Ameriprise Financial Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
July 26, 2022

Key Takeaways

  • Solid Q2 results: despite market headwinds, assets under management and administration declined 3% to $1.2 trillion, revenues rose 3% to $3.5 billion, EPS grew 10% to $5.81 and ROE reached 48.8%.
  • Advice & Wealth Management saw $8.6 billion in client net inflows, advisor productivity up 11% to $814K per advisor, and cash balances jumped to $47 billion, with $2.3 billion shifted to Ameriprise Bank to boost future yields.
  • Asset Management faced $3.1 billion of outflows (including $1.2 billion of legacy insurance) and flat revenues amid market volatility, while integrating BMO EMEA drove international assets to 36% of AUM and set a new margin target of 31–35%.
  • Retirement & Protection Solutions delivered $179 million in earnings but saw life sales down 23% and fully exited living-benefit annuities, reducing account value exposure to living benefits below 60%.
  • Ameriprise returned $600 million to shareholders in Q2 and holds $1.6 billion of excess capital, remaining on track to return ~90% of 2022 adjusted earnings, supported by strong free cash flow.
AI Generated. May Contain Errors.
Earnings Conference Call
Ameriprise Financial Q2 2022
00:00 / 00:00

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Operator

Q2 2022 earnings call. My name is Vanessa, and I will be your operator for today's call.

Operator

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. During the question-and-answer session, if you have a question, please press zero then one on your touchtone phone. As a reminder, this conference is being recorded.

Operator

I will now turn the call over to Alicia Charity. You may begin.

Alicia LANCASTER
Alicia LANCASTER
VP of Investor Relations at Ameriprise Financial

Thank you and good morning.

Alicia LANCASTER
Alicia LANCASTER
VP of Investor Relations at Ameriprise Financial

Welcome to Ameriprise Financial's Q2 earnings call.

Alicia LANCASTER
Alicia LANCASTER
VP of Investor Relations at Ameriprise Financial

On the call with me today are Jim Cracchiolo, Chairman and CEO, and Walter Berman, Chief Financial Officer. Following their remarks, we'd be happy to take your questions. Turning to our earnings presentation materials that are available on our website, on slide two you'll see a discussion of forward-looking statements.

Alicia LANCASTER
Alicia LANCASTER
VP of Investor Relations at Ameriprise Financial

Specifically, during the call, you will hear references to various non-GAAP financial measures, which we believe provide insight into the company's operations.

Alicia LANCASTER
Alicia LANCASTER
VP of Investor Relations at Ameriprise Financial

Reconciliation of non-GAAP numbers to their respective GAAP numbers can be found in today's materials and on our website. Some statements that we make on this call may be forward-looking, reflecting management's expectations about future events and overall operating plans and performance.

Alicia LANCASTER
Alicia LANCASTER
VP of Investor Relations at Ameriprise Financial

These forward-looking statements speak only as of today's date and involve a number of risks and uncertainties.

Alicia LANCASTER
Alicia LANCASTER
VP of Investor Relations at Ameriprise Financial

A sample list of factors and risks that could cause actual results to be materially different from forward-looking statements can be found in our Q2 2022 earnings release, our 2021 Annual Report to Shareholders, and our 2021 10-K report. We make no obligation to publicly update or revise these forward-looking statements. On slide 3, you see our GAAP financial results at the top of the page for the Q2.

Alicia LANCASTER
Alicia LANCASTER
VP of Investor Relations at Ameriprise Financial

Below that, you'll see our adjusted operating results, which management believes enhances the understanding of our business by reflecting the underlying performance of our core operations and facilitates a more meaningful trend analysis.

Alicia LANCASTER
Alicia LANCASTER
VP of Investor Relations at Ameriprise Financial

Many of the comments that management makes on the call today will focus on adjusted operating results. With that, I'll turn it over to Jim.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

Good morning, and welcome to our Q2 earnings call.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

Ameriprise performed well in a significantly more challenging environment and delivered a solid quarter. Clearly, high inflation in the U.S. and globally, as well as geopolitical uncertainty, continued to cause greater volatility and pressured markets. With the Fed raising rates and concern about a potential recession, markets are experiencing headwinds, and that's weighing on investor sentiment.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

While the environment impacted our results, particularly in asset management, we delivered strong profitability, good client flows in wealth management, and strong results at the bank. We're continuing to serve clients well, managing our expenses prudently, and investing in the business to drive near and longer-term growth. Let's move to Q2 results. Compared to a year ago, total assets under management and administration declined 3% to $1.2 trillion.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

We benefited from the BMO EMEA acquisition and the cumulative impact of Ameriprise client net inflows, but assets were affected by a negative foreign exchange and the steep decline in both equity and fixed income markets. In terms of adjusted operating financials, revenues grew 3% to $3.5 billion as good business performance offset market impacts.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

With that, earnings were up 4%, with EPS up 10% to $5.81. ROE was very strong at 48.8% compared to 37.5% a year ago. I'll turn to Advice & Wealth Management, where we delivered another strong quarter. We had good activity in a tough market environment. We're serving clients well with our goal-based advice, driving strong engagement, and earning strong satisfaction.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

