01—Abstract
Summary
Summary of the 10-K filed February 27, 2007. Cited figures are marked; the original filing is the authoritative source.
Ameriprise Financial (NYSE: AMP), spun off from American Express on September 30, 2005, reported 2006 results that show a company in transition but growing.
Total revenues rose 9% to $8.1 billiona and net income increased 10% to $631 million, though reported results absorbed $361 million of pretax non-recurring separation costs ($235 million after tax). Adjusted earnings, excluding those costs, rose 25% to $866 million, and adjusted return on equity improved to 11.8% from 10.2%. Management reports that revenue and earnings growth, excluding separation effects, exceeded its targets of 6-8% and 10-13%, respectively.
Owned, managed and administered assets reached $466.1 billionb, up 9%, driven by wrap-account inflows and market appreciation. The growth engine is the fee-based business. Management fees rose 15% and distribution fees rose 13%, reflecting a shift from fixed-spread products toward asset-based fees from wrap accounts, variable annuities and brokerage.
Net investment income fell 2% as fixed annuity and certificate balances declined, and the company has deliberately de-emphasized fixed products because of the rate environment. Investors should note several structural items: the company is adding interest expense from its new capital structure, it will accelerate DAC amortization under SOP 05-1 in 2007 (roughly $210 millionc pretax cumulative reduction), and it carries an indemnity exposure to American Express of more than $1.5 billion if a 50% or greater ownership change triggers the tax-free treatment of the spin-off.
The filing also highlights litigation and regulatory risk, including the $100 milliond securities class action settlement, pending arbitration awards against its Securities America unit ($22 million and $9 million), and ongoing SEC, NASD and OTS scrutiny of financial planning and sales practices. Capital is adequate, with RiverSource Life's total adjusted capital at roughly 595% of its company action level RBC, and the company is returning capital through a $750 million buyback program, of which $366 million remained at year end, and a quarterly dividend of $0.11.
02—Key points
Key Highlights
- Revenue of $8.14 billion in 2006, up 9% from $7.48 billion; net income of $631 million, up 10%.
- Adjusted earnings (excluding after-tax separation costs and AMEX Assurance) rose 25% to $866 million; adjusted ROE improved to 11.8% from 10.2%.
- Owned, managed and administered assets reached $466.1 billion, up 9%, supported by $8.1 billion in wrap account net inflows and $5.3 billion in variable annuity inflows.
- Fee-based growth drove results: management fees up 15% and distribution fees up 13%, while net investment income fell 2% as fixed annuity and certificate balances declined.
- Non-recurring separation costs of $361 million pretax in 2006 ($654 million cumulative), with about $221 million more expected, weigh on reported earnings.
- Contingent exposure: indemnity to American Express for taxes could exceed $1.5 billion if a 50%+ change in ownership occurs within the restricted period.
- Capital return: $490 million of share repurchases in 2006, $366 million remaining under the $750 million program, and a $0.11 quarterly dividend.
03—Questions
Frequently Asked Questions
Why did reported net income grow only 10% when adjusted earnings grew 25%?
Reported 2006 results include $361 million of pretax separation costs from the 2005 spin-off from American Express ($235 million after tax). In 2005, reported results also included AMEX Assurance income of $56 million, which was deconsolidated, and discontinued operations. Adjusting for these items, management's earnings growth was 25%, to $866 million from $693 million.
What is driving the shift in revenue mix, and why does it matter?
The company is shifting from fixed-spread products such as fixed annuities and investment certificates toward fee-based revenue from RiverSource variable annuities, financial planning, brokerage, asset management and banking. Management says this is less capital-intensive and better suited to the current interest-rate environment. Fee revenue is more sensitive to equity market levels, so a market downturn would reduce it, but the mix change should improve return on capital over time.
What are the largest legal and regulatory risks?
The $100 million securities class action settlement awaits final court approval at a June 2007 hearing. Securities America faces NASD arbitration awards of $22 million and $9 million, with other claims pending. The company is also subject to ongoing SEC, NASD and OTS examinations covering financial planning sales practices, revenue sharing, and compensation of advisors. Management cannot estimate the range of possible loss from these proceedings.
How strong is the capital position and what is the dividend and buyback outlook?
RiverSource Life's total adjusted capital was $3.5 billion, about 595% of its company action level RBC requirement. The company reported $2.7 billion in cash and cash equivalents at the holding company level and an unused $750 million revolver. Dividends totaled $108 million in 2006 at $0.11 per quarter, and $366 million remained under the buyback authorization, which runs through March 2008 and is expected to be funded from internally generated cash.
What accounting changes will affect 2007 earnings?
Adoption of SOP 05-1 on January 1, 2007 will change how certain internal replacements of annuity and insurance contracts are treated, from continuations to terminations. This will reduce DAC by roughly $210 million pretax, a cumulative after-tax charge of about $137 million to retained earnings. Management also expects higher ongoing DAC amortization in 2007. Continued non-recurring separation costs of about $221 million are also expected through 2007.
04—Continue