ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our consolidated results of operations and financial condition should be read in conjunction with the “Forward-Looking Statements” that follow and our Consolidated Financial Statements and Notes presented in Item 1. Our Management’s Discussion and Analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission (“SEC”) on February 23, 2023 (“2022 10-K”), as well as our current reports on Form 8-K and other publicly available information. References below to “Ameriprise Financial,” “Ameriprise,” the “Company,” “we,” “us,” and “our” refer to Ameriprise Financial, Inc. exclusively, to our entire family of companies, or to one or more of our subsidiaries.
Overview
Ameriprise Financial is a diversified financial services company with a more than 125-year history of providing financial solutions. We are a long-standing leader in financial planning and advice with $1.2 trillion in assets under management and administration as of March 31, 2023. We offer a broad range of products and services designed to achieve individual and institutional clients’ financial objectives.
The products and services we provide retail clients and, to a lesser extent, institutional clients, are the primary source of our revenues and net income. Revenues and net income are significantly affected by investment performance and the total value and composition of assets we manage and administer for our retail and institutional clients as well as the distribution fees we receive from other companies. These factors, in turn, are largely determined by overall investment market performance and the depth and breadth of our individual client relationships.
We operate our business in the broader context of the macroeconomic forces around us, including the global and U.S. economies, the coronavirus disease 2019 (“COVID-19”) pandemic, changes in interest and inflation rates, financial market volatility, fluctuations in foreign exchange rates, geopolitical strain, the competitive environment, client and customer activities and preferences, and the various regulatory and legislative developments. Financial markets and macroeconomic conditions have had and will continue to have a significant impact on our operating and performance results. In addition, the business, political and regulatory environments in which we operate are subject to elevated uncertainty and substantial, frequent change. Accordingly, we expect to continue focusing on our key strategic objectives and obtaining operational and strategic leverage from our core capabilities. The success of these and other strategies may be affected by the factors discussed in Item 1A, “Risk Factors” in our 2022 10-K and other factors as discussed herein.
Equity price, credit market and interest rate fluctuations can have a significant impact on our results of operations, primarily due to the effects they have on the asset management and other asset-based fees we earn, the values of market risk benefits associated with our variable annuities and the values of derivatives held to hedge these benefits and the “spread” income generated on our deposit products, fixed insurance, the fixed portion of variable annuities and variable insurance contracts and fixed deferred annuities. We have been operating in a historically low interest rate environment but have recently experienced a substantial increase in rates with uncertainty about where rates will go in the future. A higher (lower) interest rate environment may result in decreases (increases) to our long-duration contract reserves, which may impact our adjusted operating earnings after tax. For additional discussion on our interest rate risk, see Item 3. “Quantitative and Qualitative Disclosures About Market Risk.”
On June 2, 2021, we filed an application to convert Ameriprise Bank, FSB to a state-chartered industrial bank regulated by the Utah Department of Financial Institutions and the Federal Deposit Insurance Corporation. We also filed an application to transition the FSB’s personal trust services business to a new limited purpose national trust bank regulated by the Office of the Comptroller of the Currency. If the applications are approved, the proposed changes are not expected to impact our long-term strategy for the bank and should enable us to continue our strong lineup of banking solutions, including deposits, credit cards, mortgages and securities-based lending to our wealth management clients without interruption.
We consolidate certain variable interest entities for which we provide asset management services. These entities are defined as consolidated investment entities (“CIEs”). While the consolidation of the CIEs impacts our balance sheet and income statement, our exposure to these entities is unchanged and there is no impact to the underlying business results. For further information on CIEs, see Note 5 to our Consolidated Financial Statements. The results of operations of the CIEs are reflected in the Corporate & Other segment. On a consolidated basis, the management fees we earn for the services we provide to the CIEs and the related general and administrative expenses are eliminated and the changes in the fair value of assets and liabilities related to the CIEs, primarily syndicated loans and debt, are reflected in net investment income. We include the fees from these entities in the management and financial advice fees line within our Asset Management segment.
While our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), management believes that adjusted operating earnings measures, which exclude net realized investment gains or losses, net of reinsurance accrual; the market impact on non-traditional long-duration products (including variable and fixed deferred annuity contracts and universal life (“UL”) insurance contracts), net of hedges and the reinsurance accrual; mean reversion related impacts (the impact on variable universal life (“VUL”) products for the difference between assumed and updated separate account investment
AMERIPRISE FINANCIAL, INC.
performance on the reinsurance accrual and additional insurance benefit reserves); the market impact of hedges to offset interest rate and currency changes on unrealized gains or losses for certain investments; block transfer reinsurance transaction impact; gain or loss on disposal of a business that is not considered discontinued operations; integration and restructuring charges; income (loss) from discontinued operations; and the impact of consolidating CIEs, best reflect the underlying performance of our core operations and facilitate a more meaningful trend analysis.
The market impact on non-traditional long-duration products includes changes in market risk benefits and embedded derivative values caused by changes in financial market conditions, net of changes in economic hedge values and unhedged items including the difference between assumed and actual underlying separate account investment performance, fixed income credit exposures, transaction costs and certain policyholder contract elections. The market impact also includes certain valuation adjustments made in accordance with FASB Accounting Standards Codification 820, Fair Value Measurements and Disclosures, including the impact on embedded derivative values of discounting projected benefits to reflect a current estimate of our life insurance subsidiary’s nonperformance spread.
In the first quarter of 2023, management introduced an adjusted capital measure (“Available Capital for Capital Adequacy”), which management believes best reflects the available capital resources of our core operations and facilitates a meaningful trend analysis. Available Capital for Capital Adequacy adjusts GAAP total equity and excludes accumulated other comprehensive income (“AOCI”); goodwill and intangibles; RiverSource Life Insurance Company’s GAAP equity excluding AOCI; and includes RiverSource Life Insurance Company’s statutory total adjusted capital prepared in conformity with accounting practices prescribed or permitted by the State of Minnesota Department of Commerce; and other adjustments primarily certain deferred tax balances.
Management uses these non-GAAP measures to evaluate our financial performance and available capital on a basis comparable to that used by some securities analysts and investors. Also, certain of these non-GAAP measures are taken into consideration, to varying degrees, for purposes of business planning and analysis and for certain compensation-related matters. Throughout our Management’s Discussion and Analysis, these non-GAAP measures are referred to as adjusted operating measures. These non-GAAP measures should not be viewed as a substitute for U.S. GAAP measures.
Concurrent with the adoption of ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts, management no longer excludes adjustments for deferred acquisition costs (“DAC”), deferred sales inducement costs (“DSIC”) and unearned revenue amortization from adjusted operating earnings measures. Amortization of DAC, DSIC, and unearned revenue is no longer impacted by markets and is now amortized on a constant-level basis in accordance with GAAP.
It is management’s priority to increase shareholder value over a multi-year horizon by achieving our on-average, over-time financial targets.
Our financial targets are:
•Adjusted operating earnings per diluted share growth of 12% to 15%, and
•Adjusted operating return on equity of over 30%.
The following table reconciles our GAAP measures to adjusted operating measures:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Per Diluted Share | |
| Three Months Ended March 31, | | Three Months Ended March 31, | |
| 2023 | | 2022 | 2023 | | 2022 | |
| (in millions, except per share amounts) | |
| Net income (loss) | $ | 417 | | | $ | 825 | | | $ | 3.79 | | | $ | 7.10 | | |
Less: Net realized investment gains (losses) (1) | 3 | | | 16 | | | 0.03 | | | 0.14 | | |
Add: Market impact on non-traditional long-duration products (1) | 475 | | | (180) | | | 4.32 | | | (1.55) | | |
Add: Mean reversion related impacts (1) | — | | | — | | | — | | | — | | |
| | | | | | | | |
| | | | | | | | |
Add: Integration/restructuring charges (1) | 10 | | | 10 | | | 0.09 | | | 0.09 | | |
| Less: Net income (loss) attributable to CIEs | — | | | 2 | | | — | | | 0.02 | | |
Tax effect of adjustments (2) | (101) | | | 39 | | | (0.92) | | | 0.34 | | |
| Adjusted operating earnings | $ | 798 | | | $ | 676 | | | $ | 7.25 | | | $ | 5.82 | | |
| | | | | | | | |
| Weighted average common shares outstanding: | | | | | | | | |
| Basic | 107.9 | | | 113.7 | | | | | | |
| Diluted | 110.0 | | | 116.2 | | | | | | |
(1) Pretax adjusted operating adjustments.
(2) Calculated using the statutory federal tax rate of 21%.
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The following table reconciles the trailing twelve months’ sum of net income to adjusted operating earnings and the five-point average of quarter-end equity to adjusted operating equity:
| | | | | | | | | | | |
| | Twelve Months Ended March 31, |
| 2023 | | 2022 |
| (in millions) |
Net income | $ | 2,741 | | | $ | 2,807 | |
Less: Adjustments (1) | (266) | | | 167 | |
Adjusted operating earnings | 3,007 | | | 2,640 | |
| | | |
Total Ameriprise Financial, Inc. shareholders’ equity | 4,032 | | | 4,862 | |
Less: AOCI, net of tax | (2,037) | | | (559) | |
Total Ameriprise Financial, Inc. shareholders’ equity, excluding AOCI | 6,069 | | | 5,421 | |
Less: Equity impacts attributable to CIEs | (1) | | | 2 | |
Adjusted operating equity | $ | 6,070 | | | $ | 5,419 | |
| | | | | | | | | | | |
| | | |
Return on equity, excluding AOCI | 45.2 | % | | 51.8 | % |
Adjusted operating return on equity, excluding AOCI (2) | 49.5 | % | | 48.7 | % |
(1) Adjustments reflect the sum of after-tax net realized investment gains/losses, net of the reinsurance accrual; the market impact on non-traditional long-duration products (including variable and fixed deferred annuity contracts and UL insurance contracts), net of hedges and related reinsurance accrual; mean reversion related impacts; block transfer reinsurance transaction impacts; the market impact of hedges to offset interest rate and currency changes on unrealized gains or losses for certain investments; gain or loss on disposal of a business that is not considered discontinued operations; integration and restructuring charges; income (loss) from discontinued operations; and net income (loss) from consolidated investment entities. After-tax is calculated using the statutory tax rate of 21%.
(2) Adjusted operating return on equity, excluding AOCI is calculated using adjusted operating earnings in the numerator, and Ameriprise Financial shareholders’ equity, excluding AOCI and the impact of consolidating investment entities using a five-point average of quarter-end equity in the denominator. After-tax is calculated using the statutory tax rate of 21%.
The following table reconciles GAAP total equity to Available Capital for Capital Adequacy:
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| (in millions) |
| Ameriprise Financial, Inc. GAAP total equity | $ | 4,144 | | | $ | 3,803 | |
| Less: AOCI | (1,985) | | | (2,546) | |
| Ameriprise Financial, Inc. GAAP total equity, excluding AOCI | 6,129 | | | 6,349 | |
| Less: RiverSource Life Insurance Company GAAP equity, excluding AOCI | 1,667 | | | 2,057 | |
| Add: RiverSource Life Insurance Company statutory total adjusted capital | 3,108 | | | 3,103 | |
| Less: Goodwill and intangibles | 2,497 | | | 2,485 | |
| Add: Other adjustments | 304 | | | 299 | |
Available Capital for Capital Adequacy | $ | 5,377 | | | $ | 5,209 | |
Critical Accounting Estimates
The accounting and reporting policies that we use affect our Consolidated Financial Statements. Certain of our accounting and reporting policies are critical to an understanding of our consolidated results of operations and financial condition and, in some cases, the application of these policies can be significantly affected by the estimates, judgments and assumptions made by management during the preparation of our Consolidated Financial Statements. The accounting and reporting policies and estimates we have identified as fundamental to a full understanding of our consolidated results of operations and financial condition are described below. See Note 2 to our Consolidated Financial Statements for further information about our accounting policies.