Total client net inflows were $8.6 billion, down 10%, but quite good in this environment. Our wrap net inflows also declined to $6.2 billion. Cash balances were up sharply to more than $47 billion compared to more than $39 billion a year ago. Even in a more challenging operating environment, our advisor productivity was strong, up 11% to $814,000 per advisor.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

We recently hosted our national conference for our top advisors, and the level of engagement was terrific. They're excited about growing their practices at Ameriprise and appreciate the investments we've made and the support we provide. We're also seeing nice engagement with advisor recruits. We had another good quarter in terms of recruiting, adding 99 highly productive advisors. Our value proposition stands even taller in choppier markets.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

When experienced advisors join us, they routinely say our culture, technology, financial planning capabilities, and ability to grow are key reasons they make the move. We're driving meaningful momentum, and I feel good about our pipeline. Now I'll give you some perspective on our growing cash business, which represents a significant future revenue and earnings opportunity for us.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

First, we're beginning to generate more revenue from our off-balance sheet cash as the Fed increases short rates. Second, we continue to move more assets to Ameriprise Bank, garnering additional spread, including moving $2.3 billion to the bank late in the Q2. For perspective, total bank assets are now at $17.1 billion. Assets have more than doubled since the beginning of 2021 and we're positioned to take this further.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

An important takeaway for you is that as we move through the second half of 2022 and into 2023, the growth of our cash business and rising interest rates will provide an offset to equity market weakness.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

That leads me to AWM's financials. We continue to generate strong pre-tax income up 16% to nearly $500 million, and our margin continues to accrete up 250 basis points to nearly 24% even after the impact of substantial market declines. Moving to Retirement and Protection Solutions, the business was performing well in this environment and reflects our strategy to focus on our core products. I'll start with variable annuities. Overall, sales were down 29% given our move away from living benefit guarantees.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

We continue to prioritize annuities without living benefits in our structured products.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

In protection, life sales declined 23% given the climate and our move away from fixed insurance. We remain focused on our VUL and DI products, which have good profitability and are appropriate for our clients. In terms of earnings, they were in line with our expectations and our financial results and free cash flow were good, and our risk profile remains well managed.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

Now, let's turn to Asset Management. We've already referenced the challenging operating environment that has resulted in asset declines and tough retail flows for the industry. We're experiencing that pressure too.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

However, we feel like the business is performing well, and we're making appropriate adjustments as we move forward. Assets under management was up a bit year-over-year as a result of the BMO acquisition and the cumulative impact of net inflows, offset by market declines and a significant foreign exchange impact in the quarter.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

Revenue was essentially flat overall. Let's start with investment performance. Our long-term numbers continue to show good consistency for our 3-, 5-, and 10-year time periods, with over 75% of our funds above median on an asset-weighted basis. Regarding 1-year performance, it's been a tough period in both equities and fixed income. Domestic equity results were good, driven by our larger funds moving back above the median. In international equities, our quality positioning has been more of a challenge in these markets.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

In fixed income, results have been solid in Europe, but in the U.S. were impacted by our longer duration positioning and our quality focus in credit. We do feel with market conditions beginning to stabilize, we should see some improvement. Let's turn to flows, where we had outflows of $3.1 billion in the quarter that included $1.2 billion of legacy insurance partner outflows.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

This reflects the pressure you've seen in retail but was partially offset by positive institutional results. In retail overall, we had lower gross sales and higher redemptions, resulting in $5.8 billion of net outflows.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

This was driven largely by weak conditions in the United States and to a lesser extent in EMEA. In U.S. retail, equity outflows were generally in line with the industry, and in fixed income, results were behind given our product mix. Compared to the industry, we did not participate nearly as much in short duration.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

As interest rates stabilize and investors see opportunities, we believe our product positioning should garner improved flows. In EMEA, retail flows also remained under pressure. However, we did see some improvement in Continental Europe. Turning to Global Institutional, excluding legacy insurance partners, net inflows were $3.9 billion.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

We had some good inflows in fixed income and other strategies. In addition to our broad lineup of traditional institutional strategies, we're bringing more focus to multi-asset and solutions as well as alternatives. I was with the team in London in June, and they're feeling good about the core business, the integration, and the extensive capabilities we offer clients. In fact, just a few weeks ago, we announced the rebranding of BMO Strategies to Columbia Threadneedle, which was an important step as we move forward. I'll close Asset Management with the financials.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

Our margin was 38.5%, and that incorporated the BMO business, which has lower margins based on their mix. Given market decline and impact on revenue, we're taking steps to continue to control discretionary expenses thoughtfully. We'll be paying close attention to market environment as we move forward. Overall, Ameriprise remains in a strong position.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

We have a proven track record of navigating tougher times and will continue to do so. We're highly engaged with our clients in helping them stay on track. From a financial perspective, rising interest rates will act as an offset to compressed markets as we move through the balance of the year. We will be focused on managing our discretionary expenses even more tightly as we move forward.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

Importantly, our balance sheet fundamentals remain very good. We continue to generate strong returns and substantial free cash flow, which provide flexibility. In the quarter, we returned $600 million to shareholders and are on track to return 90% of operating earnings to shareholders in 2022. With that, I'll turn it over to Walter to provide his perspective and more detail on the quarter, and then we'll take your questions.

Walter Berman
Walter Berman
CFO at Ameriprise Financial

Thank you.

