Ameriprise Financial Inc (AMP) — Q3 2018 Earnings Call Transcript

Thank you, Operator, and good morning. Welcome to Ameriprise Financial's third quarter earnings call. On the call with me today are Jim Cracchiolo, Chairman and CEO; and Walter Berman, our Chief Financial Officer. Following their remarks, we'll be happy to take your questions. Turning to our earnings presentation materials that are available on our website, on slide 2, you will see a discussion of forward-looking statements. Specifically during the call, you will hear reference to various non-GAAP financial measures which we believe provide insights into the company's operations. Reconciliations of non-GAAP numbers to their respective GAAP numbers can be found in today's materials. 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. A sample list of factors and risks that could actual results to be materially different from forward-looking statements can be found in our third quarter 2018 earnings release, our 2017 Annual Report to shareholders, and our 2017 10-K report. We make no obligation to update publicly or revise these forward-looking statements. Turning to slide 3, you see our GAAP financial results at the top of the page for the third quarter. Below that, you see our 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. In the third quarter, we completed our annual unlocking. The comments that management makes on the call today will focus on operating financial results, excluding unlocking. And with that, I'll turn it over to Jim.

Hello and thank you for joining our earnings call. This morning, we'll discuss our strong results, give you an update on the business and our areas of focus today and going forward. Reflecting on the quarter, the macroeconomic and market picture has been positive for our clients and Ameriprise. The U.S. economy is strong, and that was punctuated by the Fed's decision to raise short-term interest rates again. However, Europe is showing signs of slower growth. Global trade issues and political uncertainty remain, including in the UK, especially as the deadline for Brexit nears. Recently, global equity markets have been more volatile. We're navigating that volatility and are very much focused on our clients. At the same time, consumer sentiment is strong. U.S. household wealth has reached a new high of over $100 trillion, which represents a significant long-term growth opportunity for Ameriprise. Turning to the company, over the years, we've built a strong business. We're well-positioned based on our broad advice capability and our integrated model allows us to leverage resources and generate consistent results through market cycles. Ameriprise delivered another strong quarter. On an adjusted operating basis, excluding unlocking, revenue increased nicely, up 5%. We continue to generate excellent EPS growth, the third consecutive quarter of 20% growth or better, building on last year's strong results. Our return on equity was also very strong, now at 32%. I am pleased with the quarter and our long-standing track record for delivering results of this caliber. In addition, our assets under management and administration are now over $900 billion. As you know, our business generates significant free cash flow and we're disciplined in our capital allocation. We continue to shift our earnings mix to less capital-intensive business lines, with more than 70% of pre-tax adjusted operating earnings coming from our Wealth Management and Asset Management businesses in the quarter. At various investment forums over the years, some of you have asked us when we would grow our less capital-intensive business lines to get to 50% or even 60%. Today, we're over 70% and we have the ability to continue to invest for growth and return to shareholders at a meaningful level. Let's move to some business highlights. Very clearly, we know the mass affluent and affluent want to work in a personal, advice-based relationship with a trusted advisor. These investors need either more advice as their assets grow, their lives become more complex and markets experience volatility. At Ameriprise, we're positioned very well to serve this growing need. We're focused on serving more investors in our target market, those with $500,000 to $5 million, and we're seeing good organic growth at the $1 million-plus level. With good client growth and positive markets, Ameriprise client assets increased 9% to $588 billion. Our investment advisory platform is one of the largest in the industry. Net inflows into fee-based investment advisory accounts were $5.7 billion in the quarter, the fifth consecutive quarter of flows over $5 billion. Year-to-date, wrap flows are 14% higher than 2017, which was an exceptionally strong year. Variable annuity sales picked up a bit, with growth of 3% in the quarter. For our Life and Health insurance offerings, cash sales increased 5%. We only offer these products in our network to Ameriprise clients as part of a comprehensive solution set. As we discussed, we focus on targeted growth within the Ameriprise client base. These solutions provide important benefits for clients while providing risk-adjusted returns for Ameriprise. Our client cash balances also remain high at more than $24 billion, and we're earning competitive returns and spread as the Fed continues to raise short-term rates. The result of these strong client flows and increased activity is continued good growth in advisor productivity, which increased 11% to $613,000 on a trailing 12-month basis, excluding the net 12b-1 change. This builds on many years of strong advisor productivity gains. Ameriprise advisors consistently grow productivity at a faster rate than many industry peers. Additionally, the level of service and leadership support we provide is reflected in our strong advisor relationships and retention rates. Regarding advisor recruiting, we're attracting productive advisors with larger practices who serve the affluent market. In fact, the third quarter was quite strong with another 87 advisors joining, and their productivity was nearly 20% higher than those recruited a year ago. For the rest of the year, the pipeline looks good. The strength of our client experience and the external recognition we receive is an important differentiator. I'm extremely pleased