Valuation of Investments
The most significant component of our investments is our Available-for-Sale securities, which we carry at fair value within our Consolidated Balance Sheets. See Note 13 to our Consolidated Financial Statements for discussion of the fair value of our Available-for-Sale securities. Financial markets are subject to significant movements in valuation and liquidity, which can impact our ability to liquidate and the selling price that can be realized for our securities and increases the use of judgment in determining the estimated fair value of certain investments. We are unable to predict impacts and determine sensitivities in reported amounts reflecting such market movements on our aggregate Available-for-Sale portfolio. Changes to these assumptions do not occur in isolation and it is
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impracticable to predict such impacts at the individual security unit of measure which are predominately Level 2 fair value and based on observable inputs.
Market Risk Benefits
Market risk benefits are contracts or contract features that both provide protection to the contractholder from other-than-nominal capital market risk and expose us to other-than-nominal capital market risk. Market risk benefits include certain contract features on variable annuity products that provide minimum guarantees to policyholders. Guarantees accounted for as market risk benefits include guaranteed minimum death benefits (“GMDB”), guaranteed minimum income benefits (“GMIB”), guaranteed minimum withdrawal benefits (“GMWB”) and guaranteed minimum accumulation benefits (“GMAB”).
Variable Annuities
We have approximately $77 billion of variable annuity account value that has been issued over a period of more than fifty years. The diversified variable annuity block consists of $33 billion of account value with no living benefit guarantees and $44 billion of account value with living benefit guarantees, primarily GMWB provisions. The business is predominately issued through the Ameriprise Financial® advisor network. The majority of the variable annuity contracts offered by us contain GMDB provisions. We discontinued most new sales of GMWB and GMAB at the end of 2021 and new sales were completely discontinued as of mid-2022. We also previously offered contracts containing GMIB provisions. See Note 11 to our Consolidated Financial Statements for further discussion of our variable annuity contracts.
In determining the liabilities for market risk benefits, we project these benefits and contract assessments using actuarial models to simulate various equity market scenarios. Significant assumptions made in projecting future benefits and assessments relate to customer asset value growth rates, mortality, persistency, benefit utilization and investment margins. Management reviews, and where appropriate, adjusts its assumptions each quarter. Unless management identifies a material deviation over the course of quarterly monitoring, management reviews and updates these assumptions annually in the third quarter of each year.
In addition, the valuation of market risk benefits is impacted by an estimate of our nonperformance risk adjustment. This estimate includes a spread over the U.S. Treasury curve as of the balance sheet date. As our estimate of this spread over the U.S. Treasury curve widens or tightens, the liability will decrease or increase. The change in fair value due to changes in our nonperformance risk is recorded in other comprehensive income.
Regarding the exposure to variable annuity living benefit guarantees, the source of behavioral risk is driven by changes in policyholder surrenders and utilization of guaranteed withdrawal benefits. We have extensive experience studies and analysis to monitor changes and trends in policyholder behavior. A significant volume of company-specific policyholder experience data is available and provides management with the ability to regularly analyze policyholder behavior. On a monthly basis, actual surrender and benefit utilization experience is compared to expectations. Experience data includes detailed policy information providing the opportunity to review impacts of multiple variables. The ability to analyze differences in experience, such as presence of a living benefit rider, existence of surrender charges, and tax qualifications provide us an effective approach in quickly detecting changes in policyholder behavior.
At least annually, we perform a thorough policyholder behavior analysis to validate the assumptions included in our market risk benefit reserves. The variable annuity assumptions and resulting reserve computations reflect multiple policyholder variables. Differentiation in assumptions by policyholder age, existence of surrender charges, guaranteed withdrawal utilization, and tax qualification are examples of factors recognized in establishing management’s assumptions used in reserve calculations. The extensive data derived from our variable annuity block informs management in confirming previous assumptions and revising the variable annuity behavior assumptions. Changes in assumptions are governed by a review and approval process to ensure an appropriate measurement of all impacted financial statement balances. Changes in these assumptions can be offsetting and we are unable to predict their movement, sensitivities in reported amounts, offsetting impacts, or future impacts to the Consolidated Financial Statements over time or in any given future period.
Future Policy Benefits and Claims
We establish reserves to cover the benefits associated with non-traditional and traditional long-duration products. Non-traditional long-duration products include variable and structured variable annuity contracts, fixed annuity contracts and UL and VUL policies. Traditional long-duration products include term life insurance, whole life insurance, disability income (“DI”) and long term care (“LTC”) insurance and life contingent payout annuity products.
The establishment of reserves is an estimation process using a variety of methods, assumptions and data elements. If actual experience is better than or equal to the results of the estimation process, then reserves should be adequate to provide for future benefits and expenses. If actual experience is worse than the results of the estimation process, additional reserves may be required.
Non-Traditional Long-Duration Products, including Embedded Derivatives
UL and VUL
A portion of our UL and VUL policies have product features that result in profits followed by losses from the insurance component of the contract. These profits followed by losses can be generated by the cost structure of the product or secondary guarantees in the contract. The secondary guarantee ensures that, subject to specified conditions, the policy will not terminate and will continue to
AMERIPRISE FINANCIAL, INC.
provide a death benefit even if there is insufficient policy value to cover the monthly deductions and charges. The liability for these future losses is determined at the reporting date using actuarial models to estimate the death benefits in excess of account value and recognizing the excess over the estimated life based on expected assessments (e.g. cost of insurance charges, contractual administrative charges, similar fees and investment margin). Significant assumptions made in projecting future benefits and assessments relate to client asset value growth rates, mortality, persistency and investment margins. Changes in these assumptions can be offsetting and we are unable to predict their movement, sensitivities in reported amounts, offsetting impacts, or future impacts to the Consolidated Financial Statements over time or in any given future period. See Note 9 to our Consolidated Financial Statements for information regarding the liability for contracts with secondary guarantees.
Embedded Derivatives
The fair value of embedded derivatives related to structured variable annuities, indexed annuities and IUL fluctuates based on equity markets and interest rates and is a liability. In addition, the valuation of embedded derivatives is impacted by an estimate of our nonperformance risk adjustment. This estimate includes a spread over the U.S. Treasury curve as of the balance sheet date. As our estimate of this spread over the U.S. Treasury curve widens or tightens, the liability will decrease or increase.
See Note 13 to our Consolidated Financial Statements for information regarding the fair value measurement of embedded derivatives.
Traditional Long-Duration Products
The liabilities for traditional long-duration products include cash flows related to unpaid amounts on reported claims, estimates of benefits payable on claims incurred but not yet reported and estimates of benefits that will become payable on term life, whole life, DI, LTC, and life contingent payout annuity policies as claims are incurred in the future. Accordingly, the claim liability (also referred to as disabled life reserves) is presented together as one liability for future policy benefits.
A liability for future policy benefits, which is the present value of estimated future policy benefits to be paid to or on behalf of policyholders and certain related expenses less the present value of estimated future net premiums to be collected from policyholders, is accrued as premium revenue is recognized. Expected insurance benefits are accrued over the life of the contract in proportion to premium revenue recognized (referred to as the net premium approach). The net premium ratio reflects cash flows from contract inception to contract termination (i.e., through the claim paying period) and cannot exceed 100%.
The liability for future policy benefits will be updated for actual experience at least on an annual basis and concurrent with changes to cash flow assumptions. When net premiums are updated for cash flow changes, the estimated cash flows over the entire life of a group of contracts are updated using historical experience and updated future cash flow assumptions.
The cash flows used in the calculation are discounted using the forward rate curve on the original contract issue date. The discount rate represents an upper-medium-grade (i.e., low credit risk) fixed-income instrument yield (i.e., an A rating) that reflects the duration characteristics of the liability.
Derivative Instruments and Hedging Activities
We use derivative instruments to manage our exposure to various market risks. All derivatives are recorded at fair value. The fair value of our derivative instruments is determined using either market quotes or valuation models that are based upon the net present value of estimated future cash flows and incorporate current market observable inputs to the extent available. We are unable to predict impacts and determine sensitivities in reported amounts reflecting such market movements on our aggregate derivative portfolio. Changes to assumptions do not occur in isolation and it is impracticable to predict such impacts at the individual security unit of measure which are predominately Level 2 fair value and based on observable inputs.
For further details on the types of derivatives we use and how we account for them, see Note 2, Note 13 and Note 15 to our Consolidated Financial Statements. For discussion of our market risk exposures and hedging program and related sensitivity testing, see Item 3. “Quantitative and Qualitative Disclosures About Market Risk.”
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements and their expected impact on our future consolidated results of operations and financial condition, see Note 3 to our Consolidated Financial Statements.
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Economic Environment
Global equity market conditions could materially affect our financial condition and results of operations. The following table presents relevant market indices:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended March 31, | | |
| | | | | 2023 | | 2022 | Change |
| S&P 500 | | | | | | | | | | | |
| Daily average | | | | | | | 3,998 | | 4,467 | | (10)% |
| Period end | | | | | | | 4,109 | | 4,530 | | (9)% |
Weighted Equity Index (“WEI”) (1) | | | | | | | | | | | |
| Daily average | | | | | | | 2,664 | | 2,953 | | (10)% |
| Period end | | | | | | | 2,718 | | 2,979 | | (9)% |
(1) Weighted Equity Index is an Ameriprise calculated proxy for equity market movements calculated using a weighted average of the S&P 500, Russell 2000, Russell Midcap and MSCI EAFE indices based on North America distributed equity assets.
See our segment results of operations discussion below for additional information on how changes in the economic environment have and may continue to impact our results. For further information regarding the impact of the economic environment on our results of operations and financial condition, and potentially material effects, see Part 1 - Item 1A “Risk Factors” of our 2022 10-K.
Assets Under Management and Administration
Assets under management (“AUM”) include external client assets for which we provide investment management services, such as the assets of the Columbia Threadneedle Investments funds, institutional clients and clients in our advisor platform held in wrap accounts as well as assets managed by sub-advisors selected by us. AUM also includes certain assets on our Consolidated Balance Sheets for which we provide investment management services and recognize management fees in our Asset Management segment, such as the assets of the general account and the variable product funds held in the separate accounts of our life insurance subsidiaries and CIEs.
Assets under administration (“AUA”) include assets for which we provide administrative services such as client assets invested in other companies’ products that we offer outside of our wrap accounts. These assets include those held in clients’ brokerage accounts. We generally record revenues received from administered assets as distribution fees. We do not exercise management discretion over these assets and do not earn a management fee. These assets are not reported on our Consolidated Balance Sheets. AUA also includes certain assets on our Consolidated Balance Sheets for which we do not provide investment management services and do not recognize management fees, such as investments in non-affiliated funds held in the separate accounts of our life insurance subsidiaries.
AUM and AUA do not include assets under advisement, for which we provide advisory services such as model portfolios but do not have full discretionary investment authority.