Walter Berman
Walter Berman
CFO at Ameriprise Financial

As Jim said, results in the quarter were strong with earnings up 4% to $665 million and EPS up 10% to $5.81 in the face of substantial market declines. This demonstrates the underlying strength of our business model and highlights the diversification benefit each segment provides across market cycles, as well as initial interest rate benefits and overall expense discipline throughout the firm.

Walter Berman
Walter Berman
CFO at Ameriprise Financial

As we move into the second half of the year, benefits from rising rates and higher cash balances are expected to offset the residual pressures from the market volatility. Our high quality, diversified investment portfolio and hedge program continue to support strong balance sheet fundamentals and our business is generating good free cash flow.

Walter Berman
Walter Berman
CFO at Ameriprise Financial

Despite the elevated level of market volatility in the quarter, Ameriprise returned $600 million of capital to shareholders and maintained significant excess capital, $1.6 billion. We are on track to return approximately 90% of adjusted operating earnings to shareholders this year. Let's turn to slide 6. We ended the quarter with assets under management and administration at $1.2 trillion, down 3%, reflecting equity and bond market depreciation as well as foreign exchange. We are executing our growth strategies, including the integration of the BMO business.

Walter Berman
Walter Berman
CFO at Ameriprise Financial

The BMO business contributed to our geographic diversification with international assets now representing 36% of asset management, AUM, up from 27% prior to the BMO acquisition. We continue to benefit from strong underlying organic growth momentum with $69 billion of wealth and asset management flows over the last 12 months.

Walter Berman
Walter Berman
CFO at Ameriprise Financial

Total flows in the quarter were $6 billion, with $9 billion of inflows in wealth management offset by $3 billion of outflows in asset management. Let's turn to individual segment performance, beginning with wealth management on slide 7. Wealth management client assets declined 9% to $735 billion. Despite the exceptional market depreciation in the quarter, with equities down 15% and bonds down 10%, we generated strong client flows from new client acquisition, excellent experience advisor recruiting, and deeper client relationships.

Walter Berman
Walter Berman
CFO at Ameriprise Financial

Our advisors had strong productivity growth with revenue per advisor reaching $814,000 in the quarter, up 11% from the prior year. On slide 8, you can see wealth management profitability benefited from organic growth and the initial rise in interest rates.

Walter Berman
Walter Berman
CFO at Ameriprise Financial

Adjusted net operating revenues increased 4% or $76 million to $2.1 billion, as market depreciation and lower transactional activity during the quarter was more than offset by rising interest rates and client flows. Cash balances increased to $47 billion, up 21% from last year. At the same time, the gross fee yield doubled versus last year, driving higher interest earnings in the quarter. \

Walter Berman
Walter Berman
CFO at Ameriprise Financial

Expenses remain well managed. G&A expenses increased $15 million or 4%, primarily from higher volume-based expenses over the past year.

Walter Berman
Walter Berman
CFO at Ameriprise Financial

Overall, wealth management profitability remained strong with pre-tax adjusted operating earnings of $492 million, up 16% from last year, and our pre-tax operating margin reached 23.9%, up 250 basis points.

Walter Berman
Walter Berman
CFO at Ameriprise Financial

As you can see on slide 9, we are well positioned to realize significant incremental benefits from rising rates on our cash products this year and going forward. In the quarter, we transferred $2.3 billion of brokerage sweep balances onto the bank's balance sheet in 2- and 3-year duration strategies with yields above 4% on average.

Walter Berman
Walter Berman
CFO at Ameriprise Financial

In July, yields on new money purchases at the bank increased further and are in the 4.5% range. We continue to feel good about the credit quality of the portfolio, with most of the portfolio in the AAA-rated structured assets. We plan to bring an additional $3 billion of assets onto the balance sheet during the Q3, bringing the full-year increase to $7 billion. Our model leverages both broker-dealer sweep program and the bank to optimize earnings from cash products.

Walter Berman
Walter Berman
CFO at Ameriprise Financial

Currently, we have about 1/3 of the client cash balances at the bank, and we expect it to be nearly 40% by the end of the year. In addition, our certificate business is another area that benefits from rising interest rates. In total, we expect to generate substantially more interest-related revenue in 2022 relative to 2021, which would offset current market-related impacts.

Walter Berman
Walter Berman
CFO at Ameriprise Financial

Based upon our current assumptions, the interest rate benefit will increase further in 2023. Let's turn to asset management on slide 10, where performance was in line with the macro environment. Total assets under management increased 1% to $598 billion as the acquisition of BMO business was largely offset by market depreciation and foreign exchange translation.

Walter Berman
Walter Berman
CFO at Ameriprise Financial

Asset management flows were negative in the quarter, with continued strength in our global institutional business offsetting a meaningful portion of retail outflows. Like the industry, we continue to experience pressures from global market volatility, a risk-off investor sentiment, and geopolitical strain in EMEA. Margin in the quarter declined to 38.5%.

Walter Berman
Walter Berman
CFO at Ameriprise Financial

It should be noted that BMO reduces our margins by approximately 400 basis points. Going forward, our new margin target will be in the 31%-35% range, reflecting the addition of BMO, which is primarily an institutional business. On slide 11, you can see asset management financial results were a reflection of the challenging market backdrop. Adjusted operating revenues were essentially flat at $881 million as the addition of BMO offset the impact of double-digit market depreciation, foreign exchange rates, and outflows. Likewise, earnings in the quarter declined $31 million.

