Ameriprise Financial Q3 2022 Earnings Call Transcript

Quartr
Provided by Quartr
October 26, 2022

There are 14 speakers on the call.

Operator

Welcome to the Third Quarter 2022 Earnings Call. My name is Lisa, and I will be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. As a reminder, the conference is being recorded.

Operator

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

Speaker 1

Thank you, and good morning. Welcome to Ameriprise Financial's Third Quarter Earnings Call. On the call with me today are Jim Cracciolo, 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.

Speaker 1

On Slide 2, you will see a discussion of forward looking statements. Specifically, during the call, you will hear references to various non GAAP financial measures, which we believe provide insight into the company's operations. 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. These forward looking statements speak only as of today's date and involve a number of risks and uncertainties.

Speaker 1

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 Q3 earnings release and our 2021 Annual Report to Shareholders and our 2021 10 ks report. We make no obligation to publicly update or revise On Slide 3, you see our GAAP financial results at the top of the page for the Q3. Below that, you'll see our adjusted operating results, followed by operating results excluding unlocking, 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. We completed our annual unlocking in the 3rd quarter. Many of the comments that management makes on the call today will focus on adjusted operating results.

Speaker 1

And with that, we'll turn it over to Jim.

Speaker 2

Good morning, and welcome to our Q3 earnings call. What I'd like to do is give you my perspective on the environment and how Ameriprise is performing, then Walter will cover the financials. In terms of the market environment, both equity and fixed income markets continued to decline in the Q3 both here and in Europe. Inflation remains high and sticky and geopolitical risk is elevated. This is causing a high level of volatility, keeping investors on the sidelines a bit more.

Speaker 2

With that, short term interest rates were up 300 basis points so far this year with 150 basis points raised just in the 3rd quarter. I believe that the Fed and other central banks have been playing catch up and that they will have to continue in increasing rates to get inflation under control. Having said that, it will lead to a slowing of the U. S. And European Economies.

Speaker 2

And at this juncture, it looks more like we're heading for a mild recession. Therefore, I expect there will be more volatility ahead. So for Ameriprise, the diversity and strength of our This allows us to deliver good outcomes even in challenging times. And you certainly saw that in our results this quarter. We continue to remain in strong client inflows in Wealth Management and the rise in interest rates, the growth of the bank and the stability of the retirement protection businesses helped to more than offset the effect of depreciating markets and foreign exchange that impacted our asset management business.

Speaker 2

The investments we made in our business over the years in our technology, client service, product solutions and advice value proposition are paying dividends as we continue our strong focus on our clients and helping our advisors navigate a difficult environment. Now I'd like to discuss our 3rd quarter results in more detail. Total assets under management and administration were $1,100,000,000,000 which is down 9% from a year ago. Assets were impacted by the steep decline in both equity and fixed income markets and the strength of the dollar, which affected the foreign exchange rate in our European business. In terms of adjusted operating financials, excluding unlocking, Revenues were $3,500,000,000 up 1%.

Speaker 2

With that, earnings per share were up 9% to $6.43 and the return on equity was strong at 47.9%, which is consistent with this time last year. Now let's talk a bit more about our businesses. I'll start with Advice and Wealth Management where we continue to deliver strong results. Despite the environment, we had good client flows as clients remained engaged. Total client flows were up 11% in the quarter to more than $11,000,000,000 The mix of our flows reflect the environment we're in.

Speaker 2

We saw strong growth in brokerage, cash, certificates and other products. As we expected, cash balances continue to be up sharply to more than $46,000,000,000 compared to more than $40,000,000,000 just a year ago. We're seeing good growth across our cash offerings. Very importantly, Our advisor productivity remains strong as we continue to reinforce our personal relationships and the value of advice. It was up 7% to 819,000 per advisor.

Speaker 2

We recently met with our top advisors to recognize their success and Growth Opportunities at Ameriprise. Engagement was terrific. Advisors are highly satisfied with the firm and the support we provide and they like the technology and the capabilities we've added, which is helping them grow, which brings me to recruiting. We had another very good quarter adding 89 highly productive advisors. Advisors consistently tell us they recognize the strength of our value proposition, our brand and the stability of the firm.

Speaker 2

It's a competitive marketplace and I feel good about our pipeline. In the Q3, As we have all year, we continue to invest steadily in the business. We continue to release additional tools, capabilities and enhancements that help our advisors engage and meet with clients, deliver actionable advice and improve efficiency of their practices. As part of our investment agenda, We've been very much focused on expanding our cash offering and growing our bank. The bank provides important flexibility in this rising interest rate environment and will continue to be a good opportunity for us to further engage and deepen our relationships with clients.

Speaker 2

We continue to move cash to the bank, Adding $3,100,000,000 in the 3rd quarter. And with that, we've been able to invest appropriately to garner additional spread. Today, our bank has grown to nearly $19,000,000,000 We also continue to see good growth in our pledged loan business and we'll be launching more products in the bank as we move forward. Overall, the Advice and Wealth Management business continues to generate strong profitable growth and margins reached 27.8 percent, up 5.40 basis points. Now let's turn to Retirement and Protection Solutions, Starting with variable annuities, we have narrowed our focus to concentrate on products that are good for clients in this environment and for the firm.

Speaker 2

And with that strategy in place, we have continued to generate solid sales in variable annuities without living benefits as well as our structured products as we have shifted away from annuities with guarantees. Therefore, our sales are down but in line with the industry. We also made a shift in protection away from fixed insurance to focus on VUL and DI products. Life sales were also down given the climate, but again results were in line with the industry. Based on what we've done to appropriately risk adjust these businesses, They continue to generate good earnings, stability and solid returns in cash flow as a complement to our other businesses.