The following table presents detail regarding our AUM and AUA:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, | | Change |
2023 | | 2022 |
| (in billions) | | |
| Assets Under Management and Administration | | | | | | | |
| Advice & Wealth Management AUM | $ | 431.4 | | | $ | 443.5 | | | $ | (12.1) | | | (3) | % |
| Asset Management AUM | 607.7 | | | 698.6 | | | (90.9) | | | (13) | |
| Corporate AUM | 0.2 | | | 0.1 | | | 0.1 | | | NM |
| Eliminations | (38.0) | | | (42.0) | | | 4.0 | | | 10 | |
| Total Assets Under Management | 1,001.3 | | | 1,100.2 | | | (98.9) | | | (9) | |
| Total Assets Under Administration | 234.3 | | | 238.9 | | | (4.6) | | | (2) | |
| Total AUM and AUA | $ | 1,235.6 | | | $ | 1,339.1 | | | $ | (103.5) | | | (8) | % |
Total AUM decreased $98.9 billion, or 9%, to $1.0 trillion as of March 31, 2023 compared to $1.1 trillion as of March 31, 2022 due to a $12.1 billion decrease in Advice & Wealth Management AUM driven by equity market depreciation, partially offset by wrap account net inflows, and a $90.9 billion decrease in Asset Management AUM primarily driven by equity and bond market depreciation. See our segment results of operations discussion below for additional information on changes in our AUM.
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Consolidated Results of Operations for the Three Months Ended March 31, 2023 and 2022
The following table presents our consolidated results of operations:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Change |
| 2023 | | 2022 |
| (in millions) | | |
| Revenues | | | | | | | |
| Management and financial advice fees | $ | 2,137 | | | $ | 2,459 | | | $ | (322) | | | (13) | % |
| Distribution fees | 517 | | | 446 | | | 71 | | | 16 | |
| Net investment income | 698 | | | 261 | | | 437 | | | NM |
| Premiums, policy and contract charges | 362 | | | 338 | | | 24 | | | 7 | |
| Other revenues | 131 | | | 123 | | | 8 | | | 7 | |
| Total revenues | 3,845 | | | 3,627 | | | 218 | | | 6 | |
| Banking and deposit interest expense | 103 | | | 2 | | | 101 | | | NM |
| Total net revenues | 3,742 | | | 3,625 | | | 117 | | | 3 | |
| Expenses | | | | | | | |
| Distribution expenses | 1,226 | | | 1,300 | | | (74) | | | (6) | |
| Interest credited to fixed accounts | 164 | | | 141 | | | 23 | | | 16 | |
| Benefits, claims, losses and settlement expenses | 301 | | | 32 | | | 269 | | | NM |
| Remeasurement gains and losses of future policy benefit reserves | (5) | | | (6) | | | 1 | | | 17 | |
| Change in fair value of market risk benefits | 489 | | | 100 | | | 389 | | | NM |
| Amortization of deferred acquisition costs | 62 | | | 65 | | | (3) | | | (5) | |
| Interest and debt expense | 72 | | | 40 | | | 32 | | | 80 | |
| General and administrative expense | 937 | | | 947 | | | (10) | | | (1) | |
| Total expenses | 3,246 | | | 2,619 | | | 627 | | | 24 | |
Pretax income | 496 | | | 1,006 | | | (510) | | | (51) | |
| Income tax provision | 79 | | | 181 | | | (102) | | | (56) | |
| Net income | $ | 417 | | | $ | 825 | | | $ | (408) | | | (49) | % |
| NM Not Meaningful. | | | | | | | |
Overall
Pretax income decreased $510 million, or 51%, for the three months ended March 31, 2023 compared to the prior year period.
•The market impact on non-traditional long duration products (including variable and fixed deferred annuity contracts and UL insurance contracts), net of hedges and the reinsurance accrual was an expense of $475 million for the three months ended March 31, 2023 compared to a benefit of $180 million for the prior year period.
•A negative impact from lower average equity markets compared to the prior year period. Our average WEI, which is a proxy for equity movements on AUM, decreased 10% in the quarter compared to the prior year period. The average S&P 500 index was 10% lower in the quarter compared to the prior year period.
•An $18 million unfavorable impact of lower asset management net performance fees.
•A favorable impact from the continued increase in short-term interest rates compared to the prior year along with higher balances in bank and certificate products.
Net Revenues
Management and financial advice fees decreased $322 million, or 13%, for the three months ended March 31, 2023 compared to the prior year period reflecting market depreciation, the cumulative impact of Asset Management net outflows and a decrease in performance fees of $49 million, partially offset by continued wrap account net inflows.
Distribution fees increased $71 million, or 16%, for the three months ended March 31, 2023 compared to the prior year period due to $110 million of higher fees on off-balance sheet brokerage cash due to an increase in short-term interest rates, partially offset by lower transactional activity and market depreciation.
Net investment income increased $437 million for the three months ended March 31, 2023 compared to the prior year period primarily reflecting:
•The favorable impact of growth in Ameriprise Bank customer deposits and certificate business as a result of the market environment and our strategic decision to invest in these businesses.
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•The favorable impact of the recent trend in rising interest rates on the investment portfolio yield, including from investment portfolio repositioning in our insurance business in the fourth quarter of 2022.
•The unfavorable impact of net realized investment gains of $4 million for the three months ended March 31, 2023 compared to net realized investment gains of $20 million for the prior year period.
Premiums, policy and contract charges increased $24 million, or 7%, for the three months ended March 31, 2023 compared to the prior year period primarily due to higher sales of immediate annuities with a life contingent feature.
Banking and deposit interest expense increased $101 million for the three months ended March 31, 2023 compared to the prior year period primarily reflecting higher average crediting rates and higher average volumes on certificates and Ameriprise Bank cash deposits.
Expenses
Distribution expenses decreased $74 million, or 6%, for the three months ended March 31, 2023 compared to the prior year period primarily reflecting lower advisor compensation due to a decrease in average wrap account balances from market depreciation.
Interest credited to fixed accounts increased $23 million, or 16%, for the three months ended March 31, 2023 compared to the prior year period primarily reflecting the following item:
•A $34 million increase in expense from other market impacts on IUL benefits, net of hedges, which was an expense of $46 million for the three months ended March 31, 2023 compared to an expense of $12 million for the prior year period. The increase in expense was primarily due to an increase in the IUL embedded derivative in the current period, which reflected less discounting due to lower treasury rates.
Benefits, claims, losses and settlement expenses increased $269 million, for the three months ended March 31, 2023 compared to the prior year period primarily reflecting the following items:
•A $223 million increase in expense from market impacts on structured variable annuities (“SVA”) embedded derivative, net of hedges in place to offset those risks. This increase was the result of a favorable $160 million change in the market impact on derivatives hedging the SVA embedded derivative and an unfavorable $383 million change in the market impact on SVA embedded derivative. The main market driver contributing to these changes was the equity market impact on the SVA embedded derivative net of the impact on the corresponding hedge assets resulted in an expense for the three months ended March 31, 2023 compared to a benefit in the prior year period.
•The impact of higher sales of immediate annuities with a life contingent feature.
•The impact of increased volume in structured variable annuities.
Change in fair value of market risk benefits increased $389 million, for the three months ended March 31, 2023 compared to the prior year period primarily reflecting the following item:
•A $405 million increase in expense from market impacts on variable annuity guaranteed benefits, net of hedges in place to offset those risks. This increase was the result of a favorable $519 million change in the market impact on derivatives hedging the variable annuity guaranteed benefits and an unfavorable $924 million change in the market impact on variable annuity guaranteed benefits reserves. The main market drivers contributing to these changes are summarized below:
•Equity market impact on the variable annuity guaranteed benefits liability net of the impact on the corresponding hedge assets resulted in a benefit for the three months ended March 31, 2023 compared to an expense in the prior year period.
•Interest rate and bond impact on the variable annuity guaranteed benefits liability net of the impact on the corresponding hedge assets resulted in an expense for the three months ended March 31, 2023 compared to a benefit in the prior year period.
•Volatility impact on the variable annuity guaranteed benefits liability net of the impact on the corresponding hedge assets resulted in a lower expense for the three months ended March 31, 2023 compared to the prior year period.
•Other unhedged items, including the difference between the assumed and actual underlying separate account investment performance, transaction costs and various behavioral items, were a lower net expense for the three months ended March 31, 2023 compared to the prior year period.
Interest and debt expense increased $32 million, or 80%, for the three months ended March 31, 2023 compared to the prior year period primarily reflecting higher interest expense of CIEs and the issuance of $750 million of unsecured senior notes in March 2023.
Income Taxes
Our effective tax rate was 15.9% for the three months ended March 31, 2023 compared to 18.0% for the prior year period. The lower effective tax rate for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was primarily the result of lower pretax income, an increase in foreign tax credits net of addback, and an increase in incentive compensation, offset by an increase in state income taxes net of federal benefit compared to the prior year period. See Note 17 to our Consolidated Financial Statements for additional discussion on income taxes.
AMERIPRISE FINANCIAL, INC.
Results of Operations by Segment for the Three Months Ended March 31, 2023 and 2022
The following table presents summary financial information by segment:
| | | | | | | | | | | |
| Three Months Ended March 31, |
2023 | | 2022 |
| (in millions) |
| Advice & Wealth Management | | | |
| Net revenues | $ | 2,265 | | | $ | 2,042 | |
| Expenses | 1,572 | | | 1,602 | |
| Adjusted operating earnings | $ | 693 | | | $ | 440 | |
| Asset Management | | | |
| Net revenues | $ | 799 | | | $ | 1,017 | |
| Expenses | 634 | | | 732 | |
| Adjusted operating earnings | $ | 165 | | | $ | 285 | |
| Retirement & Protection Solutions | | | |
| Net revenues | $ | 824 | | | $ | 768 | |
| Expenses | 630 | | | 593 | |
| Adjusted operating earnings | $ | 194 | | | $ | 175 | |
| Corporate & Other | | | |
| Net revenues | $ | 126 | | | $ | 116 | |
| Expenses | 200 | | | 198 | |
| Adjusted operating loss | $ | (74) | | | $ | (82) | |
Advice & Wealth Management
The following table presents the changes in wrap account assets and average balances for the three months ended March 31:
| | | | | | | | | | | |
| 2023 | | 2022 |
| (in billions) |
| Beginning balance | $ | 412.1 | | | $ | 464.7 | |
| Net flows | 6.2 | | | 8.7 | |
| Market appreciation (depreciation) and other | 16.4 | | | (26.4) | |
| Ending balance | $ | 434.7 | | | $ | 447.0 | |
| | | |
Advisory wrap account assets ending balance (1) | $ | 430.1 | | | $ | 442.1 | |
Average advisory wrap account assets (2) | $ | 419.5 | | | $ | 445.7 | |
(1) Advisory wrap account assets represent those assets for which clients receive advisory services and are the primary driver of revenue earned on wrap accounts. Clients may hold non-advisory investments in their wrap accounts that do not incur an advisory fee.
(2) Average ending balances are calculated using an average of the prior period’s ending balance and all months in the current period excluding the most recent month for the three months ended March 31, 2023 and 2022.
Ending wrap account assets increased $22.6 billion, or 5%, to $434.7 billion during the three months ended March 31, 2023 due to market appreciation and other of $16.4 billion and net inflows of $6.2 billion. Average advisory wrap account assets decreased $26.2 billion, or 6%, compared to the prior year period primarily reflecting year over year market depreciation, partially offset by net inflows.
AMERIPRISE FINANCIAL, INC.