Walter Berman
Walter Berman
CFO at Ameriprise Financial

Importantly, we are managing the areas we can control. The underlying fee rate remained stable in the quarter at 48 basis points. Expenses remain well managed with G&A expenses down 6% excluding BMO. We are currently in the process of evaluating all discretionary spending and hiring. We remain committed to managing expenses very tightly in the current revenue environment.

Walter Berman
Walter Berman
CFO at Ameriprise Financial

Let's turn to slide 12. Retirement & Protection Solutions continued to deliver stable earnings and free cash flow generation as a result of its differentiated risk profile. Pre-tax adjusted operating earnings were $179 million. Sales in the quarter declined as a result of market dislocation and management actions to reduce the risk profile of the business. Most notably, variable new sales declined 29%, reflecting the uncertain market environment, as well as our decision to exit manufacturing products with living benefit riders, which was completed in June.

Walter Berman
Walter Berman
CFO at Ameriprise Financial

Account value with living benefit riders represent less than 60% of the overall book, down nearly 3 percentage points from last year. Our risk profile remains strong with 94% VA hedge effectiveness in the quarter and an estimated RBC ratio of 530%. Now let's move to the balance sheet on slide 13. Our balance sheet fundamentals remain strong and our diversified high-quality double A-rated investment portfolio remains well positioned.

Walter Berman
Walter Berman
CFO at Ameriprise Financial

These strong fundamentals allow us to deliver a consistent and differentiated level of capital return to shareholders even during periods of market volatility that we experienced this quarter. During the quarter, we returned $600 million to shareholders and excess capital is at $1.6 billion. We remain on track to return approximately 90% of the adjusted operating earnings to shareholders in 2022. With that, we'll take your questions.

Operator

Thank you.

Operator

We will now begin our question and answer session. If you have a question, please press zero then one on your touch tone phone. If you wish to be removed from the queue, please press zero then two. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press zero then one on your touch tone phone.

Operator

We have our first question from Brennan Hawken with UBS.

Brennan Hawken
Brennan Hawken
Analyst at UBS

Good morning. Thank you for taking my questions. Love to start with the bank and the yield.

Brennan Hawken
Brennan Hawken
Analyst at UBS

Provided some great color on plans to continue to shift balances, saw really attractive balances. I believe, Walter, that you indicated that assets moved to the bank in the Q2, late in the quarter. Considering that and considering where reinvestments are, how should we be calibrating for the potential yield upside, not only from averaging in the late shift in the quarter, but then further deployments of the $3 billion that you're considering in the Q3?

Brennan Hawken
Brennan Hawken
Analyst at UBS

Thanks.

Walter Berman
Walter Berman
CFO at Ameriprise Financial

Okay. If I understand this question, we will be shifting in the $3 billion. We believe it will be in the early part of the quarter that we will do that. Obviously, we will continue to invest in our structured triple-A investments which currently are yielding in the 4.5% range.

Walter Berman
Walter Berman
CFO at Ameriprise Financial

That will make a total of about $7 billion of new funds into the bank and deployed. Like I said, in the Q2 is 4.2%, and now at current rates is 4.5%.

Brennan Hawken
Brennan Hawken
Analyst at UBS

Okay, great. Thank you. When we're thinking about NII continuing to grow, saw really strong margin trends here, this quarter, pre-tax margin trends in AWM despite the challenging environment. NII clearly helpful there. You know, as that continues to grow, you continue to deploy more cash. You know, should we be continuing to pace margin expansion at a similar level that we saw here in the Q2, even if markets remain challenging?

Walter Berman
Walter Berman
CFO at Ameriprise Financial

Again, a lot of assumptions in there, but from the standpoint of looking at the opportunity we have on the cash side and certainly the strong flows that we are garnering in this environment, you should be able to see margins maintain and expand.

Brennan Hawken
Brennan Hawken
Analyst at UBS

Great. Thanks for the color.

Operator

Thank you. Our next question is from Andrew Kligerman with Credit Suisse.

Andrew Kligerman
Andrew Kligerman
Managing Director at Credit Suisse

Hey, good morning. Recruiting was very solid. I think you have now 10,200+ advisors. It was up about 1% sequentially. How's the pipeline there? Is this a business that you think is going to continue to grow throughout the year, despite this market turmoil?

Walter Berman
Walter Berman
CFO at Ameriprise Financial

Um-

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

Andrew, yes, thank you for the question.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

We continue to see good recruits. I mean, actually, you know, Q2 was actually stronger than the first. The pipeline continues to look good. We are speaking to more people. I think people are recognizing what we bring to the table in combination of the support we give, the technology, and how we help them really grow their practices. We're getting really strong reviews from people who have joined us. We feel that this is a continued good opportunity for us.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

Even as you go through these volatile markets, based on the type of support we give, helping advisors to actually achieve more in regards to their productivity and how they manage their businesses, we feel it's a good opportunity for us.