to share that consumers rated Ameriprise number one in the investment industry for trust, customer service, consumer forgiveness and for loyalty, according to the most recent Temkin Ratings. Across the firm, we're further investing in our value proposition and putting significant resources towards our client experience to further build on our client engagement, advisor productivity and practice efficiency. This includes enhancing our digital and financial planning capabilities, as well as upgrading to an advanced CRM system so our advisors can work in an even more integrated way with their clients. These capabilities are in development and testing. We will be introducing them with training and support to advisors beginning and throughout next year. We're also pursuing converting our National Trust Bank to a Federal Savings Bank and targeting a launch in 2019, subject to regulatory approval. Additionally, we continue to invest in the Ameriprise brand. As you may have seen, we're back on the air with new advertising and we remain at record levels of awareness. I'm energized about our opportunity, and so are our advisors. Over the last few months, I've spent time with our top advisors across the country. We've had excellent conversations about the Ameriprise value proposition and their opportunity to grow. They feel very good about the firm, the support we provide, and how we're further enhancing our client-advisor experience to deliver value and drive growth. What does this translate into? Another great quarter for our Wealth Management business. We grew assets, increased client activity, delivered double-digit revenue, earnings and productivity growth, and are managing expenses well. As part of Ameriprise, Columbia Threadneedle is focused on delivering relevant, quality products and solutions underscored by good service to retail and institutional clients while generating competitive returns. The industry is under pressure. Like other active managers, our flows have been affected, and we've been taking steps to address it. We have a broad set of capabilities and product offerings with good performance and global distribution. Importantly, the business benefits from the resources and scale of Ameriprise. We continue to execute a strategic shift in our asset mix with declines in lower fee former parent assets under management and increased higher fee third-party assets under management. This change has helped us mitigate industry-wide fee pressures while maintaining assets under management levels and consistently delivering good profitability. Looking at the business, investment performance globally remains good overall across equities, fixed income, and asset allocation strategies. For one, three, and five-year periods, more than 60% of our funds are beating Lipper peers and related benchmarks. Where we have pockets of underperformance for the current one year, we're working to address it. We have a growth with a quality bias, and with the recent market pullback, we're seeing some improvement in our short-term numbers. In distribution, we have a good base of clients and are working to gain traction in areas we see opportunity while at the same time manage industry challenges. In U.S. retail, we continue to experience net outflows. However, our focus is on strengthening our presence at top wealth management firms and getting our products and models onto these platforms and earning more business from advisors who sell our funds. In the quarter, net outflows were higher, and that included more than $1 billion year-over-year negative swing in model flows. In the UK and Europe retail, we saw net inflows of about $300 million, but flows have been softer. We're reinforcing our strong position in the UK and investing and expanding key European markets, including Italy, Germany and Spain. Brexit remains a top priority. During this period of uncertainty, we've been supporting our clients as we begin to transition certain portfolios while we continue to extend our CKF fund range in Europe. In institutional, we had elevated outflows as clients continue to derisk, rebalance, and seek liquidity in this environment. We're working hard to convert opportunities in our pipeline, but the funding pace remains slow. We also had $1.1 billion of redemptions in our CLO business, given our leadership transition in our bank loan office. Our outflows have been higher than we like, reflecting the rise of passive and pressure on sales as we compete for share in a very competitive marketplace. Our reengineering discipline allows us to free up expenses to reallocate for growth, improve service, as well as for regulatory and compliance costs. An example of that is the enhancements we're making to move to a global operating platform. We completed the first main part of the work and reallocated expense savings to help offset higher regulatory expenses, including absorbing higher research costs. We're also investing time advancing big data initiatives, both in our investment department and improvements to data-driven distribution. In addition, we're broadening our product lines and adding new structures to provide greater access to our capabilities. This includes recent product launches that broaden our SMA capabilities in the tax-efficient space and in strategic beta. In Asset Management, we have good scale and distribution, broad investment capabilities, and the ability to adjust the business and leverage our integrated model while continuing to generate a good return. As I reflect on the quarter and the year so far, I feel very good about Ameriprise, the client experience we deliver, and how we're situated. We're generating strong results, see meaningful opportunity ahead, and are investing for growth as we continue to shift our business. We're executing consistently through market cycles. I also feel very good about how we manage risk at the company. Our approach has served us very well for many years. As you'll hear from Walter, we're comfortable with how we manage our longer-tail liabilities while maintaining the flexibility we need to capture market opportunities. Ameriprise is in a great position for future growth and to deliver an attractive return to shareholders. Now, Walter will cover the numbers. And I'll be back to take your questions.