Speaker 2

Now I'll cover asset management. As you've seen across the industry, markets have impacted asset levels from an equity and fixed income perspective. As a global asset manager with sizable presence in Europe, we were also affected by the appreciation of the sterling and the euro versus the dollar. Assets under management were down 6% to $546,000,000,000 given the equity and fixed income markets and the FX impact I've mentioned, more than offsetting the BMO acquisition. Consistent with what you're seeing in the industry, investors have more of a risk off perspective, and you have a level of tax loss harvesting taking place based on market depreciation.

Speaker 2

Very critically in this environment, We are maintaining good investment performance and we're continuing to maintain good 3, 5 10 year track records. While there's been a lot of volatility over the course of the year, over 70% of our funds are above medium on an asset weighted basis. Our short term performance has been impacted in some of our fixed income strategies based on the spike in interest rates. And in Europe, Some of our equity strategies were impacted because of our quality growth positioning. Let's turn to flows.

Speaker 2

In the quarter, we had outflows of $2,400,000,000 that included $1,000,000,000 of legacy insurance partner outflows. Positive flows in institutional were more than offset by the ongoing pressure we've seen in retail. In retail overall, We're in net outflows, but it improved a bit from a tougher second quarter for us in the industry. We ended the 3rd quarter with lower gross sales and Higher redemptions than a year ago given the markets. This resulted in $5,300,000,000 of net outflows driven by weak conditions.

Speaker 2

In U. S. Retail, equity outflows remain generally in line with the industry. In fixed income, our results were behind given our product mix. In EMEA, though retail flows remained under pressure, we did see some improvements in Continental Europe and overall flows were a bit better than the industry for the quarter.

Speaker 2

Turning to Global Institutional. Excluding Legacy Insurance Partners, net inflows were $3,900,000,000 and we're seeing fundings get extended given the markets and some asset allocation calls. In asset management, we expect the environment will remain challenging. However, we think there will be opportunities as markets settle down over time and interest rates stabilize. At the same time, we've been very much focused on integrating our BMO EMEA Business and that's going well.

Speaker 2

We continue to make good investments in the business overall, ensuring that we have the right focus to move forward in distribution as well as servicing and platform capabilities. But we also have a very strong eye towards managing expenses in this market. And adjusted for the BMO EMEA acquisition, we brought G and A expenses down by 7% and we'll continue to be very focused there. As I look ahead for Ameriprise, I believe we will continue to be operating in these markets for a while. So as you expect from us, we're very much focused on what we can control.

Speaker 2

That includes continuing our strong engagement with clients and advisers as well as leveraging our investments as we continue to manage our expenses tightly moving forward. Importantly, I feel like the strength of our And the growth of the bank will allow us to navigate these markets very well and generate a consistent level of free cash flow and good returns for our shareholders. And what's very important and critical for the firm and what we deliver is the engagement of our people and advisors. I feel very good about the team. We just conducted our employee and advisor surveys and we continue to see high levels of engagement and satisfaction, industry leading.

Speaker 2

And we know how important this is going through a challenging environment to keep our focus on our clients. In total, I feel really good about the mix of our business, The flexibility we have and how we're positioned for both the challenges and the opportunities ahead. Now I'll turn it over to Walter, and then I'll take your questions.

Speaker 3

Thank you. As Jim said, results this quarter continue to demonstrate the strength of the Ameriprise value proposition as adjusted EPS, Excluding unlocking, increased 9% to $6.43 in a challenging market environment. Both management business momentum, Higher interest rate environment and expense discipline more than offset equity and fixed income market depreciation, coupled with significant weakening of the pound and the euro in the quarter. We continue to benefit from strong growth in Wealth Management, which represented 60% of adjusted operating earnings in the quarter, up from 49% a year ago. Across the firm, We continue to manage expenses tightly relative to the revenue opportunity within each segment.

Speaker 3

As a result, We continue to make investments in the bank and other gross initiatives, particularly in Wealth Management, while prudently managing overall firm wide expenses. On a year to date basis, G and A expenses are flat excluding BMO. We expect that for the year, G and A will be down 1%. Our balance sheet fundamentals remain strong despite continued market depreciation in the quarter and we returned $632,000,000 of capital to shareholders. For the full year, we remain on track to return approximately 90% of adjusted operating earnings to shareholders.

Speaker 3

Let's turn to Slide 6. Assets under management administration ended the quarter at $1,100,000,000,000 down 9%. While AUMA benefited from strong client flows and the addition of BMO late last year, we experienced significant market impacts. Equity and fixed markets were down 90% 14%, respectively. In addition, asset management AUM levels We're substantially impacted by significant weakening of the pound and the euro, with the AUM of non U.

Speaker 3

S. Businesses down to approximately 35% of the total. Overall pre tax earnings remain strong in this environment, up 6% from last year, excluding unlocking, with meaningful benefits from interest rates and strong client flows, more than offsetting significant negative equity and fixed income markets and foreign exchange impacts that largely occurred in September. Let's turn to individual segment performance beginning with Wealth Management on Slide 7. Wealth Management client assets declined 12% to $711,000,000,000 as a result of significant market depreciation over the past year, partially offset by our strong organic growth.