Andrew Kligerman
Andrew Kligerman
Managing Director at Credit Suisse

That's great. Just on the wrap flows. You know, if you'd asked me three years ago, when you were doing $4 billion-$5 billion in net flows, and you said you did $6.2 billion like this quarter, I would've thought that was an outstanding result, and probably it still is.

Andrew Kligerman
Andrew Kligerman
Managing Director at Credit Suisse

Recently you had peak numbers around $10 billion. My question is this $6.2 billion a good base now? Or do you think that could continue to be pressured even lower just given the market volatility?

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

Well, you know, I think what you're asking it's also an excellent question. Yes, our total client activity has increased over the years, as you've seen. Even in this last quarter, we brought in almost $9 billion of new client inflows.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

Now with this market, as you would imagine, the deployment of whether it's new money or even current money is a little more, you know, people are a little more sitting on the sidelines and waiting for things to stabilize. Money's still being deployed, but not to the extent, you know, where you have rising markets or the stability in the market. With the pullback we experienced, I mean, you know, first part of the year, you're up, you know, you're down 20%, bond markets are also down.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

I think the $6 billion is quite strong in this type of market environment. My feeling is money will continue to go back into the market as things stabilize, particularly even in the fixed side of the business.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

I don't see anything changing. Now, whether you know you got some material market dislocation occurring in the Q3 or Q4, I can't tell you, but I think if markets aren't materially different, we should still continue to see good flows.

Andrew Kligerman
Andrew Kligerman
Managing Director at Credit Suisse

That's great. Thanks a lot.

Operator

Thank you. Our next question is from Alex Blostein with Goldman Sachs.

Alex Blostein
Alex Blostein
Managing Director at Goldman Sachs

Hey, good morning, everybody. Thank you for the question. So maybe just to start with some of the cash balances dynamics within Advice and Wealth. Walter, I was wondering if you can give us an update how the cash balance is holding up so far in the Q3, given obviously pretty strong trends in Q2 with cash balances being up.

Alex Blostein
Alex Blostein
Managing Director at Goldman Sachs

As we think about the deposit betas, it looks like you guys passed through almost nothing to the customer in the Q2. Any updated thoughts around sustainability of sort of such low deposit betas as you progress through the rest of the year would be helpful.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

Sure, Alex Blostein. They are holding up from that standpoint. The trend you're seeing it is holding. As it relates to the crediting rate for clients, you know, we go through an extensive competitive review.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

On that basis, we did increase some of the rates as it relates to based on that review, and we will certainly consider continue to evaluate that, which we do weekly. We see that obviously we will start crediting as if the Fed basically increases on the 75 basis points we anticipate at the end of the month. Right now, we feel there is certainly opportunity as rates increase and to certainly credit, and those are in our assumption base.

Alex Blostein
Alex Blostein
Managing Director at Goldman Sachs

Got it. And I guess as you think about just the trade-off of growing the bank beyond 2022, you gave obviously very clear guidance of how large you expect the bank to get by the end of 2022.

Alex Blostein
Alex Blostein
Managing Director at Goldman Sachs

Seeing how the yield on broker sweep balances will be fairly attractive given again, it's all floating, how are you kind of thinking about balancing growth of the bank versus just leaving it in third-party bank sweep given you know that spread probably narrows a bit here?

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

Listen, it's a good question, but if you go back to the Q1 of 2020, certainly we were earning a good short-term return and then it disappeared. The bank gives us the ability to really have a steady earning stream with high-quality investments. We are balancing that, and the spread we're getting right now we feel is very good with the risk profile.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

We will continue to do that. From that standpoint, we feel it's a critical part of our overall cash strategy. We're very fortunate to have the bank not only to offer to our clients new products and capability, but also giving this ability to have the stabilization of having the spread income come through.

Alex Blostein
Alex Blostein
Managing Director at Goldman Sachs

Great. Just a quick one for me at the end here. As we think about G&A, that's held up really nicely in the quarter. Particularly we've seen you guys bring down expenses in G&A in the asset management business. When you think about the firm-wide G&A run rate for the back half of the year, given obviously fee challenges on the back of loan markets.

Suneet Kamath
Suneet Kamath
Senior Research Analyst at Jefferies

How are you thinking about the G&A run rate for the back half? I heard your comments qualitatively about, you know, pausing maybe some of the initiatives and looking for ways to save. I guess relative to, like, the $880 million-ish G&A run rate we saw in the Q2, what does the back half look like?

Walter Berman
Walter Berman
CFO at Ameriprise Financial

Number one, from a company standpoint, certainly we look at it as we are going to be very well managed on our G&A overall, as you indicated. Certainly Asset Management, Jim indicated, certainly they are looking at discretionary spend. Overall from a company standpoint, we are going to be in the range that we talk about, and we're performing well.

Walter Berman
Walter Berman
CFO at Ameriprise Financial

As it relates to AWM, with the good revenue growth we see and other things, it's going to be managed. But we are certainly trying to garner and increase basically and take advantage of this situation to invest. It's going to be well managed and certainly within expectations to the revenue growth that we see, which we think is going to be good.

Suneet Kamath
Suneet Kamath
Senior Research Analyst at Jefferies

Okay. Thanks very much.

Operator

We have our next question from Tom Gallagher with Evercore ISI.