Thank you, Jim. Ameriprise delivered another excellent quarter, consistent with our longer-term performance. This is led by Advice & Wealth Management, which delivered 19% earnings growth and continued strong metric trends. Our other businesses are generating good, stable earnings. Asset Management is delivering good profitability as we navigate an environment and regulatory change agenda. Protection and Annuities are generating very good risk-adjusted returns that are in line with our expectations. In the quarter, we completed our unlocking and LTC experience review, which resulted in a marginal charge, well within historical ranges. As I previously indicated, Long Term Care will not impact our ability to deploy capital for business investments and return to shareholders. Turning to page 6, Ameriprise delivered strong results in the quarter. We're continuing to make significant progress in delivering our long-term shareholder objectives, as demonstrated by strong 5% growth in revenue, 20% growth in EPS, and a 32% return on equity. Let me take you through the details, beginning on slide 7. Overall, Ameriprise delivered strong revenue growth, up 5% in the quarter, largely driven by Advice & Wealth Management. Asset Management, Annuities, and Protection had fairly stable revenue that was in line with expectations. Expenses continued to be well-managed across the firm, with G&A up only 1%. I will go into detail on expenses in each segment on the subsequent pages. In total, adjusted operating EPS was $4.05, excluding unlocking, fueled by Advice & Wealth Management, which now makes up 46% of our pre-tax adjusted operating earnings. Year-to-date, we returned over 90% of earnings to shareholders, a continuation of our track record of differentiated return. In the quarter, we returned $484 million to shareholders through buybacks and dividends. Lastly, we have maintained $1.4 billion of excess capital while achieving a 32% return on equity, up 150 basis points. Let's turn to slide 8. As I indicated, Advice & Wealth Management represents 46% of pre-tax adjusted operating earnings, demonstrating a significant upward trend from the 41% last year. We have diversified sources of free cash flow from our businesses, with Advice & Wealth Management driving much of our growth, complemented by Asset Management, Annuities, and Protection. Our fee-based businesses of Wealth Management and Asset Management now make up nearly three-quarters of our earnings. Let's turn to AWM on slide 9. Advice & Wealth Management is delivering consistent, strong financial performance that is underpinned by business fundamentals that have continually demonstrated an ability to drive sustained organic profitable growth. Overall, AWM had substantial 19% earnings growth to $355 million. Revenues grew 11%, driven by $5.7 billion of wrap net inflows and higher transactional activity levels, as well as equity markets and the benefit of higher short-term rates on cash sweep balances. The third quarter had lower transactional levels than the first half of the year, which is typical in our industry, associated with the summer slowdown. As we move into the fourth quarter, we expect transactional activity to return to a more normal level. Expenses increased in line with revenues and included higher distribution-related expenses. G&A increased 7%, driven by higher volume-related expenses as well as elevated growth investments. We are diligently managing G&A while investing to improve the client experience and ease of doing business. We are making investments where we will see the best payback. Margins continued at a record high of 22.7%. We have seen strong growth trends in Advice & Wealth Management, both in the quarter and over the last several years. You can see some of these trends on slide 10. Total client assets increased 9% to $588 billion in the quarter, driven by growth in wrap assets of 16%, reflecting client demand for fee-based products. Over the past three years, our client assets are up 11% and wrap flows grew 21% on a compounded annual basis. Brokerage cash balances remain substantial at $24.2 billion, down slightly from last quarter as clients are putting money to work. We are benefiting from short rates getting back to more normal historical levels, and we saw the spread increase to 1.73% in the quarter. While we have retained a high percentage of the rise in short rates to date, we are closely monitoring crediting rates to remain competitive with peers. Finally, organic advisor productivity also continues to steadily improve, reaching nearly $613,000 on a trailing 12-month basis for the quarter. This level has grown steadily over the longer term, with a combined annual growth rate of 8% over the past three years. This is well above the productivity growth experienced by many of our wealth management peers. Let's turn to Asset Management on page 11, where financial performance remains solid and profit margins high as the business and the industry face some secular headwinds. Earnings were $197 million. The year-ago quarter included a one-time $10 million gain on CLO unwinds. Excluding that prior-year item, earnings were up slightly. Adjusting for the CLO unwind, revenues were in line with a year ago. The fee rate in the quarter was 54 basis points, slightly above our expectations in the 52 to 53 basis point range. Expenses continued to be prudently managed by generating operating efficiencies and reengineering, which is funding growth investments and higher regulatory costs in Europe to address MiFID II, GDPR, and Brexit. We are continuing to make investments in the business to build our brand, expand our product offering, and enhance our distribution capability in Europe. We delivered a 40% margin in the quarter. We continue to expect the margin to be consistently in the 35% to 39% range in the near term. Let's turn to Annuities on slide 12. Annuities are a core enablement capability for our Wealth Management business and part of our important set of solutions tailored to meet our clients' needs. This business continues to generate good risk-adjusted returns for the company. In the quarter, variable annuities earnings were $131 million, which was essentially flat to last year. Equity market appreciation increased account values year-over-year but was largely offset by net outflows. Variable annuities continue to experience outflows, though at a slower pace than last year. Variable annuity sales continue to be solid, up 13% year-to-date, which is above the industry. Nearly 30% of our