The following table presents the results of operations of our Advice & Wealth Management segment on an adjusted operating basis:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Change |
| 2023 | | 2022 |
| (in millions) | | |
| Revenues | | | | | | | |
| Management and financial advice fees | $ | 1,299 | | | $ | 1,380 | | | $ | (81) | | | (6) | % |
| Distribution fees | 593 | | | 529 | | | 64 | | | 12 | |
| Net investment income | 409 | | | 78 | | | 331 | | | NM |
| Other revenues | 67 | | | 57 | | | 10 | | | 18 |
| Total revenues | 2,368 | | | 2,044 | | | 324 | | | 16 | |
| Banking and deposit interest expense | 103 | | | 2 | | | 101 | | | NM |
| Total net revenues | 2,265 | | | 2,042 | | | 223 | | | 11 | |
| Expenses | | | | | | | |
| Distribution expenses | 1,173 | | | 1,232 | | | (59) | | | (5) | |
| | | | | | | |
| Interest and debt expense | 7 | | | 2 | | | 5 | | | NM |
| General and administrative expense | 392 | | | 368 | | | 24 | | | 7 | |
| Total expenses | 1,572 | | | 1,602 | | | (30) | | | (2) | |
| Adjusted operating earnings | $ | 693 | | | $ | 440 | | | $ | 253 | | | 58 | % |
| NM Not Meaningful. | | | | | | | |
Our Advice & Wealth Management segment pretax adjusted operating earnings, which exclude net realized investment gains or losses, increased $253 million, or 58%, for the three months ended March 31, 2023 compared to the prior year period primarily reflecting higher short-term interest rates and the cumulative impact of client net flows, partially offset by market depreciation and decreased transactional activity. Pretax adjusted operating margin was 30.6% for the for the three months ended March 31, 2023 compared to 21.5% for the prior year period.
Ameriprise Bank, FSB is continuing its deposit growth trend, with cash sweep balances increasing $6.8 billion from the prior year period to $20.0 billion. Profitability at the bank increased compared to the prior year period reflecting the trend in deposit growth and increased interest rates. The Ameriprise Certificate Company experienced strong growth in the current interest rate environment with client deposits increasing $5.9 billion from the prior year period to $11.1 billion.
Net Revenues
Management and financial advice fees decreased $81 million, or 6%, for the three months ended March 31, 2023 compared to the prior year period primarily due to lower average wrap account assets. Average advisory wrap account assets decreased $26.2 billion, or 6%, compared to the prior year period primarily reflecting market depreciation, partially offset by continued net inflows.
Distribution fees increased $64 million, or 12%, for the three months ended March 31, 2023 compared to the prior year period reflecting $110 million of higher fees on off-balance sheet brokerage cash, primarily due to an increase in short-term interest rates, partially offset by decreased transactional activity and market depreciation.
Net investment income, which excludes net realized investment gains or losses, increased $331 million, for the three months ended March 31, 2023 compared to the prior year period primarily due to higher average invested assets due to increased bank and certificate deposits and the favorable impact of increased short-term interest rates, including higher investment yields on the investment portfolio supporting the bank and certificate products.
Banking and deposit interest expense increased $101 million for the three months ended March 31, 2023 compared to the prior year period primarily reflecting higher average crediting rates and higher average volumes on certificates and bank cash deposits.
Expenses
Distribution expenses decreased $59 million, or 5%, for the three months ended March 31, 2023 compared to the prior year period reflecting lower asset-based advisor compensation from lower average wrap account assets and decreased transactional activity, partially offset by increased investments in recruiting experienced advisors.
Interest and debt expense increased $5 million for the three months ended March 31, 2023 compared to the prior year period due to the increase in capital supporting the growth in the bank and certificate products.
General and administrative expense increased $24 million, or 7%, for the three months ended March 31, 2023 compared to the prior year period primarily due to higher volume related expenses and investments for business growth.
AMERIPRISE FINANCIAL, INC.
Asset Management
The following tables present the mutual fund performance of our retail Columbia Threadneedle Investments funds as of March 31, 2023:
| | | | | | | | | | | | | | |
Retail Fund Rankings in Top 2 Quartiles or Above Index Benchmark - Asset Weighted(1) | 1 year | 3 year | 5 year | 10 year |
| Equity | 61% | 49% | 83% | 87% |
| Fixed Income | 35% | 74% | 58% | 91% |
| Asset Allocation | 28% | 29% | 69% | 90% |
| | | | |
4- or 5-star Morningstar rated funds(2) | Overall | 3 year | 5 year | 10 year |
| Number of rated funds | 118 | 82 | 93 | 103 |
| Percent of rated assets | 63% | 27% | 48% | 66% |
(1) Retail Fund performance rankings for each fund are measured on a consistent basis against the most appropriate peer group or index. Peer groupings of Columbia funds are defined by Lipper category and are based on the Primary Share Class (i.e. Institutional if available, otherwise Advisor or Instl3 share class), net of fees. Peer groupings of Threadneedle funds are defined by either IA or Morningstar index and are based on the Primary Share Class. Comparisons to Index are measured gross of fees.
To calculate asset weighted performance, the sum of the total assets of the funds with above median ranking are divided by total assets of all funds. Funds with more assets will receive a greater share of the total percentage above or below median.
Aggregated Asset Allocation Funds may include funds that invest in other Columbia or Threadneedle branded mutual funds included in both equity and fixed income.
(2) Columbia funds are available for purchase by U.S. customers. Out of 104 Columbia funds rated (based on primary share class), 4 received a 5-star Overall Rating and 39 received a 4-star Overall Rating. Out of 153 Threadneedle funds rated (based on highest-rated share class), 19 received a 5-star Overall Rating and 56 received a 4-star Overall Rating. The Overall Morningstar Rating is derived from a weighted average of the performance figures associated with its 3-, 5- and 10-year (if applicable) Morningstar Rating metrics.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| The following table presents global managed assets by type: | | Average (1) | | Change |
| As of March 31, | | Change | Three Months Ended March 31, |
2023 | | 2022 | | 2023 | | 2022 |
| (in billions) |
| Equity | $ | 309.0 | | | $ | 367.1 | | | $ | (58.1) | | | (16) | % | | $ | 308.6 | | | $ | 379.6 | | | $ | (71.0) | | | (19) | % |
| Fixed income | 224.7 | | | 256.5 | | | (31.8) | | | (12) | | | 217.8 | | | 267.2 | | | (49.4) | | | (18) | |
| Money market | 22.2 | | | 12.9 | | | 9.3 | | | 72 | | | 22.1 | | | 11.8 | | | 10.3 | | | 87 | |
| Alternative | 34.7 | | | 40.2 | | | (5.5) | | | (14) | | | 34.7 | | | 40.1 | | | (5.4) | | | (13) | |
| Hybrid and other | 17.1 | | | 21.9 | | | (4.8) | | | (22) | | | 16.9 | | | 22.5 | | | (5.6) | | | (25) | |
| Total managed assets | $ | 607.7 | | | $ | 698.6 | | | $ | (90.9) | | | (13) | % | | $ | 600.1 | | | $ | 721.2 | | | $ | (121.1) | | | (17) | % |
(1) Average ending balances are calculated using an average of the prior period’s ending balance and all months in the current period.
AMERIPRISE FINANCIAL, INC.
The following table presents the changes in global managed assets:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
| (in billions) |
| Global Retail Funds | | | |
| Beginning assets | $ | 309.3 | | | $ | 409.4 | |
| Inflows | 12.1 | | | 21.8 | |
| Outflows | (16.4) | | | (23.2) | |
| Net VP/VIT fund flows | (1.2) | | | (1.1) | |
Net new flows (1) | (5.5) | | | (2.5) | |
| Reinvested dividends | 0.9 | | | 0.6 | |
| Net flows | (4.6) | | | (1.9) | |
| Distributions | (1.0) | | | (0.8) | |
| Market appreciation (depreciation) and other | 16.0 | | | (25.8) | |
Foreign currency translation (2) | 1.7 | | | (0.9) | |
| Total ending assets | 321.4 | | | 380.0 | |
| | | |
| Global Institutional | | | |
| Beginning assets | 274.7 | | | 344.7 | |
Inflows (3) | 12.8 | | | 12.7 | |
Outflows (3) | (10.7) | | | (11.5) | |
Net flows (1) | 2.1 | | | 1.2 | |
Market appreciation (depreciation) and other (4) | 6.4 | | | (21.7) | |
Foreign currency translation (2) | 3.1 | | | (5.6) | |
| Total ending assets | 286.3 | | | 318.6 | |
| | | |
| Total managed assets | $ | 607.7 | | | $ | 698.6 | |
| Total net flows | $ | (2.5) | | | $ | (0.7) | |
| | | |
Legacy insurance partners net flows (5) | $ | (0.8) | | | $ | (0.7) | |
(1) First quarter 2022 net flows included $2.5 billion of retail and $0.1 billion of institutional net flows from the US asset transfer in connection with our acquisition of the BMO Global Asset Management (EMEA) business.
(2) Amounts represent local currency to US dollar translation for reporting purposes.
(3) Global Institutional inflows and outflows include net flows from our structured annuity product and Ameriprise Bank.
(4) Included in Market appreciation (depreciation) and other for Global Institutional is the change in affiliated general account balance, excluding net flows related to our structured variable annuity product and Ameriprise Bank.
(5) Legacy insurance partners assets and net flows are included in the rollforwards above.
Total segment AUM increased $23.7 billion, or 4%, during the three months ended March 31, 2023 primarily due to equity market appreciation. Net outflows were $2.5 billion for the three months ended March 31, 2023, a decrease of $1.8 billion compared to the prior year period.
AMERIPRISE FINANCIAL, INC.
The following table presents the results of operations of our Asset Management segment on an adjusted operating basis:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Change |
| 2023 | | 2022 |
| (in millions) | | |
| Revenues | | | | | | | |
| Management and financial advice fees | $ | 694 | | | $ | 898 | | | $ | (204) | | | (23) | % |
| Distribution fees | 90 | | | 111 | | | (21) | | | (19) | |
| Net investment income | 9 | | | 4 | | | 5 | | | NM |
| Other revenues | 6 | | | 4 | | | 2 | | | 50 | |
| Total revenues | 799 | | | 1,017 | | | (218) | | | (21) | |
| Banking and deposit interest expense | — | | | — | | | — | | | - |
| Total net revenues | 799 | | | 1,017 | | | (218) | | | (21) | |
| Expenses | | | | | | | |
| Distribution expenses | 230 | | | 277 | | | (47) | | | (17) | |
| Amortization of deferred acquisition costs | 1 | | | 3 | | | (2) | | | (67) | |
| Interest and debt expense | 2 | | | 1 | | | 1 | | | NM |
| General and administrative expense | 401 | | | 451 | | | (50) | | | (11) | |
| Total expenses | 634 | | | 732 | | | (98) | | | (13) | |
| Adjusted operating earnings | $ | 165 | | | $ | 285 | | | $ | (120) | | | (42) | % |
| NM Not Meaningful. | | | | | | | |
Our Asset Management segment pretax adjusted operating earnings, which exclude net realized investment gains or losses, decreased $120 million, or 42%, for the three months ended March 31, 2023 compared to the prior year period primarily due to market depreciation, the cumulative impact of net outflows and lower performance fees, partially offset by disciplined expense management.
Net Revenues
Management and financial advice fees decreased $204 million, or 23%, for the three months ended March 31, 2023 compared to the prior year period primarily due to market depreciation, the cumulative impact from net outflows, a decrease in performance fees of $49 million and the negative impact of foreign exchange rates.
Distribution fees decreased $21 million, or 19%, for the three months ended March 31, 2023 compared to the prior year period primarily due to market depreciation and the cumulative impact from net outflows.
Expenses
Distribution expenses decreased $47 million, or 17%, for the three months ended March 31, 2023 compared to the prior year period primarily due to market depreciation and the cumulative impact from net outflows.
General and administrative expense decreased $50 million, or 11%, for the three months ended March 31, 2023 compared to the prior year period primarily reflecting lower performance fee related compensation, the impact of foreign exchange rates and disciplined expense management.