Speaker 3

Total client net flows remained strong at 11,200,000,000 up 11% from last year with $6,400,000,000 of flows into wrap accounts and $4,800,000,000 into non advisory accounts, specifically certificates and retail brokerage as anticipated in this environment. Revenue per Aviza reached 819,000 in the quarter, up 7% from the prior year from continued enhanced productivity and business growth. On Slide 8, you can see wealth management profitability increased 30% in the quarter with the significant benefit from interest rates and strong organic growth Exceeding negative impacts from market depreciation and lower transactional activity, pre tax operating margin Reached nearly 28%, up over 500 basis points year over year and up 3.90 basis points sequentially. Adjusted operating expense declined 3% with distribution expenses down 7%, reflecting lower transactional activity and asset balances. G and A is up 12% in the quarter and up 7% on a year to date basis.

Speaker 3

The higher than normal year over year Increase in the Q3 was driven by unusually low prior year expenses relating to staffing levels and T and A, timing of expenses in the current year and continued expenses associated with higher volumes and continued investments in the bank and other growth initiatives. We anticipate that the full year will be in line with the 7% year to date growth pace. We expect the higher interest rate pattern to drive Substantial and sustainable benefit in the Q4 of 2022 as well as 2023. Let's discuss the components in more detail. 1st, cash balances remain high at $46,000,000,000 this quarter.

Speaker 3

With multiple products available to meet client needs, including brokerage cash, bank and certificates. The majority of our brokerage cash is in working cash accounts for our clients, with over half of the balances less than $100,000 and our client crediting rates are continuously benchmarked and remain competitive. As a result, we have not experienced cash sorting issues to the extent of others in the industry. Our Certificate Products offer another solution for clients looking to ladder their liquidity and garner some additional rate upside in the multiple product offerings. 2nd, the bank provides flexibility to optimize the benefits Higher rates by investing in high quality, longer duration securities, creating sustainability of interest earnings.

Speaker 3

Our bank reached nearly $19,000,000,000 in the quarter, up from $10,000,000,000 a year ago. In 2023, we plan to grow the bank to the $22,000,000,000 range. In the quarter, the pickup from investments in the bank is approximately 150 basis points to 200 basis points above the spreads from WAF balance sheet cash. Over the past several years, our total client cash balances Have been consistently 5% to 6% of total client assets. This positions us well to capture the opportunity from rising rates and lock in those benefits over the medium term.

Speaker 3

In 2022, spread earnings will increase by over $600,000,000 versus the prior year and we expect this trend to continue into 2023. Let's turn to Asset Management on Slide 9. We are managing the business well through a challenging market. Total assets under management declined 6% $546,000,000,000 primarily from equity and fixed income market depreciation and unexpected significant negative pound and euro foreign exchange impact. As I mentioned, the BMO acquisition broadened our geographic diversification with about 35% of the assets in EMEA.

Speaker 3

However, this diversification increased our foreign exchange translation exposure. Asset management, like the industry, was in outflows in the quarter. Continued strength in our global institutional business offset a meaningful portion of retail outflows. Like others, we experienced pressures from global market volatility, a risk off investor sentiment and geopolitical strain in EMEA. March in the quarter declined to 35.6%, which is slightly above our target range of 31% to 35%.

Speaker 3

Decline versus last year is attributable to broad market depreciation and foreign exchange impacts. Given the material market depreciation and foreign Currency weakening in September. We expect additional margin erosion next quarter. On Slide 10, you can see Management Financial Results reflect the market environment. Earnings declined to $191,000,000 reflecting double digit market depreciation, Significant foreign exchange weakening and outflows.

Speaker 3

Importantly, we continue to manage the areas we can control. Expenses remain well mannered. Excluding BMO, total expenses were down 13% aided by a 7% decline in G and A. We continue to make market driven trade offs and discretionary spend and remain committed to managing expenses very tightly in the current revenue environment. And the fee rate remains stable in the quarter at 48 basis points.

Speaker 3

Let's turn to Slide 11. Retirement Protection Solutions continue to deliver stable earnings and free cash flow generation, a clear result of a differentiated risk profile. Pre tax adjusted operating earnings, excluding unlocking were $203,000,000 In the quarter, we completed our annual actuarial assumption update, which resulted in an unfavorable pre tax impact of $172,000,000 Sales in the quarter similar to the industry declined as a result of the volatile market environment as well as management action to discontinue sales of variable annuities with limiting benefits to reduce the risk profile of the business. Protection sales remain concentrated in higher margin asset accumulation BUL, which now represents 1 third of total insurance in force assets. Annuity sales in the quarter were in lower risk Products without guarantees and structured variable annuities.

Speaker 3

These products represent over 40% of our total VA account value. We have begun to reposition our investment portfolio to capture the interest rate opportunity. We have remained short on duration in this portfolio given the low rate environment over the past several years. We now have the opportunity to enhance yield by extending asset duration and changing the mix of investments without increasing credit risk. Now let's move to the balance sheet on Slide 12.

Speaker 3

Our balance sheet fundamentals remain strong and our diversified high quality investment portfolio remains well positioned. In total, the average credit rating of the portfolio is AA, with only 1.6% of the portfolio and below investment grade securities. Despite significant market dislocation in the quarter, VA hedge effectiveness remained very strong in the quarter at 97%. Our diversified business model benefits from significant Sable free cash flow contributions from all business segments. This supports the consistent and differentiated level of capital return to shareholders even during periods of market depreciation like we experienced this quarter.