VA sales are in our product without living benefit riders. Fixed annuities pre-tax adjusted operating earnings declined to $12 million as lapses in interest rates continue to impact results, as expected. Turning to Protection on slide 13, Life and Health pre-tax adjusted operating earnings were $65 million and included a one-time expense associated with a modification of cost within a reinsurance contract. Claims were in line with expectations, though claims were somewhat favorable to the prior year. Life insurance sales have been good, with 5% sales growth and acceleration from earlier this year. In the Auto and Home business, pre-tax adjusted operating earnings were $17.9 million, excluding net catastrophe losses. Earnings were down $3.4 million from last year, primarily due to the wind-down of the previously announced affinity partnership termination and delay in reducing expenses associated with this contract. We continue to reduce home exposures in severe convective storm states from the termination of our affinity partnership I just mentioned, along with other actions. This has resulted in homeowner policies in force declining 18% year-over-year. We expect this to improve our risk profile going forward. Turning to slide 14. A cornerstone of our success as a company is predicated on a proactive, integrated risk management process, which results in sustained strong balance sheet fundamentals. We have a rigorous process to identify, quantify, and mitigate risk that we use to make business decisions. Over the years and across all business lines, we have been successful and avoided surprises. There are a number of underlying metrics that demonstrate our successful ERM program including ALM, where we are short duration and positioned for rising rates, as well as credit quality and hedge effectiveness. These underlying examples support our strong balance sheet. In the third quarter, we completed our experience update as part of our comprehensive and consistent unlocking process. Overall, the impact from market assumptions was marginal and behavioral characteristics were within ranges. Unlocking was consistent with our expectations, with a $58 million total charge, with $52 million coming from Long Term Care. The majority of the Long Term Care charge related to updating morbidity experience, which was offset by actual and expected premium rate increases. Let me remind you, our reserves do not incorporate any future improvement in morbidity or mortality and we have a conservative approach to the level of rate increases assumed. Let's turn to slide 15. Our LTC experience is some of the most extensive in the industry as we sell policies from 1989 to 2002. Each year, we do a granular analysis of our experience and update assumptions accordingly. Let me provide a bit more detail into the drivers of the level of credible experience that support our active life reserves. Each year, we update our experience tables to incorporate an additional year of information. We have 29,000 policies that are closed with claim activity, as well as 8,000 currently active claims. We apply this claim experience to our in-force policies at a very granular level broken down by issue year, attained age, and benefit features. Another critical fact is that 75% of claims experience provides statistically valid information that is used in estimating our reserve assumptions. Policies with lifetime benefits have higher claim duration, and this is incorporated into our reserves. In the appendix, we provide additional insights into these areas. Lastly, we have been pursuing rate increases since 2005 and have achieved substantial or appropriate increases. As we incorporate future rate increases into our assumptions, we are conservative. Based on recent industry trends, we believe there is an opportunity for additional premium increases as well as benefit changes, both of which are not incorporated into our current reserve methodology. Turning to page 16, we laid out the core assumptions for the LTC block and associated sensitivities. I want to focus on three key takeaways. First, our best estimate reserve assumptions are conservative and consistent with our actual experience based on our granular approach. To reiterate, we do not assume improvements in morbidity and mortality. For lapse rates and asset yields, assumptions are based on our actual experience. For expected future rate increases, we consistently assume a lower level than what we've historically received. Second, looking at sensitivities, the impact is minimal on a relative basis. As you would expect, the larger sensitivity is to morbidity, which is $127 million, significantly less than what others in the industry have disclosed. But this sensitivity is overstated because it applies across the whole book rather than to the subset that does not have credible claims experience. If we apply the sensitivity just to that portion, the impact would be reduced from $127 million to $57 million. Third, these scenarios do not reflect any potential benefit to reserves from additional premium increases and benefit reductions that align with industry trends. Now, let's turn to free cash flow generation and capital return on slide 17. Ameriprise's cash flow generation, balance sheet quality, and capital return capability continue to be very strong. Ameriprise's excess capital is $1.4 billion and our estimated RBC ratio is 515%. In the quarter, we returned $484 million of capital to shareholders, bringing our year-to-date total to more than $1.5 billion. This is over 90% of our adjusted operating earnings. This demonstrates our ongoing commitment to capital return, as well as confidence in our risk analytics and future cash flow capacity. In closing, Ameriprise delivered another strong quarter of financial results and organic growth that is exceeding expectations, with strong client flows and productivity gains in Advice & Wealth Management. We're meeting and exceeding client needs, as evidenced by our profitable growth and the recognition we receive. We are continuing to invest for future growth. Our ERM decision-making process demonstrates that we effectively manage risk and avoid surprises. Our Long Term Care results in the quarter are no exception to that. As we've indicated, Long Term Care will not impede our ability to invest for business growth and return capital to shareholders. Finally, our business model generates significant free cash flow that will sustain our differentiated capital return. And with that, we'll take your questions.