AMERIPRISE FINANCIAL, INC.
Retirement & Protection Solutions
The following table presents the results of operations of our Retirement & Protection Solutions segment on an adjusted operating basis:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Change |
2023 | | 2022 |
| (in millions) | | |
| Revenues | | | | | | | |
| Management and financial advice fees | $ | 183 | | | $ | 218 | | | $ | (35) | | | (16) | % |
| Distribution fees | 97 | | | 112 | | | (15) | | | (13) | |
| Net investment income | 195 | | | 114 | | | 81 | | | 71 | |
| Premiums, policy and contract charges | 346 | | | 321 | | | 25 | | | 8 | |
| Other revenues | 3 | | | 3 | | | — | | | - |
| Total revenues | 824 | | | 768 | | | 56 | | | 7 | |
| Banking and deposit interest expense | — | | | — | | | — | | | - |
| Total net revenues | 824 | | | 768 | | | 56 | | | 7 | |
| Expenses | | | | | | | |
| Distribution expenses | 110 | | | 122 | | | (12) | | | (10) | |
| Interest credited to fixed accounts | 88 | | | 96 | | | (8) | | | (8) | |
| Benefits, claims, losses and settlement expenses | 162 | | | 109 | | | 53 | | | 49 | |
| Remeasurement gains and losses of future policy benefit reserves | (3) | | | (7) | | | 4 | | | 57 | |
| Change in fair value of market risk benefits | 115 | | | 131 | | | (16) | | | (12) | |
| Amortization of deferred acquisition costs | 58 | | | 59 | | | (1) | | | (2) | |
| Interest and debt expense | 13 | | | 9 | | | 4 | | | 44 |
| General and administrative expense | 87 | | | 74 | | | 13 | | | 18 | |
| Total expenses | 630 | | | 593 | | | 37 | | | 6 | |
| Adjusted operating earnings | $ | 194 | | | $ | 175 | | | $ | 19 | | | 11 | % |
Our Retirement & Protection Solutions segment pretax adjusted operating earnings, which excludes net realized investment gains or losses (net of the reinsurance accrual), the market impact on variable annuity guaranteed benefits (net of hedges), the market impact on IUL benefits (net of hedges and the reinsurance accrual), mean reversion related impacts, and block transfer reinsurance transaction impacts increased $19 million, or 11%, for the three months ended March 31, 2023 compared to the prior year period.
Variable annuity account balances decreased 10% to $76.8 billion as of March 31, 2023 compared to the prior year period due to market depreciation and net outflows of $2.2 billion. Variable annuity sales decreased 16% compared to the prior year period reflecting a decrease in sales of variable annuities with living benefit guarantees. Account values with living benefit riders declined to 57% as of March 31, 2023 compared to 60% a year ago reflecting management’s actions to optimize our business mix. This trend is expected to continue and meaningfully shift the mix of business away from products with living benefit guarantees over time.
Net Revenues
Management and financial advice fees decreased $35 million, or 16%, for the three months ended March 31, 2023 compared to the prior year period primarily due to market depreciation and variable annuity net outflows.
Distribution fees decreased $15 million, or 13%, for the three months ended March 31, 2023 compared to the prior year period due to market depreciation.
Net investment income, which excludes net realized investment gains or losses, increased $81 million, or 71%, for the three months ended March 31, 2023 compared to the prior year period primarily due to higher interest rates, investment portfolio repositioning resulting in higher yields and increased structured variable annuity balances.
Premiums, policy and contract charges increased $25 million, or 8%, for the three months ended March 31, 2023 compared to the prior year period primarily due to higher sales of immediate annuities with a life contingent feature.
Expenses
Distribution expenses decreased $12 million, or 10%, for the three months ended March 31, 2023 compared to the prior year period primarily reflecting lower variable annuity sales and market depreciation.
Benefits, claims, losses and settlement expenses, which exclude the market impact on structured variable annuities indexed account embedded derivative (net of hedges) and mean reversion related impacts, increased $53 million, or 49%, for the three months ended
AMERIPRISE FINANCIAL, INC.
March 31, 2023 compared to the prior year period primarily reflecting the impact of higher sales of immediate annuities with a life contingent feature and increased volume in SVAs.
Change in fair value of market risk benefits, which exclude the market impact on variable annuity guaranteed benefits (net of hedges), decreased $16 million, or 12%, for the three months ended March 31, 2023 compared to the prior year period reflecting market depreciation on contractual fees.
Corporate & Other
The following table presents the results of operations of our Corporate & Other segment on an adjusted operating basis:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Change |
| 2023 | | 2022 |
| (in millions) | | |
| Revenues | | | | | | | |
| | | | | | | |
| | | | | | | |
| Net investment income | $ | 51 | | | $ | 33 | | | $ | 18 | | | 55 | % |
| Premiums, policy and contract charges | 24 | | | 24 | | | — | | | - |
| Other revenues | 55 | | | 59 | | | (4) | | | (7) | |
| Total revenues | 130 | | | 116 | | | 14 | | | 12 | |
| Banking and deposit interest expense | 4 | | | — | | | 4 | | | - |
| Total net revenues | 126 | | | 116 | | | 10 | | | 9 | |
| Expenses | | | | | | | |
| Distribution expenses | (2) | | | (1) | | | (1) | | | NM |
| Interest credited to fixed accounts | 61 | | | 61 | | | — | | | - |
| Benefits, claims, losses and settlement expenses | 58 | | | 59 | | | (1) | | | (2) | |
| Remeasurement gains and losses of future policy benefit reserves | (2) | | | 1 | | | (3) | | | NM |
| | | | | | | |
| Amortization of deferred acquisition costs | 3 | | | 3 | | | — | | | - |
| Interest and debt expense | 18 | | | 16 | | | 2 | | | 13 | |
| General and administrative expense | 64 | | | 59 | | | 5 | | | 8 | |
| Total expenses | 200 | | | 198 | | | 2 | | | 1 | |
| Adjusted operating loss | $ | (74) | | | $ | (82) | | | $ | 8 | | | 10 | % |
NM Not Meaningful. |
Our Corporate & Other segment includes our closed blocks of LTC insurance and fixed annuity and fixed indexed annuity (“FA”) business.
Our Corporate & Other segment pretax adjusted operating loss excludes net realized investment gains or losses, the market impact on fixed index annuity benefits (net of hedges), the market impact of hedges to offset interest rate and currency changes on unrealized gains or losses for certain investments, block transfer reinsurance transaction impact, gain or loss on disposal of a business that is not considered discontinued operations, integration and restructuring charges, and the impact of consolidating CIEs. Our Corporate & Other segment pretax adjusted operating loss decreased $8 million, or 10%, for the three months ended March 31, 2023 compared to the prior year period.
LTC insurance had a pretax adjusted operating earnings of $8 million for the three months ended March 31, 2023 compared to a pretax adjusted operating loss of $5 million for the prior year period primarily reflecting the benefit of investment portfolio repositioning and higher interest rates on cash positions compared to the prior year period.
FA business had a pretax adjusted operating loss of $9 million for the three months ended March 31, 2023 compared to a pretax adjusted operating loss of $5 million for the prior year period. Fixed deferred annuity account balances declined 9% to $6.9 billion as of March 31, 2023 compared to the prior year period as policies continue to lapse and we previously discontinued new sales of fixed deferred annuities.
Net Revenues
Net investment income, which excludes net realized investment gains or losses, the market impact of hedges to offset interest rate and currency changes on unrealized gains or losses for certain investments, integration and restructuring charges, and the impact of consolidating CIEs, increased $18 million, or 55%, for the three months ended March 31, 2023 compared to the prior year period primarily reflecting the benefit of investment portfolio repositioning and higher interest rates on cash positions.
AMERIPRISE FINANCIAL, INC.
Expenses
General and administrative expense, which excludes integration and restructuring charges, increased $5 million, or 8%, for the three months ended March 31, 2023 compared to the prior year period primarily reflecting the unfavorable mark-to-market impact on share-based compensation expense.
Fair Value Measurements
We report certain assets and liabilities at fair value; specifically, separate account assets, derivatives, market risk benefits, embedded derivatives, and most investments and cash equivalents. Fair value assumes the exchange of assets or liabilities occurs in orderly transactions and is not the result of a forced liquidation or distressed sale. We include actual market prices, or observable inputs, in our fair value measurements to the extent available. Broker quotes are obtained when quotes from pricing services are not available. We validate prices obtained from third parties through a variety of means such as: price variance analysis, subsequent sales testing, stale price review, price comparison across pricing vendors and due diligence reviews of vendors. See Note 13 to the Consolidated Financial Statements for additional information on our fair value measurements.
Fair Value of Liabilities and Nonperformance Risk
Companies are required to measure the fair value of liabilities at the price that would be received to transfer the liability to a market participant (an exit price). Since there is not a market for our obligations of our variable annuity riders, fixed deferred indexed annuities, structured variable annuities, and IUL insurance, we consider the assumptions participants in a hypothetical market would make to reflect an exit price. As a result, we adjust the valuation of variable annuity riders, fixed deferred indexed annuities, structured annuities, and IUL insurance by updating certain contractholder assumptions, adding explicit margins to provide for risk, and adjusting the rates used to discount expected cash flows to reflect a current market estimate of our nonperformance risk. The nonperformance risk adjustment is based on observable market data adjusted to estimate the risk of our life insurance company subsidiaries not fulfilling these liabilities. Consistent with general market conditions, this estimate resulted in a spread over the U.S. Treasury curve as of March 31, 2023. As our estimate of this spread widens or tightens, the liability will decrease or increase. If this nonperformance credit spread moves to a zero spread over the U.S. Treasury curve, the reduction to total equity would be approximately $1.2 billion, net of the reinsurance accrual and income taxes (calculated at the statutory tax rate of 21%), based on March 31, 2023 credit spreads.
Liquidity and Capital Resources
Overview
As of March 31, 2023 and December 31, 2022, we had Available Capital for Capital Adequacy of $5.4 billion and $5.2 billion, respectively. Available Capital for Capital Adequacy best reflects the available capital resources of our core operations.
We maintained substantial liquidity during the three months ended March 31, 2023. At March 31, 2023 and December 31, 2022, we had $8.4 billion and $7.0 billion, respectively, in cash and cash equivalents excluding CIEs and other restricted cash on a consolidated basis.
As of March 31, 2023 and December 31, 2022, the parent company had $770 million and $389 million, respectively, in cash, cash equivalents, and unencumbered liquid securities. Liquid securities predominantly include U.S. government agency mortgage back securities. Additional sources of liquidity at the parent company include a line of credit with an affiliate up to $727 million and an unsecured revolving committed credit facility for up to $1.0 billion that expires in June 2026. Management’s estimate of liquidity available to the parent company in a volatile and uncertain economic environment as of March 31, 2023 was $2.0 billion which includes cash, cash equivalents, unencumbered liquid securities, the line of credit with an affiliate and a portion of the committed credit facility.
Under the terms of the committed credit facility, we can increase the availability to $1.25 billion upon satisfaction of certain approval requirements. Available borrowings under this facility are reduced by any outstanding letters of credit. At March 31, 2023, we had no outstanding borrowings under this credit facility and had $1 million of letters of credit issued against the facility. Our credit facility contains various administrative, reporting, legal and financial covenants. We remain in compliance with all such covenants at March 31, 2023.