Speaker 3

During the quarter, we returned $632,000,000 to shareholders and excess capital and holding company liquidity remains strong. We are on track to return approximately 90 Send of the adjusted operating earnings to shareholders in 2022. With that, we'll take your questions.

Operator

Thank you. We will now begin the question and answer session. We'll take our first question from Ryan Krueger with KBW.

Speaker 4

Hi, thanks. Good morning. My first question is, could you give an update on your excess capital position and Any moving parts on the quarter?

Speaker 3

Sure. I will take that. The number is $1,300,000,000 It's Down $300,000,000 from last quarter and the main drivers on that is the market dislocation and the growth in the bank and the remainder is coming from the unlocking.

Speaker 4

Got it. Thank you. And then separately, In Retirement and Protection, the earnings are over $200,000,000 this quarter ex unlocking. They had previously been running more in the 180 $190,000,000 range. Can you help us think about the run rate earnings in that business going forward?

Speaker 4

And also how the Portfolio repositioning will impact that?

Speaker 3

Yes. I would say that, yes, it did increase a little, but I think the run rate that you're talking about between 180 range is certainly 1 to 2 that we anticipate going forward. And yes, the interest rates will take that up again as we do it because we are reinvesting out As we looked at the portfolio and the opportunities, because we basically say shorter duration now, we're taking advantages, we move out. But it will go up, but I would say, I would start with the $180,000,000 range.

Speaker 4

Got it. That's helpful. Thank you.

Operator

We'll take our next question from Brennan Hawken with UBS Financial.

Speaker 5

Good morning, Jim Walter. Thanks for taking my question. I'd love to start with some of the comments on the bank. I believe you indicated that you'd be moving about $3,000,000,000 in balances in 2023. Why not accelerate that?

Speaker 5

We saw more Then that move in 2022, the rate environment is certainly attractive, and it seems like a good place to utilize some of that capital. So that's number 1. And then number 2, when you think about The pledge loan book within the bank, are you seeing any change in demand or growth as a result of higher rates where maybe the demand is eased up a bit?

Speaker 3

So as it relates to 2023, I indicated that it's probably It was better to say it was at least $2,000,000,000 Next year, obviously, we'll gauge the situation. We certainly have the capacity to do more, both from the availability of liabilities and capital and we will assess it and the key element associated with that is also the availability of investments that meet our standards both from a quality standpoint and diversification standpoint that will be a factor in that. We feel very comfortable with the balances we have that will be So I would probably modify and say at least $3,000,000,000

Speaker 5

Okay. Thanks for that clarification. And then Pledge loans, have you seen any shift in demand with higher rates or have those continued to grow?

Speaker 2

On the pledged loan side

Speaker 3

Oh, the pledged loans, I'm sorry.

Speaker 5

I didn't hear it.

Speaker 3

The pledged loan is actually right now it's adjusting with markets, but it's growing steadily and We feel very comfortable with it. And from that standpoint, it's a total of that is in the over the $1,000,000,000 range for total standpoint with our program. So we feel very comfortable with it.

Speaker 5

Great. Thanks for that. And then In the Wealth business, you guys do a great job of returning capital to shareholders and have a long track record there and I think it's appreciated. But Have you considered maybe shifting and having an allocation to growth capital and using some of your excess capital to actually Continue to build on the recent success that you've had in adding advisors and generating that really steady Net new assets in the mid single digits and maybe even pushing that a little higher. Have you considered any of that?

Speaker 5

Or is that you're just sort of comfortable with the recruiting approach that you've taken so far.

Speaker 2

Yes. So we're very much focused on Continuing to bring in quality recruits, we just don't want to associate people to us and have to be in a processing platform per se. As you can see, we have a very good strong client value proposition. That's very important. That's why we generate Good returns, good margins, good retention of assets.

Speaker 2

We ensure that we have an excellent client experience, keeping our client satisfaction really high. And we really focus on helping good quality advisors grow their practices and retain and build. So we're going to continue to look and attract good advisors in. We're spending a bit more time on bringing in some younger people again and Building succession in their practices and helping advisers extend their teams. And we're also building out our IPI Group, which is our institutional business and we're winning some nice accounts there and growing the advisor force.

Speaker 2

And we're also doing some work on our remote channels And expanding that activity that we think will also be a complement. So along those lines, we are putting money to work, we are investing, So it's not so much about the use of capital, it's more about continuing to drive in the areas that we think We can generate both good returns, but more importantly, continue to build out against our value proposition.

Speaker 5

Great. Thanks for the color.

Operator

We'll take our next question from Suneet Kamath with Jefferies.

Speaker 6

Great. Thanks. Just wanted to go back to the bank, if I could. I guess, in addition to adding more deposits, we're thinking another lever you guys have Reinvest some assets that are maturing that the deposits are currently supporting. So can you frame maybe how much of those assets are rolling In 2023 and if possible, what the yield was on those assets relative to where you're able to invest new money today?

Speaker 3

So let me take an approximate, it's Walter. Approximately, because this is where short duration, if you look at where duration is tad over 3, That you should expect over $3,000,000,000 to mature in the year. And I don't have the exact numbers on yield, but you should imagine that We're going to pick up at least 300 to 400 basis points versus what's maturing, but I can have Alicia get back to you on that.

Speaker 2

Perfect. That's helpful. Thanks. And then

Speaker 6

I guess for Jim, towards as the quarter progressed, we're getting quite a few questions on LDI in the U. K. And what's going on there and what any impact on your U. K. Asset Management business there could be.