Thanks, guys. So maybe just to start with Advice & Wealth, revenue growth of 1% quarter-over-quarter, despite the fact that we got obviously the benefit of higher rates and your asset growth and core metrics continued pretty good. I'm assuming it's all kind of slower activity rates, but any incremental color on what kind of slowed the implied fee rates in the quarter? And I guess more importantly, as you guys look into October, any sort of notable changes given the moves in the market in terms of client allocation or any noticeable moves back into cash or anything like that would be helpful.

Alex, so the third quarter was actually quite strong on a seasonal basis. As you would imagine, the summer months are always a little slower compared to the second quarter and therefore, even the fourth quarter. I would actually add a little more color because it was a very strong quarter; in our third quarter, we have our National Conference, which takes our top 15% of advisors away for a week and some extend mainly for two weeks. We also have our Chairman's Advisory Council, which is our very top advisors, and they were away for a week to two weeks as well in that quarter in addition to the National Conference. That's a compounding factor, which is our most productive advisors were also out in the summertime for special events. So we think it was an exceptionally strong quarter. Looking against the industry, you'll find that the stats are quite strong.

And October, kind of how are things trending so far?

And October, listen, there's an experienced level of volatility. Our advisors are really engaged with their clients and they're sticking to their allocation methodologies, so we do not see a shift at this point. I mean, it's early in the quarter, etc., but it's part of the engagement we have with the advisors and their clients, and we give them a lot of support to work with their clients over a longer term.

Got it. And just my second question around Asset Management; the industry continues to be under a lot of pressure and, frankly, the market volatility is only adding fuel to the fire here. We've seen some deals in the space. You signed off Oppenheimer. You guys have been in the past thinking about potentially pursuing acquisitions in the space. Given the fact that scale is becoming more critical and you have your own flow problems, are you thinking about opportunities to consolidate in the industry, given the excess capital position and just kind of updated thoughts around M&A in the space?

We continue to do a lot to improve the way we operate at Columbia Threadneedle with the capabilities we're installing, the front, middle, and back office globally to give us efficiency. We do believe as we continue this journey that we'll be able to add more assets to our platforms in a more efficient and effective way. We do look at opportunities that arise, but we are very practical and appropriate in understanding where we can extract good shareholder value as well as add strategically to the business. We'll evaluate those things as they come along. We have the means and capability, but more importantly, we want to ensure that we can execute appropriately and leverage it. So we will keep our eyes out for opportunities that may make sense for us that we can extract an appropriate return and add value to the business longer term.

Okay. Thanks, Jim.

Great. Thanks and good morning. So with Long Term Care, we've seen one of your peers enter into a transaction to reduce their exposure. Given your block is seasoned with very credible experience, is a sale of your block also a possibility? And second, you provided all the gap sensitivities to the various factors, which is very helpful; I just wanted to check whether the statutory impact would be roughly similar.