Tom Gallagher
Tom Gallagher
Senior Managing Director at Evercore ISI

Good morning. Walter, just wanted to come back to what, if you can give some indication of broadly what you're investing in the banking deposits in. I think you mentioned AAA structured assets. Are those CLOs or what? Can you give a little more color on why you feel confident in the quality on the asset side?

Walter Berman
Walter Berman
CFO at Ameriprise Financial

Okay. It is structured. It's in CMBS. It is basically in retail in MBS. These CLOs are the highest structure within the seniors within that structure. They all are triple rated from that standpoint. 88% of what we invest is in those AAA securities, structured securities.

Tom Gallagher
Tom Gallagher
Senior Managing Director at Evercore ISI

Okay. That's helpful. Question on your capital. I think excess capital went down by $300 million this quarter. Can you talk a bit about what drove it? I assume it was variable annuity related in your life insurance business.

Tom Gallagher
Tom Gallagher
Senior Managing Director at Evercore ISI

Maybe a little bit below the surface, sort of what happened there with hedging. Was it higher required capital? You know, what kind of drove that?

Walter Berman
Walter Berman
CFO at Ameriprise Financial

Well, as you saw it drop $300 million, again, within our rata expectations. You know, with that tolerance reporting, it was within total tolerances. It hit reserves and basically capital on the VA side as it relates to that 15% drop in the quarter.

Walter Berman
Walter Berman
CFO at Ameriprise Financial

From that standpoint, the hedging was effective. It was at 94%, so we feel very comfortable. It was a substantial drop and certainly within our expectations from our modeling. That it was both on reserves and on capital.

Tom Gallagher
Tom Gallagher
Senior Managing Director at Evercore ISI

Okay, thanks. Final question, just can you give an update on how the whole process for potential risk transfer is going? You know, I think when you started this whole process late in 2021, you had commented that you felt like the quality of your insurance business would be validated as you went through that process.

Tom Gallagher
Tom Gallagher
Senior Managing Director at Evercore ISI

Would you say you still feel that way, that if you do something, it's gonna be reflected in an attractive price? Or what have you learned so far through that process, maybe?

Walter Berman
Walter Berman
CFO at Ameriprise Financial

We're continuing to evaluate, certainly have interest in that and we're evaluating that. Yes, to be direct about it, I think it is clear to us that the value and the quality of which we have is being recognized from that standpoint.

Walter Berman
Walter Berman
CFO at Ameriprise Financial

As you know, these are long tail evaluations, and they're continuing.

Tom Gallagher
Tom Gallagher
Senior Managing Director at Evercore ISI

Okay, thank you.

Operator

Thank you. Our next question is from Suneet Kamath.

Suneet Kamath
Suneet Kamath
Senior Research Analyst at Jefferies

Thanks. Good morning. Just a couple from me. Walter, I think last quarter you talked about a $200 million benefit from the bank.

Suneet Kamath
Suneet Kamath
Senior Research Analyst at Jefferies

I know we talked about a bunch of moving pieces so far on this call, but can you give us a sense, at least, based on where we sit today, kind of how you're feeling about that $200 million number? Did it contemplate future rate hikes and that sort of thing? Just some color there would be helpful.

Walter Berman
Walter Berman
CFO at Ameriprise Financial

Sure. In there, we're anticipating, based on the latest estimates from the Fed, there'll be an additional 175 basis point increase, and we'll see where that goes. Certainly from that, we also, the crediting rates, we're assuming that we would start distributing at a higher level within that. Right now, the NII versus for the whole year is the change versus last year would be in the $400 million range plus.

Walter Berman
Walter Berman
CFO at Ameriprise Financial

That $200 that we talked about is in the $400 million range plus for the total year.

Suneet Kamath
Suneet Kamath
Senior Research Analyst at Jefferies

That's for 2022. As we think about 2023.

Walter Berman
Walter Berman
CFO at Ameriprise Financial

2023 or 2021. Yes.

Suneet Kamath
Suneet Kamath
Senior Research Analyst at Jefferies

Yeah. Okay. All right. That's good. Then I guess sort of a specific one, but I noticed that your long-term care reserves came down, I think about 10-11% from last year. Is that just the benefit of higher rates? Could you talk about that a little bit?

Suneet Kamath
Suneet Kamath
Senior Research Analyst at Jefferies

To follow up on Tom's risk transfer question, any more activity in terms of long-term care that you're hearing in the market?

Walter Berman
Walter Berman
CFO at Ameriprise Financial

Okay. On the reserves, I believe it is, but we'll get back and confirm that. As it relates to, we're evaluating. Let me just say we're continuing to evaluate across the spectrum. All right.

Suneet Kamath
Suneet Kamath
Senior Research Analyst at Jefferies

Okay. Just the last one is just on the asset management margin, the new target of 31%-35%. Is that entirely BMO driven or is there also a piece related to the, you know, pretty significant market decline that we've seen?

John Barnidge
John Barnidge
Managing Director at Piper Sandler

Here in the Q2. At some point, you know, do you start to push back towards your prior range or is just kind of the new level for that business? Thanks.

Walter Berman
Walter Berman
CFO at Ameriprise Financial

The 400 basis points is strictly BMO. That's a normalization on the BMO from that so that 35-39 is, like I said, going down 400 basis points strictly because in BMO it does not. Obviously we're coming down because of the market standpoint, but because we're in the 40s, and now it's dropping because of the deleveraging that's taking place because of the equity markets and the fixed income.