Speaker 6

So could you maybe frame that out, how you're thinking about that as an opportunity or where the risks are? Just want to make sure that it's Clear in terms of where your exposure is, if possible. Thanks.

Speaker 2

Sure, Suneet. So I think as everyone is aware, this is a very large market. It's over 1 point $1,300,000,000,000 in the UK, depends on the day. And it's really used by Almost all the pension funds there are supported by the regulatory authorities. The long term guilt in European interest rates, you know, increased dramatically in September And that resulted in clients having to post additional collateral to maintain their LDI coverage ratios.

Speaker 2

The volatility It was something that wasn't necessarily seen in the past. It was in the 15 to 18 standard deviation type event, which is really abnormal. And so that volatility affecting the bond markets, interest rates going up, etcetera. So Clients have maintained their LDI positions as you would expect the systems, and we think this will normalize over time, but they had to post more collateral and then free up some assets to do it. This market will come back Around in a sense of the stabilization and the reverting back to the mean.

Speaker 2

So, we feel like the market will continue to be very important there, And the pension funds will continue to utilize that for the way they have to manage their assets going forward to get the returns. We do expect some adjustments in the market going forward. Some players would have to reduce leverage a bit. There may be some more operational adjustments to make sure that The markets can flow a bit more easily as you get these type of dislocations. And with us, You of course saw a asset level decline meaning from the depreciation of the market, but we really haven't seen major outflows in any fashion.

Speaker 2

And in fact, there's some new business that came in. So we feel like this market will recover, and we feel like we can Still do a good business there and it won't have a significant long term effect.

Speaker 6

So just to summarize, near term more of a kind of AUM potentially Earnings issue as opposed to anything more significant than that.

Speaker 4

Yes, yes, exactly.

Speaker 6

Terrific. Okay, thanks guys.

Operator

We'll take our next question from Alex Blostein with Goldman Sachs.

Speaker 7

Great. Good morning. Thank you for the question. First, just around some of the cash dynamics over in Advice and Wealth and kind of how that's trending. So, So, clearly, great to see deposit beta is still very low at this point in the cycle.

Speaker 7

As you look forward, I guess, how do you think that will progress? And Part B to that, curious if you're seeing any incremental demand from 3rd party bank sweep, and whether the spread is starting to

Speaker 3

So as far as 3rd party demand, certainly, we have an extensive program And we do not have an issue on the placement of the funds from that standpoint. And we also and again, the bank allows us capability as I talked about growing and certainly reinvesting more directly with our bank institution. As far as the Deposit daters, look, we do a competitive scan each week. We certainly evaluate it certainly as rates go up and we look at the competitive elements as you look at the Per account compensation or client crediting rates, they will change and I'm sure they will be going up As it relates to because we our main focus is to ensure that our clients are getting appropriate rates that are competitive.

Speaker 7

Got it. And Walter, just to make sure that I understood, the are you saying you're seeing an improvement in demand from 3rd party Bancsoup or no real change In terms of what we've seen over the last couple

Speaker 8

of months.

Speaker 3

I would say this is a healthy environment, but it's a healthy environment than certainly we saw back a couple of months ago from that standpoint, absolutely.

Speaker 9

Got it.

Speaker 7

Understood. And then Jim, one for you. There's been a couple of articles talking about some potential asset management platforms for sale. In the past, you guys have obviously been very opportunistic when I kind of think about the Columbia acquisition from Bank of America. As the environment Gets potentially or remains I guess kind of dicey here.

Speaker 7

How do you think about opportunities for incremental M and A for Ameriprise on the asset management side of the house?

Speaker 2

So, again, I think market is going through a level of dislocation right now and some pressure from, as you can see, depreciation of the market and flows. We are very much focused on really the business that we have right now. We're integrating the BMO in international and that's going well and that's Consuming and some time and attention. At the same time, we know that this is a time for us to really engage our clients and maintain it and we have a lot of good new stuff going on in some of the areas and disciplines that we've been investing in from ESG to some of the institutional and OCIO and etcetera, etcetera and some alternatives. So we feel good about the hand.

Speaker 2

We don't know that down the road if there's More significant dislocation and it makes some sense, maybe we'll play, but right now it's not something we have on the plate.

Speaker 7

Got it. Thank you, guys.

Speaker 6

We'll take

Operator

our next question from Andrew Kligerman with Credit Suisse.

Speaker 8

Hey, good morning. Maybe staying on the topic of M and A, but on the divestiture end, the market's been pretty volatile. And just in general, Block transactions of insurance assets have not been as robust as we would have thought. And I had some optimism that maybe Ameriprise would do some transactions. Could you give a little color on the types of talks you're having about long term care, variable annuities and life insurance blocks respectively and the potential to divest.

Speaker 2

Sure, Jim. So as we said, we wanted to survey the market, The potential and what the opportunity may be just to evaluate. And in so doing, what we found most importantly is that There aren't a lot of market participants that have transacted or interested in more, what I would call, high quality books In a sense, they've been much more focused on general account assets so that they can invest with using their various structures Capital situations. So we don't think the market has sufficiently evolved to look at the type of business that we have and the type of value that we realize from that business. And so at this juncture, we actually feel very good about holding business.

Speaker 2

We actually Erisk the business tremendously. We moved out of a lot of types of businesses that have a bit more of that volatility or a long term tail. Our mix of business, including our variable annuities without living benefits is a Significant part of our portfolio, the other portfolio with the living benefits that's closed at this point was actually done in the right way with the right benefits and the right hedging. And so we get good cash flow from these businesses and good stability. I think you even saw in the current quarter, This has been a nice stability for us as you get depreciating markets on the equity side.