As it relates to looking at alternatives, certainly we will evaluate it from that standpoint. Our statutory reserves are higher, but the impact will be pretty much the same. But the statutory is a little higher than the gap.

Good morning and thank you for taking my questions. In terms of the fees in A&WM, you've talked about for transactional fees; there's some seasonality in the third quarter. But how should we think about the financial planning fees? In your disclosure, there seems to be some volatility throughout the years. Just wondering if there's some kind of seasonality there that we should be thinking about going into the fourth quarter?

On actual financial planning fees, it really depends on how the advisors rotate their annual fees and renewals with their clients, so it does vary based on the time of year that they've executed those. I haven't looked at that. We can see, but I don’t expect any material changes that we would expect from year to year.

Got it. And then in terms of the productivity, I believe being able to do more financial planning is one of the drivers to get to a stronger productivity number. But I was wondering if there is any kind of metric that you can share in terms of the penetration of financial planning activities in your customer base?

We're investing even more today so that we can ensure we can deliver a consistent level of advice to all of our clients as we go forward. What an advisor does today is they'll do an annual plan at some time in that relationship, and roughly 40-plus percent of our clients have a full comprehensive plan, and there are a lesser percentage that do that on an ongoing annual basis. What we're looking to do is increase the number of clients and the consistency of that financial planning methodology being applied, and we think that's a great opportunity. So we're investing a bit more in our capabilities to digitally enable all that advice with online goal tracking and ensuring that, in an interactive way, our clients can deliver that seamlessly to more of their clients because it does take a bit more work and engagement. This is something I'm really excited about as we move into 2019 and could be a big opportunity for us.

So just to put some context into that opportunity, if we were to think back a couple of years ago, where would that number be in terms of clients with comprehensive financial planning?

Our annual increase in planning activities is probably high single digits a year increase. So we're looking to see if we can up that even more. But we do have good penetration compared to anyone in the industry in that regard, but it's still an opportunity for us based on our value proposition.

Morning. Just a few Long Term Care questions, Walter. When you think about capital allocation and potential risk transfer for Long Term Care, do you think you'd be able to fund that with current excess capital or would you likely have to slow or stop the buyback?

I do not have to use excess capital because I believe we are adequately covered. As I indicated, we feel comfortable with where we are at that position.

No, my question is for potential risk transfer, not for the current maintaining the book.

If you're referring to the CNO and doing risk transfers through that sort of method, that would be one of the evaluation elements, but we certainly have the capacity if that was something we wanted to pursue. But the answer is we would have to evaluate the facts and circumstances associated with any of those transactions.

We don't foresee even in a risk transfer that it would affect our buyback capability on any quarter basis.

Got it. That's helpful. And then in terms of the morbidity experience that you're seeing, can you give a little more color for what's going on below the surface or is it frequency? Is it claim durations? Is it severity? A little more color there would be helpful.

It's a meticulous process that we use, looking at it on a consistent basis. It's all of the above as they move through their issue age to attained age. It's a combination of all of it. This is progressing just as we anticipated, but it's all those components together. There's no one factor that stands out; it's a combination.

Okay. And then, just on the morbidity, the fact that you're not including morbidity improvement in your reserves but you're actually seeing adverse morbidity trends, is this informing you that your baseline morbidity assumptions are too aggressive? Is that something you're going to have to revisit or do you still feel comfortable with those?

I guess the short answer is we feel comfortable, and this is actually the process we follow. We don't anticipate improvement, but we evaluate actual experience, and we feel very comfortable this is the way we derived our best estimate with that knowledge.

Okay. And my final question: just given what's going on with Genworth and your reinsurance on Long Term Care with them, I understand that if Genworth goes bankrupt, you've commented that you have enhanced asset protection. But what if Genworth needs to bolster its reserves backing the Long Term Care reinsurance contract? I'm assuming that's where there would be a potential shortfall for you in the event of a Genworth bankruptcy. Am I thinking about that correctly or is there any other offset to think about?

I don't think you are thinking about it correctly because we are comfortable with their reserves and we understand them. We work well with them, and so we don't think that is a major exposure.

I mean, Walter, my one reaction to that is the company is selling themselves and saying this is their best option, which to me they're signaling very clearly to the market that there is an overall very big reserve deficiency. So just based on what their actions, I think they're implying to the market that there is a very big deficiency there. Is your block different than the rest? I'm just a little confused on how to interpret that.

