters include claims and arbitrations involving private-placement products sold by Securities America, including Medical Capital and Provident Shale matters. The company could not estimate the potential loss range, and adverse outcomes could materially affect results.
- Tax authorities were examining various open years. Management estimated that gross unrecognized tax benefits could increase by $20 million to $25 million over the following 12 months. Potential changes to the life-insurance separate-account dividends-received deduction could reduce future tax benefits.
- The company had an indemnification obligation of up to $10 million through April 15, 2015 related to advances made to clients whose Reserve Primary Fund assets were frozen.
- Credit ratings and subsidiary dividend capacity affect liquidity. A.M. Best, S&P and Fitch maintained negative outlooks on Ameriprise and RiverSource Life at the filing date, while Moody’s had changed its outlook to stable.
Most Important Facts for Investors to Verify
- Reconcile GAAP results with results excluding consolidated investment entities, particularly the $5.5 billion of newly consolidated assets and $5.1 billion of liabilities.
- Assess whether revenue growth from market appreciation and asset-based fees is sustainable if equity markets weaken or client flows reverse.
- Review the sensitivity of earnings, capital and liquidity to variable-annuity guarantee valuations, hedging effectiveness, basis risk and nonperformance-spread assumptions.
- Confirm the funding, integration costs and anticipated benefits of the Columbia Management acquisition completed after quarter-end.
- Monitor debt refinancing, the revolving-credit-facility renewal, subsidiary capital restrictions and insurance-company financial-strength ratings.
- Track developments in the Securities America litigation and arbitration matters, tax examinations and potential changes to the separate-account dividends-received deduction.