Speaker 2

And now, Walt is able to even invest out Longer and get higher yields on the book, which is good. In our long term care book, you could See the quality of that even over the current years and number of years. And so here again, there might be some opportunities As people start to get more informed on this over time that we'll see and I think we're starting to. But I think at this juncture, We're very comfortable with the hand we have, what we're doing, the type of businesses we maintain and the type of businesses we invest in, the type of businesses that we move and handle the book to manage. And so we actually think it's a great complement, particularly in an environment like this.

Speaker 8

That's really helpful. And Jim, maybe just shifting over to Asset Management. Per the presentations, clearly in retail, the 3, 5 10 year numbers are excellent versus peers, But the 1 year numbers seem to have deteriorated in both retail equity and retail fixed income. Could you Kind of give a little color on why those figures have deteriorated versus peers and strategically what you might do to turn around that performance.

Speaker 2

So again, good question. And I think we've mentioned it at a little Higher level, so let me dig a little deeper for you. So overall, across our portfolios, even for the 1 year, they're very good. There are a few Pockets that where we have some underperformance, but it's not by a lot that really brings the averages down. So, some of that's in our fixed income.

Speaker 2

So in some of the longer duration, because of the rise the spike in interest rates as quickly, our teams were much Yes, more focused on the credit side and so the duration was a bit longer and so that impact now that will come and reverse around as we get further out where the yield will be good and etcetera. But I would probably say that's where we've gotten some of the impact, not on the shorter duration, on the longer. And then the second part is in Europe. And it's not because of underperformance. It's because in Europe, When they have equities, they don't break their benchmark into value versus growth, etcetera.

Speaker 2

And so we have more growth quality oriented portfolios. And as you would understand, value has performed a bit better in this market even though it's down, it's been down less than growth oriented. And so those benchmarks underperform the benchmark, but our clients there understand that. That's why they invested in the portfolios and they know and feel good about what that is over the longer term. But on a benchmark basis, that's why you got the underperformance.

Speaker 8

Makes a lot of sense. Thank you.

Operator

We'll take our next

Speaker 10

Thanks. Good morning, everyone. My question is on brokerage cash sorting. How do you expect soaring activity to trend over the next 6 to 12 months? And what do you see as the direct impact of both money market fund AUM and cash balances?

Speaker 2

So let me start and I both want to compliment. So we already have and in what you've Seeing in the growth of our cash, there's already had the cash sorting occurring. So the growth of cash itself, if you call it in a larger Category is higher than our $46,000,000,000 because money has gone into money markets and they have gone into shorter duration funds and some brokerage activities. And so with the growth that we have, this is more of the continuation of the growth that's more in the transactional held to cash or in our certificate programs. And so we saw some of that cash sorting occur in the Q3, as you said.

Speaker 2

We may see some more of it, but the Ties of the cash has grown because people have moved money to the sidelines.

Speaker 3

The only thing I would add there is, I think as I think Alish said yesterday, Over 50% of this transitional working cash is less than $100,000 or $100,000 or less. So Stickiness is there and certainly we are competitive in what we do. So I think the sorting is less of an issue for us from that standpoint because in the higher tiers we are And we constantly evaluate, like I said, weekly to ensure that that stays. So it's a different model that we have and I think it's demonstrating its

Speaker 10

Thank you, Walter. Then sticking with brokerage cash, what are your longer term targets for both Off balance sheet cash and then on balance sheet cash inside of the bank. And I'm thinking when you reach more of an equilibrium in your cash mix is post the bulk transfer effort.

Speaker 3

So let me take a shot. Listen, obviously, we have a growing situation certainly with getting additional cash from Our current clients and new ears coming in, so we think we see that as growing from that standpoint and we will gauge it as obviously the impact of looking At alternatives because it is again transitional and where it's going to go, but that is something from a directional standpoint very sticky and we do see certainly potential to grow. We will then look for, as I indicated, the ability to redeploy in our multiple strategies to ensure the stability of our earnings that we have both And garnering the higher yield with the certainly the high the low risk profile that we do and to ensure that. So I would say that you'll see the percentage going over to bank increasing as we progress, as we feel comfortable, but it's all situationally driven. And that's why I said, when I said in my 12 points, dollars 3,000,000,000 is probably at least $3,000,000,000 because we do see in this case, but we reevaluate that there's substantial opportunity to use the bank, Not just for the investments, we're talking about to grow the capabilities that we have to meet our clients' needs also with deposit process and other products that they're developing at this stage.

Speaker 2

Yes. We'll be launching a number of deposit products in the bank, starting in the Q1 and then high yielding type of deposits and other things that you And some of the other types of institutions later in the year. So we feel there's an opportunity to not just transfer money in, but

Operator

Take our next question from Kenneth Fui with RBC Capital Markets.

Speaker 11

Hi. Thanks for taking my questions and good morning. Just one on the Asset Management business. In terms of the margins, Yes, obviously above the target range this past quarter. Wondering if there is any specific factors driving that, any potential Benefits that are non recurring.

Speaker 11

And in terms of the outlook for margins, you mentioned potential erosion based on FX. Just wondering if you could just further expand that. Thanks.