Walter Berman
Walter Berman
CFO at Ameriprise Financial

We'll continue. That's it. Hopefully, I answered it.

John Barnidge
John Barnidge
Managing Director at Piper Sandler

Yeah, I got it. Sounds like that's the new level with the business. Okay. Thanks.

Operator

Our next question is from Steven Chubak with Wolfe Research.

Steven Chubak
Steven Chubak
Managing Director and Senior Analyst at Wolfe Research

Hi, good morning. Just one follow-up for me, relating to that prior question on the asset management margin outlook. I just wanted to make sure, Walter, it does sound like that is the new run rate, but does that 31%-35% contemplate some of the actions you alluded to around discretionary spend? Also wanted to see whether that also incorporated some of the BMO expense synergies that are not yet reflected in the run rate.

Walter Berman
Walter Berman
CFO at Ameriprise Financial

From that standpoint, it is now normalized, okay, because we always said it would be 34, up to 39. It is our target range. As we look at the markets and we evaluate the implications, we are going to be looking at the expenses. It does have some of the synergies that we anticipate with BMO, which was going to be more backloaded to 2023.

Steven Chubak
Steven Chubak
Managing Director and Senior Analyst at Wolfe Research

Understood. Maybe just one quick follow-up. Can you just speak to how the flow trends are tracking in July, just so we can think about some of the cadence of flows versus 2Q, recognizing the industry is still facing some headwinds just from a flow perspective?

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

Yes. So this is Jim. What I would expect is more of a continuation at this point. I think, you know, from a retail perspective, I think things are still on the asset management side, soft. I think you'll see that across the industry. If you look at the new SIMFUND data coming out or will come out, I think on institutional, it's just, you know, longer for mandates, et cetera. You know, I don't see a dramatic change at this point. Now we'll see what the Fed does, and we'll see what the outlook is, for various things as we go forward. That's what I would probably say.

Steven Chubak
Steven Chubak
Managing Director and Senior Analyst at Wolfe Research

Very helpful. Thanks so much for taking my questions.

Operator

Thank you. Our next question is from John Barnidge with Piper Sandler.

John Barnidge
John Barnidge
Managing Director at Piper Sandler

Thank you very much. With that new guidance around margins in the asset management segment, can you maybe talk about the level of composition of variable expenses, maybe across the franchise in your businesses? Thanks.

Walter Berman
Walter Berman
CFO at Ameriprise Financial

Looking at our expense base, there's a reasonable portion that's variable. Again, the exact proportions, it gives us the ability to certainly adjust. The exact percentages, candidly, I would have to get back on that. We do have because there is investment spending that we do, and certainly, we have evaluation of hiring and other things on open positions. There's a reasonable amount of variable in there, but I don't have the exact percentage in front of me right now.

John Barnidge
John Barnidge
Managing Director at Piper Sandler

Maybe my follow-up question. Is there a way to size the liability-driven investing opportunity as that seems like it's been a strong area for institutional?

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

Yes. You know, with the BMO acquisition, et cetera, they have very good capabilities. Now we are looking at those opportunities across the franchise with our expanded level of institutional business. We feel it will be a good channel as well as a relationship building channel for us.

John Barnidge
John Barnidge
Managing Director at Piper Sandler

Thank you.

Operator

Thank you. Our next question is from Erik Bass with Autonomous Research.

Erik Bass
Analyst at Autonomous Research

Hi. Thank you. Can you talk about the level of foreign exchange sensitivity in the asset management business post the BMO acquisition? I guess there's clearly impact on revenues in AUM, but how much of an offset is there in expenses, and how should we think about the kind of net earnings impact?

Walter Berman
Walter Berman
CFO at Ameriprise Financial

Yeah. With BMO, obviously we shifted from 27% to 36%, and that is sensitive too. Approximately in the PTI elements of it was around a $15 million impact to us.

Erik Bass
Analyst at Autonomous Research

$15 million in the quarter?

Walter Berman
Walter Berman
CFO at Ameriprise Financial

Yeah. That's the net. Yeah.

Erik Bass
Analyst at Autonomous Research

Got it. Thank you. You highlighted the $1.6 billion of excess capital that you have. In past periods of market weakness, you've sometimes increased the level of capital return above the 90% target of earnings and leaned into buybacks a bit more. Is that something that you would consider given the pullback in your stock here today?

Walter Berman
Walter Berman
CFO at Ameriprise Financial

Well, from this, if I understand your question, in the certainly with the 1.6, we feel comfortable at the continuance we indicated on hitting our trend line for the 90% for the year. Obviously, as you look at the back half of the year, we'll be able to certainly with that 90%, hitting buyback a lot more shares with where the share price was last year versus it is right now. Hopefully, it will get back to where it is, but where it is right now, it will give us the ability at that level to buy back more shares. Got it. You're not thinking of changing the percentage?

Ryan Krueger
Ryan Krueger
Managing Director at Keefe, Bruyette & Woods

At this stage we evaluate each quarter, but the answer is. We'll be optimistic as we assess it, but we're still targeting 90%.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

Remember, then, I think it's actually pretty good. A lot of companies are pulling back on their buybacks if they were doing them, and we're doing them at a still, a very strong rate.