You’re making a lot of assumptions on that basis. They are sitting on surplus, and we work with them. They do all our claims handling and claims administration. We certainly work with their actuary. So we feel comfortable with the process we have in place with them. That should not be a major issue.

Hey, good morning. I'll go away from Long Term Care. Can you speak about your expectations for G&A growth in Advice & Wealth Management? I think last quarter you indicated for the full year we should expect a range of G&A growth versus 2017 of about 4% to 6%. If I've got the numbers right, you're running above 7% through the first nine months. Should we be thinking about that 4% to 6% range as still a good way to think about the full year, or should we think about being above that range?

These are difficult areas, especially when you talk about splitting the difference between 1%, but we think it's totally consistent. We've had good volume growth, and a lot of those expenses are tied to that volume and certainly we are investing. We feel that range is good whether it's 6%, 7%. The deviations factors are pretty small when you get to that. But the ability to drive our margins and really have good growth, that's the factor.

Okay. And then, Jim, I have a bigger picture question for you. As you look out over the next couple of years, what are your strategic priorities? A good part of the narrative on your company and stock has really been about potential structural opportunities with a few of your businesses; already earlier in the Q&A there was some discussion about Long Term Care, potential risk transfer. You've talked about the Auto and Home business and the improvement needed there to maybe pursue something, maybe something that can be done in combination with your Annuities business as we think about companies like Apollo and Athene that have openly talked about a willingness to do multiple product line kinds of transactions. So with the continued discount in your stock valuation, I know it's early today, but your stock is underperforming again; is there any increased sense of urgency to pursue any of these kinds of paths?

Thank you for the question because I think it's an important one as we think through it. As we've highlighted to you a number of years ago, we continue to be focused on the strategic growth of our business and generate good returns for shareholders. I mean, we have a 32% ROE, one of the highest in the industry, with all amortization, all costs included in it. Others look at EBITDA and everything else. From our perspective, we're doing exactly what we told you we would do a number of years ago and we've executed quite well on it. Our growth has been consistent; growth of our business is really in the forte of Advice & Wealth Management. It's almost 50% of the total business earnings right now, and it continues to grow nicely. We have a nice complement with the Asset Management that we manage assets for advice, as well as the same with the Insurance and Annuities. We’ve reduced the I&A business and the balance sheet requirements tremendously over the years. It's less than 30% of our total earnings. The balance sheet is quite well risk managed, generating a reasonably good return with cash generated. We've done what we said we would do, and we'll continue to. Now, we'll evaluate strategically opportunities; we have good discussions with our board to see what would generate long-term shareholder value, not on a quarterly basis, but longer term. We'll make informed decisions as those opportunities rise or if there's a structure that makes sense for us for risk transfer. We'll evaluate that as we continue to move forward. I think sometimes we overlook what we're generating overall, the type of earnings. AWM, just as an example, excellent quarter. I know models are there for a reason, but consistently strong performance. The business itself is generating great cash flow that we're returning to you and investing. We have opportunities for inorganic growth; we will look at some adjustment of risk transfer in some of the businesses you mentioned if it makes sense from a shareholder perspective. We do evaluate that. We bring in people to evaluate and do it internally as well. It's a good question and I can understand why you're asking it. If an opportunity comes along that makes sense strategically for us longer term, we will evaluate it.

Thank you. Deposit betas have been a big theme. Any pressure to share more of the benefit?

We can't hear you. Could you...

Sorry. Is that better?

Much better.

Thanks. I just had a question on sort of your deposit betas because that's been a big theme for banks. Your deposit balance was relatively flat quarter-over-quarter, but just are you seeing any pressure to share more of the benefit from higher rates with clients, and do you have an estimate for how much of the benefit from additional rate hikes you expect to drop to the bottom line going forward?

We continually evaluate that. We have extensive reviews of competitive elements, and we have not seen any particular pressure at this stage. We're still evaluating it. We do anticipate maybe in the future, more will be shared. But as we indicated, we're not seeing that right now.

Okay. And then, you mentioned the plans to launch a Federal Savings Bank next year. Can you just provide an update on your thinking about the revenue opportunity there and potential bottom line impact, both near and intermediate term?

Our intentions are to certainly start the bank next year, as Jim has indicated. When we exited the bank several years ago, we were earning around $60 million pre-tax. Our best estimates now are that we could get up to in five years in the range of $100 million pre-tax.