Speaker 3

So on the margins, as you saw, certainly as it relates to the Markets that we looked at last year, they're running there in their 40s and we mentioned that we're certainly getting the benefits from the market appreciation was taking place. And now you're saying from that standpoint, we've already absorbed the lower margin as we indicated to that associated to BMO business, which is the nature of the business. So this 35 0.6 percent range is that above slightly above our target of 31% to 35%. That's been impacted by the markets primarily. There's no Abnormalities that we see other than the foreign exchange and the other things that have impacted them.

Speaker 3

But as I'll mention, the market Basically, depreciation substantially took place in the September timeframe. So you will see a carryover of that into the Q4, but there will be a market driven situation, we'll probably move it to the low end of the range.

Speaker 2

And foreign exchange, we have 40% of our assets, A year ago, with the BMO acquisition in Europe and the UK, and you can see the size of that depreciation of the pound and the euro, And that had a sizable effect. Now hopefully, that will stabilize and over time, because the dollar is so strong, maybe start to come back in In a fashion that would be a positive, but the combination of that and depreciating markets have really squeezed that a bit.

Speaker 11

Got you. Very helpful. And just one follow-up, if I may, just on the annual actuarial review. Wondering if you could just share with us some of the key assumption changes driving most of the impact. Thanks.

Speaker 3

Okay. The key elements that drove it from the actuarial element was that we adjusted our mortality tables and from the standpoint we looked at our experience and So that was one. And then we also saw lower lapses coming in and therefore extending living benefits going those at a partner. Well, again, nothing out of pattern. It was just that was the trend line.

Speaker 2

And we did not adjust our interest rates where we had lower than a year ago. And you can see the rise in interest rates.

Speaker 11

Got you. Very helpful. Thanks again.

Operator

We'll take our next question from Tom Gallagher with Evercore ISI.

Speaker 9

Good morning. First question is just how do you think about the ROI difference Right now between the build in bank versus the benefit of share repurchase, Thinking about how much you've grown, the size of that bank and the capital that's been used to build that up, I assume those are pretty high ROEs. Just curious if you can give some perspective on what level ROE, ROI, however you wanted to describe and how that would compare to the return you get from share repurchase?

Speaker 3

Well, it's interesting because listen, I think as you look at the amount of free cash flow we generate and the amount of excess capital we have and our ability to Does not inhibit in any manner, shape or form our ability to continue to grow and invest in our bank to garner the benefits of both and we constantly are Making that evaluation, accessing our excess as it is the situation and the generation that we have. So I would say the return to the bank Certainly getting to very respectful levels and the buyback from that standpoint is an element that we look at certainly our excess, Looking at the opportunity to return to shareholders and then other opportunities, but one of the things that we constantly do is the ability that we are not Basically, stopping or reducing our impact of investing in the business and that is a key to us. So I would say they're not

Speaker 2

And I think you'll also find that the bank now will become a nice complement. And it's not just for what it is Today, but strategically, it will actually help us expand our relationships, deepen them with clients, offer a lot of other products that's situational for the wealth business. And so we actually think it's a great diversifier and a great complement and that capital that we're deploying will get a very good return on it.

Speaker 9

Okay. Thanks. And then just a follow-up on the whole cash Benefit that you would still expect to see heading into 2023. I just want to make sure I'm Thinking about this correctly or at least directionally correctly, if I add look at the $46,000,000,000 all in of balances and listen to everything you've said so far. On the revenue side, I can and I'm going Compared to the run rate you had in 3Q to then where they should go to in 2023.

Speaker 9

But on the revenue side, I can get somewhere in the $300,000,000 to 4 It's clear to me how much of a give up you would expect to have on cost of crediting, whether that's 20%, 50% and any So, Walter, curious if you can give me some idea whether I'm in the right directional place on the revenue pickup And then

Speaker 3

I'll pass it over to the credit. Tom, I'm not going to get into the forecast. I will say, as you see what the trend lines are and certainly The elements of potential rate increases and the balances we have, but there's a lot of variables that go into it. But certainly, we have a very, very Strong trend line as we certainly go into the Q4 and going into 2023. And we feel with the Compliment of both the short cash coming out of the sweep accounts and the investments there and the spreads that we're picking up in the bank, You can imagine it is going to be a positive trend as we move into the 4th and first in 2023.

Speaker 9

And Walter, sorry, just a follow-up on that. Anything you can offer, it doesn't look like you've had to give much up on cost of crediting so far. Any sense for how that might change? Do you think that's still going to be a fairly low impact? What do you think that might move up?

Speaker 9

I would say

Speaker 2

what we're saying is there is an increase in crediting rates and there will be as rates Continue to be persistent or it will go up. We will make adjustments, again, based on size of account and whether it's really transactional or not in keeping the cash. But as Walt has said, some of that could be will be offset based on some of the rollover in assets we have in the bank and how to invest As well as what we transfer, but also there's a question, is the Fed going to continue to raise rates? I mean, it's pretty much we think is going to go up again. I know there's a lot of things that the Fed is going to pull back next year, but inflation is so persistent, I'm not sure if that's the case.

Speaker 2

And if it is, We have the ability to invest out. So, I think we're feeling very good that what we get from the bank, What we get from the overall business will offset the depreciating markets and give us a nice complement here.

Speaker 9

Okay. Thanks.

Operator

We'll take our next question from Steven Chubak with Wolfe Research.

Speaker 4

Hey, good

Speaker 12

morning. So wanted to start off with a question just on the organic growth drivers in AWM. The 6% Organic growth, certainly a good result given the choppy tape. It looks like you recorded some wins in the financial institutions channel during the quarter. Now how material were some of those wins from an NNA perspective?