In addition, we have access to collateralized borrowings, which may include repurchase agreements, Federal Home Loan Bank (“FHLB”) advances, and advances at the Federal Reserve. Our subsidiaries, RiverSource Life Insurance Company (“RiverSource Life”), and Ameriprise Bank, FSB are members of the FHLB of Des Moines, which provides access to collateralized borrowings. As of March 31, 2023 and December 31, 2022, we had $8.2 billion and $8.0 billion, respectively, under the FHLB facilities, of which $201 million was outstanding as of both March 31, 2023 and December 31, 2022, respectively, and is collateralized with commercial mortgage backed securities and residential mortgage backed securities. In addition, Ameriprise Bank, FSB maintains access to a significant level of collateralized borrowings from the Federal Reserve and the Company has no advances outstanding.
There have been no material changes to our contractual obligations disclosed in our 2022 10-K.
AMERIPRISE FINANCIAL, INC.
We issued $750 million of 5.150% unsecured senior notes on March 9, 2023. See Note 12 to our Consolidated Financial Statements for further information about our long-term debt maturities, including $750 million maturing within the 2023 calendar year.
We believe cash flows from operating activities, available cash balances, our availability of internal and external borrowings and dividends from our subsidiaries will be sufficient to fund our short-term and long-term operating liquidity needs and stress requirements.
On August 16, 2022, federal legislation commonly referred to as the Inflation Reduction Act of 2022 (“IRA”) was enacted. We have evaluated the tax provisions of the IRA, the most significant of which are the corporate alternative minimum tax (“CAMT”) and the share repurchase excise tax. Both the CAMT and share repurchase tax are effective beginning in 2023. We expect to be an applicable corporation required to compute CAMT; however, based on current estimates, we do not believe we will be liable for the CAMT in 2023 and therefore have not recorded a liability. We will be a covered corporation subject to the share repurchase excise tax. As the Internal Revenue Service issues additional guidance related to the IRA, we will continue to evaluate any impact to our consolidated financial statements.
Dividends from Subsidiaries
Ameriprise Financial is primarily a parent holding company for the operations carried out by our wholly-owned subsidiaries. Because of our holding company structure, our ability to meet our cash requirements, including the payment of dividends on our common stock, substantially depends upon the receipt of dividends or return of capital from our subsidiaries, particularly our life insurance subsidiary, RiverSource Life, our face-amount certificate subsidiary, Ameriprise Certificate Company (“ACC”), AMPF Holding, LLC, which is the parent company of our retail introducing broker-dealer subsidiary, Ameriprise Financial Services, LLC (“AFS”) and our clearing broker-dealer subsidiary, American Enterprise Investment Services, Inc. (“AEIS”), our transfer agent subsidiary, Columbia Management Investment Services Corp., our investment advisory company, Columbia Management Investment Advisers, LLC, TAM UK International Holdings Ltd, which includes Ameriprise International Holdings GmbH within its organizational structure, and Columbia Threadneedle Investments UK International Ltd. The payment of dividends by many of our subsidiaries is restricted and certain of our subsidiaries are subject to regulatory capital requirements.
Actual capital and regulatory capital requirements for our wholly owned subsidiaries subject to regulatory capital requirements were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Actual Capital | | Regulatory Capital Requirements |
| March 31, 2023 | | December 31, 2022 | March 31, 2023 | | December 31, 2022 |
| (in millions) |
RiverSource Life (1) | $ | 3,108 | | | $ | 3,103 | | | N/A | | $ | 571 | |
RiverSource Life of NY (1) | 324 | | | 320 | | | N/A | | 40 | |
ACC (3)(4) | 636 | | | 534 | | | $ | 592 | | | 496 | |
TAM UK International Holdings Ltd (5) | 512 | | | 437 | | | 214 | | | 214 | |
| | | | | | | |
Ameriprise Bank, FSB (6) | 1,678 | | | 1,542 | | | 1,045 | | | 999 | |
AFS (2)(3) | 150 | | | 90 | | | # | | # |
Ameriprise Captive Insurance Company (2) | 38 | | | 38 | | | 14 | | | 10 | |
Ameriprise Trust Company (2) | 56 | | | 54 | | | 40 | | | 38 | |
AEIS (2)(3) | 233 | | | 208 | | | 28 | | | 26 | |
RiverSource Distributors, Inc. (2)(3) | 12 | | | 12 | | | # | | # |
Columbia Management Investment Distributors, Inc. (2)(3) | 19 | | | 17 | | | # | | # |
Columbia Threadneedle Investments UK International Ltd. (5) | 337 | | | 330 | | | 155 | | | 152 | |
N/A Not applicable as only required to be calculated annually.
# Amounts are less than $1 million.
(1) Actual capital is determined on a statutory basis. Regulatory capital requirement is the company action level and is based on the statutory risk-based capital filing.
(2) Regulatory capital requirement is based on the applicable regulatory requirement, calculated as of March 31, 2023 and December 31, 2022.
(3) Actual capital is determined on an adjusted GAAP basis.
(4) ACC is required to hold capital in compliance with the Minnesota Department of Commerce and SEC capital requirements.
(5) Actual capital and regulatory capital requirements are determined in accordance with U.K. regulatory legislation.
(6) Actual capital and regulatory capital requirements are determined in accordance with rules defined under Basel III capital framework. As permitted, AOCI is excluded from the calculation of regulatory capital.
In addition to the particular regulations restricting dividend payments and establishing subsidiary capitalization requirements, we take into account the overall health of the business, capital levels and risk management considerations in determining a strategy for
AMERIPRISE FINANCIAL, INC.
payments to our parent holding company from our subsidiaries, and in deciding to use cash to make capital contributions to our subsidiaries.
During the three months ended March 31, 2023, the parent holding company received cash dividends or a return of capital from its subsidiaries of $605 million (including $200 million from RiverSource Life) and contributed cash to its subsidiaries of $138 million. During the three months ended March 31, 2022, the parent holding company received cash dividends or a return of capital from its subsidiaries of $777 million (including $300 million from RiverSource Life) and contributed cash to its subsidiaries of $129 million (including $95 million to Ameriprise Bank, FSB).
In 2009, RiverSource Life established an agreement to protect its exposure to Genworth Life Insurance Company (“GLIC”) for its reinsured LTC. In 2016, substantial enhancements to this reinsurance protection agreement were finalized. The terms of these confidential provisions within the agreement have been shared, in the normal course of regular reviews, with our domiciliary regulator and rating agencies. GLIC is domiciled in Delaware, so in the event GLIC was subjected to rehabilitation or insolvency proceedings, such proceedings would be located in (and governed by) Delaware laws. Delaware courts have a long tradition of respecting commercial and reinsurance affairs as well as contracts among sophisticated parties. Similar credit protections to what we have with GLIC have been tested and respected in Delaware and elsewhere in the United States, and as a result we believe our credit protections would be respected even in the unlikely event that GLIC becomes subject to rehabilitation or insolvency proceedings in Delaware. Accordingly, while no credit protections are perfect, we believe the correct way to think about the risks represented by our counterparty credit exposure to GLIC is not the full amount of the gross liability that GLIC reinsures, but a much smaller net exposure to GLIC (if any that might exist after taking into account our credit protections). Thus, management believes that our agreement and offsetting non-LTC legacy arrangements with Genworth will enable RiverSource Life to recover on all net exposure in all material respects in the event of a rehabilitation or insolvency of GLIC.
Dividends Paid to Shareholders and Share Repurchases
We paid regular quarterly dividends to our shareholders totaling $138 million and $133 million for the three months ended March 31, 2023 and 2022, respectively. On April 24, 2023, we announced an increase in our quarterly dividend to $1.35 per common share. The dividend will be paid on May 19, 2023 to our shareholders of record at the close of business on May 8, 2023.
In January 2022, our Board of Directors authorized us to repurchase up to $3.0 billion for the repurchase of our common stock through March 31, 2024. As of March 31, 2023, we had $1.1 billion remaining under the share repurchase authorization. We intend to fund share repurchases through existing working capital, future earnings and other customary financing methods. The share repurchase program does not require the purchase of any minimum number of shares, and depending on market conditions and other factors, these purchases may be commenced or suspended at any time without prior notice. Acquisitions under the share repurchase program may be made in the open market, through privately negotiated transactions or block trades or other means. During the three months ended March 31, 2023, we repurchased a total of 1.6 million shares of our common stock at an average price of $322.54 per share.
Cash Flows
Cash flows of CIEs and restricted and segregated cash and cash equivalents are reflected in our cash flows provided by (used in) operating activities, investing activities and financing activities. Cash held by CIEs is not available for general use by Ameriprise Financial, nor is Ameriprise Financial cash available for general use by its CIEs. Cash and cash equivalents segregated under federal and other regulations is held for the exclusive benefit of our brokerage customers and is not available for general use by Ameriprise Financial.
Operating Activities
Net cash provided by operating activities increased $647 million to $1.1 billion for the three months ended March 31, 2023 compared to $409 million for the prior year period primarily reflecting a $1.3 billion increase in policyholder account balances, future policy benefits and claims and market risk benefits, partially offset by a $434 million decrease in brokerage deposits and a $408 million decrease in net income.
Investing Activities
Our investing activities primarily relate to our Available-for-Sale investment portfolio and in recent quarters is significantly affected by the net flows of our face amount and bank deposit activity.
Net cash used in investing activities increased $1.5 billion to $3.1 billion for the three months ended March 31, 2023 compared to $1.7 billion for the prior year period primarily reflecting a $1.1 billion increase in cash used for purchases of Available-for-Sale securities, a $745 million decrease in proceeds from maturities, sinking fund payments and calls of Available-for-Sale securities, partially offset by a $313 million increase in proceeds from sales of Available-for-Sale securities.
Financing Activities
Net cash provided by financing activities increased $2.6 billion to $3.2 billion for the three months ended March 31, 2023 compared to $518 million for the prior year period primarily reflecting a $1.9 billion increase in net cash flows from investment certificates and $741 million in proceeds from our long-term debt issuance.
AMERIPRISE FINANCIAL, INC.
Forward-Looking Statements
This report contains forward-looking statements that reflect management’s plans, estimates and beliefs. Actual results could differ materially from those described in these forward-looking statements. Examples of such forward-looking statements include:
•statements of the Company’s plans, intentions, positioning, expectations, objectives or goals, including those relating to asset flows, mass affluent and affluent client acquisition strategy, client retention and growth of our client base, financial advisor productivity, retention, recruiting and enrollments, the introduction, cessation, terms or pricing of new or existing products and services, acquisition integration, benefits and claims expenses, general and administrative costs, consolidated tax rate, return of capital to shareholders, debt repayment and excess capital position and financial flexibility to capture additional growth opportunities;
•statements about the expected trend in the shift to lower-risk products, including the exit from variable annuities with living benefit riders and the discontinuance of new sales of universal life insurance with secondary guarantees;
•statements about the outcomes from the application to convert Ameriprise Bank to a state-chartered bank and national trust bank or the anticipated deposit growth or impacts from possible future interest rate increases;
•other statements about future economic performance, the performance of equity markets and interest rate variations and the economic performance of the United States and of global markets; and
•statements of assumptions underlying such statements.
The words “believe,” “expect,” “anticipate,” “optimistic,” “intend,” “plan,” “aim,” “will,” “may,” “should,” “could,” “would,” “likely,” “forecast,” “on track,” “project,” “continue,” “able to remain,” “resume,” “deliver,” “develop,” “evolve,” “drive,” “enable,” “flexibility,” “scenario,” “case”, “appear”, “expand” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from such statements.