Walter Berman
Walter Berman
CFO at Ameriprise Financial

Yeah. No, very fair. Obviously with the price lower, you're buying more shares, so appreciate it.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

Thank you.

Operator

We have our next question from Kenneth Lee.

Kenneth Lee
Kenneth Lee
Analyst at RBC Capital Markets

Hey, good morning, and thanks for taking my question. Just one on the asset management side again. Curious as to what you're seeing in terms of net flows within the fixed income category, just given the industry trends we're seeing. Thanks.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

Yeah. What we saw in our business is our net flows were a little on a percentage basis a little worse than where we saw on our equity side, and that's mainly because of the mix of business that we have. Some of the players that might have had larger areas of short duration, et cetera, we have a short duration business, but it's not necessarily one that we're across a lot of channels in. People who had that business saw a little more of the inflow in there than we did because we really were in mortgages and total bond and things such as that a little longer duration products.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

The other area that I think, you know, probably had some greater flows was more on the leveraged loan area, which is only a small business for us. I think it had to do more with mix than anything else. Because of being in the type that we were in with the dislocation in the fixed income market, as you would imagine, redemptions would be up a little more and flows were down. Municipals was another area that we had a bit of that weakness in based on the market situation.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

We believe that the areas that we do have now, based on the credit quality, et cetera, will come back, we think as interest rates stabilize a little more or as you see on the long end, it's starting to, you know, soften up a little bit.

Kenneth Lee
Kenneth Lee
Analyst at RBC Capital Markets

Great. Very helpful there. Just one related question as my follow-up. More broadly speaking within the asset management side, how do you think about the overall product offerings mix, the strategies out there? Any particular gaps that you would like to fill at this point? Thanks.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

Yeah. What we have now, we have a good mix with the BMO acquisition. We're putting more energy and time in on the ESG of the RI part and responsible investing. We're doing more on things like LDI and solutions. We're doing more on alternatives. We're trying to build out a little more on our retail real estate and property businesses, institutional as well. There are certain things like that that we're focused on for what we have in place. We feel good about the mix that we have. Again, we're in a little bit of this. I think you'll look across the asset management industry. I'm not sure you'll see a lot of favorability at this point across.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

I think we're in good shape. We have good businesses. We can control our expenses. We're still investing appropriately to get some greater scale efficiencies in the integration with BMO. We're in a little bit of a dislocated market, but I think, and that's really one of the benefits of the firm like Ameriprise. We're very balanced, even where I know on one end someone says risk transfer, but we generate some really good solid earnings and cash flow from our I&A business activities. Our AWM now with the growth of the bank in complement, it gives us a good offset.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

I think over time, again, you'll see the strength of how the company really plays out, and how we can use this opportunity to really leverage against the, you know, whether it's having to do with shareholder return or even flexibility.

Kenneth Lee
Kenneth Lee
Analyst at RBC Capital Markets

Great. Very helpful there. Thanks again.

Operator

Thank you. Our next question is from Ryan Krueger with KBW.

Ryan Krueger
Ryan Krueger
Managing Director at Keefe, Bruyette & Woods

Hey, thanks. Good morning. Just to follow up on the $400 million of upside from interest rates in full year 2022. Just given that, probably a fair amount of that is coming in the back half of the year, are you able to comment on how that might look in 2023 as well?

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

Okay. It should look pretty good.

Walter Berman
Walter Berman
CFO at Ameriprise Financial

Yeah. Obviously, it's Walter. You're gonna get the normalization if the Fed increases come in, which is 175 coming in in the back end, and getting the normalization on calendarization is going to take place there. It is dependent, of course, again, what happens to the cash balances and the crediting rates. There's a lot of variables, but as Jim said, you're gonna get an increase, and certainly we anticipate there will be an increase based on our modeling. That is again, from our standpoint, it is going to be substantial.

Ryan Krueger
Ryan Krueger
Managing Director at Keefe, Bruyette & Woods

Got it. Just on the asset management margin target, you were still a fair amount above that new target in the Q2. Should we just think about this as a longer term target, or in the current environment, would you anticipate being down to, you know, within that new target in, you know, in the near term?

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

I think what you have to sort of factor in, and again, it depends on what happens with markets, right? You had a bit more of a dislocation of the markets in the Q2. You know, and so as you look at that, you know, probably compared to where the averages are between the first and the Q2 going into the third, you will continue to have a little bit more of that margin compression, as in depreciation on the asset base, if you roll it over. Having said that, I would say that we still feel good about being within those margins after you take that into account. Remember, markets depreciated, and it's not just equity markets.

Jim Cracchiolo
Jim Cracchiolo
Chairman and CEO at Ameriprise Financial

The fixed income market, which is not normal in a sense where you get both of them depreciating at the same time.

Ryan Krueger
Ryan Krueger
Managing Director at Keefe, Bruyette & Woods

Got it. Thank you.

Operator

We have no further questions. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

Executives
    • Alicia LANCASTER
      Alicia LANCASTER
      VP of Investor Relations
    • Jim Cracchiolo
      Jim Cracchiolo
      Chairman and CEO
    • Walter Berman
      Walter Berman
      CFO
Analysts
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