Speaker 12

And could you help frame the organic growth opportunity that you envisage within that channel?

Speaker 2

Yes. So we are getting some nice wins and we actually have a good pipeline Even some larger size types of deals arrangements. And as Those deals occur, the assets usually follow. So in that sense, you have that pipeline that occurs And then you bring on the advisors, etcetera, to help grow those channels. So we feel it will be a nice growth business For us, again, based on the size and scale compared to a lot of other businesses, it's not of the scale yet, but we think this will grow in scale over time.

Speaker 2

And so we feel very good about it. We don't break out information yet. That will be something we'll look at down the road.

Speaker 12

Got it. And just a follow-up on the earlier discussion relating to cash sorting. You noted that you've seen some better cash Shorting trends relative to peers. Some of your peers also alluded to a benefit from heavy selling activity in September. And I was hoping you can just Give an update on what you're seeing in terms of cash balance trends or levels in October and maybe a little bit more specificity just in terms of where you Back cash balances to settle out once we reach whether it's terminal fed funds or just peak sorting activity across the complex.

Speaker 3

The only thing I

Speaker 2

mean, the way I would position it to you is we've always had a certain level that is held in our cash based on how we do asset allocation, How we have it for clients' liquidity needs and emergency or even for cash to reinvest And balances that our ability to allocate. And so if you Assume that's the case 5%, 6%. You can look at it that way. Of course, cash has built up a bit more and we saw that. And that's why I said there's a complement Cash above what we're holding that have gone into some of these other types of money markets and other things and broken CDs, etcetera, etcetera.

Speaker 2

So I would probably say we are not seeing that there would be a dramatic Fall off in the cash that we're holding. There may be some adjustment because it's gone up a bit. But we feel very comfortable that within that type Term, they usually our advisors usually invest at one level anyway, even if it's in a type of cash product or a bond. I think over time fixed income will come back. That bode well for our asset management business as well and go to work in our wrap accounts.

Speaker 2

But I still think that the 5% or 6% would be rational as the clients as we've seen over the past.

Speaker 12

Helpful color. Thanks so much for taking my questions.

Operator

We'll take our next question from John Barnidge with Piper Sandler.

Speaker 12

Thank you very much. Appreciate it. Can you talk about your outlook for expense reductions in asset management with the BMO acquisition now coming up on a Full year. I know the 1 year rule is important for European regulators.

Speaker 2

The synergies from BMO acquisition.

Speaker 3

Synergies right now are actually on track. As we talked about, we gave in our We announced that we are tracking on synergies. Obviously, from that standpoint, the synergies between us are But for 2023, that's where I would say the bulk of these synergies will be achieved as we go. And we'll also then complete our most of our transition expense activities as related to it. And so we're on track and performing well.

Speaker 2

And most of what you saw in the reduction expenses wasn't necessarily from synergies yet in the current periods. So that's more of tightening up our expenses, as we go in and the team is doing a good job of rationalizing what that is, and we'll look to maintain control of those expenses. We are still making nice investments in asset management, But I think the synergies will be helpful as well as we go in that will offset some of the compression that we're seeing in the European markets.

Speaker 12

Thank you. And then my follow-up question. Seasonally, mortality is the best, strongest or healthiest in 3Qs annually. Did that pre COVID cadence to mortality trends return for the Retirement and Protection Solutions Life Business? Thank you.

Speaker 3

So if you're talking about mortality table that we adjusted, couldn't that separate?

Speaker 2

No, I'm just talking about

Speaker 3

The mortality in our normal life business, again, our mortality in the life business we're using basically industry tables Right now, we are basically saying that our trends are totally consistent with the industry tables that we've been that are out there.

Speaker 11

Thank you.

Operator

Our last question will come from Eric Bass with Autonomous Research.

Speaker 13

Hi. Thank you. It was maybe for Wealth Management, just trying to put it all together. It doesn't sound like there's anything unusual that benefited margins This quarter and you'll still expect to see some benefits from interest rates going forward. So do you see a margin in the 27% range sustainable near term and something that Potentially even move higher if markets stabilize.

Speaker 3

I would say, listen, our margin in the base business are increasing, but really we are getting The lift from the interest rates and that is an important contributor. And certainly, we do see margins from those activities being larger elements As you look at the bank and you look at the Sweet Cash. So yes, the answer is yes, we do see the margins will be increasing based upon the current assumptions that we see.

Speaker 13

Thank you. And then just last thing, just on the new advisor recruiting outlook. Can you just talk about how market conditions Are affecting your ability to recruit advisors? This was a good quarter this quarter, but I know things sort of happen on a lag. So are you seeing any change in the pipeline?

Speaker 2

No, we see a good pipeline. We are maintaining sort of our focus on that in the areas and levels that you've been seeing. I think we are finally breaking through as far as what advisors understand about our business. I mean, when we compare What we do, our capabilities, our technology, etcetera, I think advisors are very impressed, and we get very good Compliments, I mean, 9 times out of 10, our advisors join us say that our capabilities, technology support is way beneficial From the farmers they've joined us from, whether they be the independents or the wires, etcetera. So we feel very good about what that is as long as we have the conversations.

Speaker 13

Perfect. Thank you.

Operator

And that does conclude today's presentation. Thank you for your participation and you may now disconnect.

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Earnings Conference Call
Ameriprise Financial Q3 2022
00:00 / 00:00