Why did Ameriprise's net income fall in 2005 despite revenue growth?

Net income fell 28% to $574 million, largely because of $293 million in pretax separation costs incurred to become independent from American Express, a $100 million pretax settlement of a securities class action, and higher non-field compensation and other ongoing standalone costs. Revenue growth of 7% was driven by higher asset-based management fees from wrap accounts, variable annuities and Threadneedle, but it was not enough to offset these expenses.

How much exposure does the company have to American Express after the spin-off?

The company relies on American Express for certain transition services, including technology and disaster recovery, for up to two years after the September 30, 2005 distribution. It also has a tax allocation agreement that includes an indemnity to American Express for taxes if the distribution is later deemed taxable, which the company estimates could exceed $1.5 billion in a 50% or greater ownership change. It may use the American Express brand in a limited capacity until September 30, 2007.

What are the main regulatory risks to the business?

The company is under elevated scrutiny from the SEC, NASD, OTS and state regulators on sales practices, revenue sharing, 529 plans, market timing, and advisor supervision. In 2005 it settled SEC matters for $45 million and an NASD matter for a $12.3 million fine. Open matters include RiverSource fund portability and out-of-state licensing, and regulators could reduce 12b-1 fees, which the company received about $1.2 billion of in distribution fees in 2005.

How strong is the capital position and what are the near-term capital plans?

The company reported shareholders' equity of $7.69 billion and a 435% RBC ratio at IDS Life. It issued $800 million of 5.35% notes due 2010 and $700 million of 5.65% notes due 2015, and it holds an undrawn $750 million revolving credit facility. It declared a $0.11 quarterly dividend and authorized a repurchase of up to 2 million shares through the end of 2006.

AMP 10-K FY2005 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 8, 2006. Cited figures are marked; the original filing is the authoritative source.

Ameriprise Financial (AMP), spun off from American Express on September 30, 2005, filed its first standalone 10-K on March 8, 2006.

Reported 2005 total revenues were $7.48 billion^a (up 7%), pretax income before discontinued operations and accounting change fell 33% to $745 million, and net income declined 28% to $574 million. The decline reflects $293 million of pretax separation costs ($191 million after-tax), a $100 million pretax securities class action settlement, and the deconsolidation of AMEX Assurance. Excluding separation effects and AMEX Assurance, management reported revenue growth of about 9% and income before discontinued operations down about 4%, with return on equity below the 12-15% target.

Total owned, managed and administered assets reached $428.2 billion^b, up 5%, with growth driven by wrap accounts, variable annuities and Threadneedle. The business profile centers on a financial advisor network of over 12,000 advisors, with more than 10,500 branded advisors, and a mass-affluent client focus. The company operates two segments, Asset Accumulation and Income (about 67% of revenue) and Protection (about 26%), and it is rebranding under the Ameriprise and RiverSource names.

Key risks for investors include regulatory scrutiny of mutual fund revenue sharing and market-timing practices, reliance on American Express for transition services and disaster recovery for up to two years, a potential indemnity to American Express exceeding $1.5 billion^c if a 50% or greater ownership change occurs, and sensitivity to equity markets through guaranteed minimum benefits on variable annuities. Outflows from proprietary RiverSource mutual funds and a material weakness-type change in internal control during the transition are also worth monitoring. Capital position is solid.

Subsidiary IDS Life reported an RBC ratio of 435%, the company raised $1.5 billion^d of senior notes in November 2005, and it has a $750 million revolving credit facility. Shareholders' equity rose to $7.69 billion, and the board declared a $0.11 quarterly dividend and authorized a 2 million share buyback for 2006.

02—Key points

Key Highlights

Total revenues of $7.48 billion in 2005, up 7% from $7.03 billion; excluding AMEX Assurance, revenue grew 9%.
Net income of $574 million, down 28% from $794 million, mainly due to $293 million pretax separation costs and a $100 million securities class action settlement.
Owned, managed and administered assets of $428.2 billion at year-end 2005, up 5%; managed assets reached $264.0 billion.
Network of over 12,000 financial advisors, including over 10,500 branded advisors, with over 75% of financial plan clients retained for three or more years.
IDS Life risk-based capital ratio improved to 435% in 2005 from 355% in 2004, and $1.5 billion of senior notes were issued to refinance the bridge loan to American Express.
Potential indemnity to American Express for taxes could exceed $1.5 billion if a 50% or greater change in stock ownership occurs within the restricted period.
Board declared a $0.11 quarterly dividend and authorized a 2 million share repurchase program effective through the end of 2006.

03—Questions

Frequently Asked Questions

Why did Ameriprise's net income fall in 2005 despite revenue growth?
Net income fell 28% to $574 million, largely because of $293 million in pretax separation costs incurred to become independent from American Express, a $100 million pretax settlement of a securities class action, and higher non-field compensation and other ongoing standalone costs. Revenue growth of 7% was driven by higher asset-based management fees from wrap accounts, variable annuities and Threadneedle, but it was not enough to offset these expenses.
How much exposure does the company have to American Express after the spin-off?
The company relies on American Express for certain transition services, including technology and disaster recovery, for up to two years after the September 30, 2005 distribution. It also has a tax allocation agreement that includes an indemnity to American Express for taxes if the distribution is later deemed taxable, which the company estimates could exceed $1.5 billion in a 50% or greater ownership change. It may use the American Express brand in a limited capacity until September 30, 2007.
What are the main regulatory risks to the business?
The company is under elevated scrutiny from the SEC, NASD, OTS and state regulators on sales practices, revenue sharing, 529 plans, market timing, and advisor supervision. In 2005 it settled SEC matters for $45 million and an NASD matter for a $12.3 million fine. Open matters include RiverSource fund portability and out-of-state licensing, and regulators could reduce 12b-1 fees, which the company received about $1.2 billion of in distribution fees in 2005.
How strong is the capital position and what are the near-term capital plans?
The company reported shareholders' equity of $7.69 billion and a 435% RBC ratio at IDS Life. It issued $800 million of 5.35% notes due 2010 and $700 million of 5.65% notes due 2015, and it holds an undrawn $750 million revolving credit facility. It declared a $0.11 quarterly dividend and authorized a repurchase of up to 2 million shares through the end of 2006.

04—Continue

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