Such factors include, but are not limited to:
•market fluctuations and general economic and political factors, including volatility in the U.S. and global market conditions, client behavior and volatility in the markets for our products;
•changes in interest rates;
•adverse capital and credit market conditions or any downgrade in our credit ratings;
•effects of competition and our larger competitors’ economies of scale;
•declines in our investment management performance;
•our ability to compete in attracting and retaining talent, including financial advisors;
•impairment, negative performance or default by financial institutions or other counterparties;
•the ability to maintain our unaffiliated third-party distribution channels and the impacts of sales of unaffiliated products;
•changes in valuation of securities and investments included in our assets;
•the determination of the amount of allowances taken on loans and investments;
•the illiquidity of our investments;
•effects of the elimination of LIBOR on, and value of, securities and other assets and liabilities tied to LIBOR;
•failures by other insurers that lead to higher assessments we owe to state insurance guaranty funds;
•failures or defaults by counterparties to our reinsurance arrangements;
•inadequate reserves for future policy benefits and claims or for future redemptions and maturities;
•deviations from our assumptions regarding morbidity, mortality and persistency affecting our insurance profitability;
•changes to our reputation arising from employee or advisor misconduct or otherwise;
•direct or indirect effects of or responses to climate change;
•interruptions or other failures in our operating systems and networks, including errors or failures caused by third-party service providers, interference or third-party attacks;
•interruptions or other errors in our telecommunications or data processing systems;
• identification and mitigation of risk exposure in market environments, new products, vendors and other types of risk;
• ability of our subsidiaries to transfer funds to us to pay dividends;
• changes in exchange rates and other risks in connection with our international operations and earnings and income generated overseas;
• occurrence of natural or man-made disasters and catastrophes;
• risks in acquisition transactions, such as the integration of the BMO Global Asset Management (EMEA) business, or other potential strategic acquisitions or divestitures;
• legal and regulatory actions brought against us;
• changes to laws and regulations that govern operation of our business;
• supervision by bank regulators and related regulatory and prudential standards as a savings and loan holding company that may limit our activities and strategies;
AMERIPRISE FINANCIAL, INC.
• changes in corporate tax laws and regulations and interpretations and determinations of tax laws impacting our products;
• protection of our intellectual property and claims we infringe the intellectual property of others; and
•changes in and the adoption of new accounting standards.
Management cautions the reader that the foregoing list of factors is not exhaustive. There may also be other risks that management is unable to predict at this time that may cause actual results to differ materially from those in forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. Management undertakes no obligation to update publicly or revise any forward-looking statements. The foregoing list of factors should be read in conjunction with the “Risk Factors” discussion included in Part I, Item 1A of our 2022 10-K.
Ameriprise Financial announces financial and other information to investors through the Company’s investor relations website at ir.ameriprise.com, as well as SEC filings, press releases, public conference calls and webcasts. Investors and others interested in the company are encouraged to visit the investor relations website from time to time, as information is updated and new information is posted. The website also allows users to sign up for automatic notifications in the event new materials are posted. The information found on the website is not incorporated by reference into this report or in any other report or document the Company furnishes or files with the SEC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Our primary market risk exposures are interest rate, equity price, foreign currency exchange rate and credit risk. Equity price and interest rate fluctuations can have a significant impact on our results of operations, primarily due to the effects they have on the asset management and other asset-based fees we earn, the spread income generated on our brokerage client cash balances, banking deposits, face-amount certificate products, fixed portion of our variable annuities and variable insurance contracts, fixed annuity and insurance contracts, the value of market risk benefits and other liabilities associated with our variable annuities and the value of derivatives held to hedge related benefits.
The variable annuity guarantees continue to be managed by utilizing a hedging program which attempts to match the sensitivity of the assets with the sensitivity of the benefits. This approach works with the premise that matched sensitivities will produce a highly effective hedging result. Our comprehensive hedging program focuses mainly on first order sensitivities of assets and liabilities: Equity Market Level (Delta), Interest Rate Level (Rho) and Volatility (Vega). Additionally, various second order sensitivities are managed. We use various options, swaptions, swaps and futures to manage risk exposures. The exposures are measured and monitored daily, and adjustments to the hedge portfolio are made as necessary.
To evaluate interest rate and equity price risk we perform sensitivity testing which measures the impact on pretax income from the sources listed below for a 12-month period following a hypothetical 100 basis point increase in interest rates or a hypothetical 10% decline in equity prices. The interest rate risk test assumes a sudden 100 basis point parallel shift in the yield curve, with rates then staying at those levels for the next 12 months. The equity price risk test assumes a sudden 10% drop in equity prices, with equity prices then staying at those levels for the next 12 months. In estimating the values of variable annuities, indexed annuities, stock market certificates, indexed universal life (“IUL”) insurance and the associated hedging instruments, we assume no change in implied market volatility despite the 10% drop in equity prices.
The following tables present our estimate of the impact on pretax income from the above defined hypothetical market movements as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 |
| Equity Price Decline 10% | | Equity Price Exposure to Pretax Income | |
| Before Hedge Impact | | Hedge Impact | | Net Impact |
| | | (in millions) | |
Asset-based management and distribution fees (1) | | $ | (300) | | | $ | 3 | | | $ | (297) | | |
| | | | | | | |
| Variable annuity and structured variable annuity benefits: | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Market risk benefits | | (986) | | | 736 | | | (250) | | |
| Indexing feature for structured variable annuities | | 568 | | | (335) | | | 233 | | |
| | | | | | | |
| Total variable annuity and structured variable annuity benefits | | (418) | | | 401 | | | (17) | | |
| | | | | | | |
| | | | | | | |
| Certificates | | 2 | | | (2) | | | — | | |
| IUL insurance | | 44 | | | (42) | | | 2 | | |
| Total | | $ | (672) | | | $ | 360 | | | $ | (312) | | (2) |
| |
AMERIPRISE FINANCIAL, INC.
| | | | | | | | | | | | | | | | | | | | | | | |
| Interest Rate Increase 100 Basis Points | | Interest Rate Exposure to Pretax Income | |
| Before Hedge Impact | | Hedge Impact | | Net Impact |
| | (in millions) | |
Asset-based management and distribution fees (1) | | $ | (54) | | | $ | — | | | $ | (54) | | |
| Variable annuity and structured variable annuity benefits: | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Market risk benefits | | 1,602 | | | (1,171) | | | 431 | | |
| Indexing feature for structured variable annuities | | (29) | | | 91 | | | 62 | | |
| | | | | | | |
| Total variable annuity and structured variable annuity benefits | | 1,573 | | | (1,080) | | | 493 | | |
| | | | | | | |
| Fixed annuities, fixed insurance and fixed portion of variable annuities and variable insurance products | | 18 | | | — | | | 18 | | |
| Banking deposits | | 32 | | | — | | | 32 | | |
| Brokerage client cash balances | | 98 | | | — | | | 98 | | |
| | | | | | | |
| Certificates | | (3) | | | — | | | (3) | | |
| IUL insurance | | 12 | | | 2 | | | 14 | | |
| Total | | $ | 1,676 | | | $ | (1,078) | | | $ | 598 | | |
| |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Equity Price Decline 10% | | Equity Price Exposure to Pretax Income | |
| Before Hedge Impact | | Hedge Impact | | Net Impact |
| | | (in millions) | |
Asset-based management and distribution fees (1) | | $ | (285) | | | $ | 2 | | | $ | (283) | | |
| | | | | | | |
| Variable annuity and structured variable annuity benefits: | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Market risk benefits | | (870) | | | 648 | | | (222) | | |
| Indexing feature for structured variable annuities | | 494 | | | (291) | | | 203 | | |
| | | | | | | |
| Total variable annuity and structured variable annuity benefits | | (376) | | | 357 | | | (19) | | |
| | | | | | | |
| | | | | | | |
| Certificates | | 1 | | | (1) | | | — | | |
| IUL insurance | | 39 | | | (21) | | | 18 | | |
| Total | | $ | (621) | | | $ | 337 | | | $ | (284) | | (2) |
| |
| | | | | | | | | | | | | | | | | | | | | | | |
| Interest Rate Increase 100 Basis Points | | Interest Rate Exposure to Pretax Income | |
| Before Hedge Impact | | Hedge Impact | | Net Impact |
| | (in millions) | |
Asset-based management and distribution fees (1) | | $ | (53) | | | $ | — | | | $ | (53) | | |
| Variable annuity and structured variable annuity benefits: | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Market risk benefits | | 1,484 | | | (1,028) | | | 456 | | |
| Indexing feature for structured variable annuities | | (29) | | | 82 | | | 53 | | |
| | | | | | | |
| Total variable annuity and structured variable annuity benefits | | 1,455 | | | (946) | | | 509 | | |
| | | | | | | |
| Fixed annuities, fixed insurance and fixed portion of variable annuities and variable insurance products | | 25 | | | — | | | 25 | | |
| Banking deposits | | 28 | | | — | | | 28 | | |
| Brokerage client cash balances | | 146 | | | — | | | 146 | | |
| | | | | | | |
| Certificates | | (9) | | | — | | | (9) | | |
| IUL insurance | | 12 | | | 1 | | | 13 | | |
| Total | | $ | 1,604 | | | $ | (945) | | | $ | 659 | | |
| |
(1) Excludes incentive income which is impacted by market and fund performance during the period and cannot be readily estimated.
(2) Represents the net impact to pretax income. The estimated net impact to pretax adjusted operating income is $(297) million as of March 31, 2023 and $(283) million as of December 31, 2022, respectively.
Net impacts shown in the above tables from market risk benefits result largely from differences between the liability valuation basis and the hedging basis. Liabilities are valued using fair value accounting principles, with risk margins incorporated in contractholder behavior assumptions. Our hedging is based on our determination of economic risk, which excludes certain items in the liability valuation.
Actual results could and likely will differ materially from those illustrated above as fair values have a number of estimates and assumptions. For example, the illustration above includes assuming that implied market volatility does not change when equity prices fall by 10% and that the 100 basis point increase in interest rates is a parallel shift of the yield curve. Furthermore, we have not tried to
AMERIPRISE FINANCIAL, INC.
anticipate changes in client preferences for different types of assets or other changes in client behavior, nor have we tried to anticipate all strategic actions management might take to increase revenues or reduce expenses in the above scenarios.
The selection of a 100 basis point interest rate increase as well as a 10% equity price decline should not be construed as a prediction of future market events. Impacts of larger or smaller changes in interest rates or equity prices will not be proportional to those shown for a 100 basis point increase in interest rates or a 10% decline in equity prices.
Asset-Based Management and Distribution Fees
We earn asset-based management fees and distribution fees on our assets under management. As of March 31, 2023, the value of our assets under management was $1.0 trillion. These sources of revenue are subject to both interest rate and equity price risk since the value of these assets and the fees they earn fluctuate inversely with interest rates and directly with equity prices. We currently only hedge certain equity price risk for this exposure, primarily using futures and swaps. We currently do not hedge any of the interest rate risk for this exposure.
Market Risk Benefits
The total contract value of all variable annuities as of March 31, 2023 was $76.8 billion. See Note 11 for details of the reserves associated with market risk benefits. The changes in fair value of variable annuity market risk benefits are recorded through earnings, with the exception of the portion of the change in fair value due to a change in the Company’s nonperformance risk, which is recognized in other comprehensive income. Fair value is calculated based on projected, discounted cash flows over the life of the contract, including projected, discounted benefits and fees.
Equity Price Risk
The variable annuity guaranteed benefits guarantee payouts to the annuity holder under certain specific conditions regardless of the performance of the investment assets. For this reason, when equity prices decline, the returns from the separate account assets coupled with guaranteed benefit fees from annuity holders may not be sufficient to fund expected payouts. In that case, reserves must be increased with a negative impact to earnings.
The core derivative instruments with which we hedge the equity price of risk these benefits are longer dated put and call options; these core instruments are supplemented with equity futures and total return swaps. See Note 15 to our Consolidated Financial Statements for further information on our derivative instruments.
Interest Rate Risk
Increases in interest rates reduce the fair value of the liabilities and may result in market risk benefits in an asset position. The interest rate exposure is hedged with a portfolio of interest rate swaps, futures and swaptions. We have entered into interest rate swaps according to risk exposures along maturities, thus creating both fixed rate payor and variable rate payor terms. If interest rates were to increase, we would have to pay more to the swap counterparty, and the fair value of our equity puts would decrease, resulting in a negative impact to our pretax income.
Structured Variable Annuities
Structured variable annuities offer the contractholder the ability to allocate account value to either an account that earns fixed interest (fixed account) or an account that is impacted by the performance of various equity indices (indexed account). Our earnings are based upon the spread between investment income earned and the credits made to the fixed account and benefits reflected in an indexed account of the structured variable annuities. As of March 31, 2023, we had $7.4 billion in liabilities related to structured variable annuities.
Equity Price Risk
The equity-linked return to contractholders creates equity price risk as the amount paid to contractholders depends on changes in equity prices. The equity price risk for structured variable annuities is evaluated together with the variable annuity riders as part of a hedge program using the derivative instruments consistent with our hedging on variable annuity riders.
Interest Rate Risk
The fair value of the embedded derivative associated with structured variable annuities is based on a discounted cash flow approach. Changes in interest rates impact the discounting of the embedded derivative liability. The spread between the investment income earned and amounts transferred to contractholders is also affected by changes in interest rates. These interest rate risks associated with structured variable annuities are not currently hedged.
Fixed Annuities, Fixed Insurance and Fixed Portion of Variable Annuities and Variable Insurance Contracts
Our earnings from fixed deferred annuities, fixed insurance, and the fixed portion of variable annuities and variable insurance contracts are based upon the spread between rates earned on assets held and the rates at which interest is credited to accounts. We primarily invest in fixed rate securities to fund the rate credited to clients. We guarantee an interest rate to the holders of these products. Investment assets and client liabilities generally differ as it relates to basis, repricing or maturity characteristics. Rates credited to clients’ accounts generally reset at shorter intervals than the yield on the underlying investments. Therefore, in an
AMERIPRISE FINANCIAL, INC.
increasing interest rate environment, higher interest rates may be reflected in crediting rates to clients sooner than in rates earned on invested assets, which could result in a reduced spread between the two rates, reduced earned income and a negative impact on pretax income. While interest rates under the current environment have relieved some pressure from the liability guaranteed minimum interest rates (“GMIRs”), there are still some GMIRs above current levels. Hence, liability credited rates will move more slowly under a modest rise in interest rates while projected asset purchases would capture the full increase in interest rates. This dynamic would result in widening spreads under a modestly rising rate scenario given the current relationship between the current level of interest rates and the underlying GMIRs on the business. Of the $34.9 billion in Policyholder account balances, future policy benefits and claims as of March 31, 2023, $17.8 billion is related to liabilities created by these products. We do not hedge this exposure.
As a result of the current market environment, reinvestment yields are becoming more aligned with the current portfolio yield. We would expect the recent decline in our portfolio income yields to slow and begin to stabilize in future periods under the current environment. The carrying value and weighted average yield of non-structured fixed maturity securities and commercial mortgage loans that may generate proceeds to reinvest through March 31, 2025 due to prepayment, maturity or call activity at the option of the issuer, excluding securities with a make-whole provision, were $4.3 billion and 4.5%, respectively, as of March 31, 2023. In addition, residential mortgage backed securities, which can be subject to prepayment risk under a low interest rate environment, totaled $17.7 billion and had a weighted average yield of 3.9% as of March 31, 2023. While these amounts represent investments that could be subject to reinvestment risk, it is also possible that these investments will be used to fund liabilities or may not be prepaid and will remain invested at their current yields. In addition to the interest rate environment, the mix of benefit payments versus product sales as well as the timing and volumes associated with such mix may impact our investment yield. Furthermore, reinvestment activities and the associated investment yield may also be impacted by corporate strategies implemented at management’s discretion. The average yield for investment purchases during the year ended March 31, 2023 was approximately 5.6%.
The reinvestment of proceeds from maturities, calls and prepayments at rates near the current portfolio yield will have limited impact to future operating results. In this volatile rate environment, we assess reinvestment risk in our investment portfolio and monitor this risk in accordance with our asset/liability management framework. In addition, we may update the crediting rates on our fixed products when warranted, subject to guaranteed minimums.
See Note 9 for more information on the account values of fixed deferred annuities, fixed insurance, and the fixed portion of variable annuities and variable insurance contracts by range of GMIRs and the range of the difference between rates credited to policyholders and contractholders as of March 31, 2023 and December 31, 2022 and the respective guaranteed minimums, as well as the percentage of account values subject to rate reset in the time period indicated.
Banking Deposits and Brokerage Client Cash Balances
We pay interest on banking deposits and certain brokerage client cash balances and have the ability to reset these rates from time to time based on prevailing economic and business conditions. We earn revenue to fund the interest paid from interest-earning assets or fees from off-balance sheet deposits at Federal Deposit Insurance Corporation insured institutions, which are indexed to short-term interest rates. In general, the change in interest paid lags the change in revenues earned.
Certificate Products
Fixed Rate Certificates
We have interest rate risk from our investment certificates generally ranging in amounts from $1 thousand to $2 million with interest crediting rate terms ranging from 3 to 36 months. We guarantee an interest rate to the holders of these products. Payments collected from clients are primarily invested in fixed income securities to fund the client credited rate with the spread between the rate earned from investments and the rate credited to clients recorded as earned income. Client liabilities and investment assets generally differ as it relates to basis, repricing or maturity characteristics. Rates credited to clients generally reset at shorter intervals than the yield on underlying investments. This exposure is not currently hedged although we monitor our investment strategy and make modifications based on our changing liabilities and the expected interest rate environment. Of the $33.9 billion in customer deposits as of March 31, 2023, $10.9 billion related to reserves for our fixed rate certificate products.
Stock Market Certificates
Stock market certificates are purchased for amounts generally from $1 thousand to $2 million for terms of 52 weeks, 104 weeks or 156 weeks, which can be extended to a maximum of 15 years depending on the term. For each term the certificate holder can choose to participate 100% in any percentage increase in the S&P 500® Index up to a maximum return or choose partial participation in any increase in the S&P 500® Index plus a fixed rate of interest guaranteed in advance. If partial participation is selected, the total of equity-linked return and guaranteed rate of interest cannot exceed the maximum return. Liabilities for our stock market certificates are included in Customer deposits. As of March 31, 2023, we had $225 million in reserves related to stock market certificates. The equity-linked return to investors creates equity price risk exposure. We seek to minimize this exposure with purchased futures and call spreads that replicate what we must credit to client accounts. This risk continues to be fully hedged. Stock market certificates have some interest rate risk as changes in interest rates affect the fair value of the payout to be made to the certificate holder. This risk is not currently hedged and was immaterial as of March 31, 2023.
AMERIPRISE FINANCIAL, INC.
Indexed Universal Life
IUL insurance is similar to UL in many regards, although the rate of credited interest above the minimum guarantee for funds allocated to an indexed account is linked to the performance of the specified index for the indexed account (subject to stated account parameters, which include a cap and floor, or a spread and floor). The policyholder may allocate all or a portion of the policy value to a fixed or any available indexed account. As of March 31, 2023, we had $2.5 billion in liabilities related to the indexed accounts of IUL.
Equity Price Risk
The equity-linked return to investors creates equity price risk as the amount credited depends on changes in equity prices. Most of the proceeds received from IUL insurance are invested in fixed income securities. To hedge the equity exposure, a portion of the investment earnings received from the fixed income securities is used to purchase call spreads which generate returns to replicate what we must credit to client accounts.
Interest Rate Risk
As mentioned above, most of the proceeds received from IUL insurance are invested in fixed income securities with the return on those investments intended to fund the purchase of call spreads and options. There are two risks relating to interest rates. First, we have the risk that investment returns are such that we do not have enough investment income to purchase the needed call spreads. Second, in the event the policy is surrendered we pay out a book value surrender amount and there is a risk that we will incur a loss upon having to sell the fixed income securities backing the liability (if interest rates have risen). This risk is not currently hedged.
Foreign Currency Risk
We have foreign currency risk through our net investment in foreign subsidiaries and our operations in foreign countries. We are primarily exposed to changes in British Pounds related to our net investment in Threadneedle, which was approximately £1.4 billion as of March 31, 2023. We also have exposure related to operations in foreign countries to Euros, Indian Rupees and other currencies. We monitor the foreign exchange rates that we have exposure to and enter into foreign currency forward contracts to mitigate risk when economically prudent. As of March 31, 2023, the notional value of outstanding contracts and our remaining foreign currency risk related to operations in foreign countries were not material.
Interest Rate Risk on External Debt
The stated interest rates on our $3.6 billion of senior unsecured notes are fixed.
Credit Risk
We are exposed to credit risk within our investment portfolio, including our loan portfolio, and through our derivative and reinsurance activities. Credit risk relates to the uncertainty of an obligor’s continued ability to make timely payments in accordance with the contractual terms of the financial instrument or contract. We consider our total potential credit exposure to each counterparty and its affiliates to ensure compliance with pre-established credit guidelines at the time we enter into a transaction which would potentially increase our credit risk. These guidelines and oversight of credit risk are managed through a comprehensive enterprise risk management program that includes members of senior management.
We manage the risk of credit-related losses in the event of nonperformance by counterparties by applying disciplined fundamental credit analysis and underwriting standards, prudently limiting exposures to lower-quality, higher-yielding investments, and diversifying exposures by issuer, industry, region and underlying investment type. We remain exposed to occasional adverse cyclical economic downturns during which default rates may be significantly higher than the long-term historical average used in pricing.
We manage our credit risk related to over-the-counter derivatives by entering into transactions with creditworthy counterparties, maintaining collateral arrangements and through the use of master netting arrangements that provide for a single net payment to be made by one counterparty to another at each due date and upon termination. Generally, our current credit exposure on over-the-counter derivative contracts is limited to a derivative counterparty’s net positive fair value of derivative contracts after taking into consideration the existence of netting arrangements and any collateral received. This exposure is monitored and managed to an acceptable threshold level.
The counterparty risk for centrally cleared over-the-counter derivatives is transferred to a central clearing party through contract novation. The central clearing party requires both daily settlement of mark-to-market and initial margin. Because the central clearing party monitors open positions and adjusts collateral requirements daily, we have minimal credit exposure from such derivative instruments.
Exchange-traded derivatives are effected through regulated exchanges that require contract standardization and initial margin to transact through the exchange. Because exchange-traded futures are marked to market and generally cash settled on a daily basis, we have minimal exposure to credit-related losses in the event of nonperformance by counterparties to such derivative instruments. Other exchange-traded derivatives would be exposed to nonperformance by counterparties for amounts in excess of initial margin requirements only if the exchange is unable to fulfill the contract.
AMERIPRISE FINANCIAL, INC.
We manage our credit risk related to reinsurance treaties by evaluating the financial condition of reinsurance counterparties prior to entering into new reinsurance treaties. In addition, we regularly evaluate their financial strength during the terms of the treaties. As of March 31, 2023, our largest reinsurance credit risks are related to coinsurance treaties with Commonwealth and with life insurance subsidiaries of Genworth Financial, Inc.