Hi. Thanks. Good morning. I had a follow-up on asset management M&A from the earlier question. In recent years, you've been primarily focused on adding pretty small bolt-on deals that give you new capabilities. Is that still your focus, or would you contemplate something that would be more financially motivated that had cost savings opportunities but was less strategic when it came to new capabilities?

You're correct. We've been looking at more bolt-on deals strategically in product areas that we're not playing in. We will continue to do that because it would be appropriate for us to continue building out rather than organically building some areas where we don't have the expertise. But no, we would entertain an appropriate larger deal. We think that will be appropriate as we build more assets onto the platform more efficiently. We've been able to execute those larger deals, like Columbia, and get real good efficiencies. We've globalized Threadneedle, which gives us an opportunity as we think about adding international capabilities more easily. So yes, we would entertain that. Of course, it always looks at what the seller's looking for, and we want to ensure that it's appropriate for us as well.

Understood. And then, just on debt capacity, how do you evaluate how much debt capacity you have? Because if you look at your balance sheet like a life insurance company, your debt-to-capital ratio is not particularly low; but if you look at it more like a fee-based company, your debt-to-EBITDA, it would look like you have a fair amount of capacity.

We do have a fair amount of capacity. Obviously, this is reviewed with the agencies once a year. But you're correct. You can look at it both from the insurance standpoint and each agency has their own guidelines, but we do have a fair amount of debt capacity.

Thanks. Good morning. This year and last year, you're doing a great job of growing earnings per share, obviously plus 20%. It's a very good growth rate. What about next year? I mean, if the asset growth slows down or flattens, what additional levers can you pull to get earnings growth or EPS growth at least in the low to mid-teens?

We have a few levers; if the markets slow down or if we go into a slower environment, we've been very able over the past, as we've reflected to you, to adjust our expense base appropriately, slow down investments, and slow down some of the things we execute on an ongoing basis, like our advertising and various initiatives. So there are levers we can pull. We can also accelerate our reengineering, which can lead to some structural improvements and additional efficiencies. Right now, we wanted to be a little more in investment mode because we've spent considerable time on regulation and compliance over the last few years, which has reenergized the machine there. But we could definitely make adjustments and still keep those investments going. Part of the lever is also that we have a very good balance sheet right now. We have good excess capital that could be utilized as well.

Hey, finally. A couple of quick questions: brokerage sweep fees. You came in at 173 basis points this quarter versus 157 last quarter and 111 last year. Where do you think a good normalized number could settle in?

That strictly depends on where the Fed goes. They've talked about doing two or three more hikes. The trajectory is up, but I can't tell you how high, Andrew.

As rates continue to go up, we will be passing more onto the client. We look at that very competitively because the increases that you usually see off of a base would have been a greater share of the growth. But because we are recovering from such a low point, it hasn't been shared as much. As rates continue to rise and get into the little higher 2% to 3% range, you'll start to see a bigger amount shared.

Got it. And then, in the Auto and Home area, you mentioned favorable reserve development. Could you elaborate a little on maybe how much potentially there is in favorable reserve development?

I can't get into the exact number. What I can say is we've looked at this and certainly looked at our prior year and the redundancies we have built. We're seeing very favorable trends across both the Auto and Home aspects of it. We're feeling very comfortable that the rates we have set up are working well; we're looking at frequency and severity trends coming in. Some are longer tail; some are shorter tail, but we have built reserves. We have to assess when to say they are a redundancy. But we are in a very good position at this stage.

Got it. And then lastly, the consolidated tax rate: it looks like it's trending to about 16% this year. Where do you think it could go next year?

I think our range is still between 17% and 19%, probably tending to the lower end of that. But that range is good until we refine it further.

Thanks. Starting with Long Term Care, Walter. To Tom's question earlier, you had said you'd be able to do a reinsurance solution without any excess capital if I'm understanding your response correctly. So I guess what's the hold up? If it doesn't cost you any additional capital, the sensitivities here don't look that significant. So why not pursue something? I can't imagine there'd be a big overhang on your stock.

Let me clarify. We watch Genworth, and certainly discount rates are a factor. We have the capacity; it just depends on whether we are comfortable making a deal based on current evaluations.

We are not opposed to a risk transfer. We will evaluate it depending on the opportunity and interest that's out there in the marketplace. We will strategically look for opportunities that make sense for the business.

Yeah, last one just on the overall environment. If revenues are flat in 2019, do you think you have enough leverage on the expense side to reduce expenses, or are these investments that you're making of the type where it's really hard to pull back now that you've started them?

It's a timing issue. If you reflect on past economic downturns, the revenue tends to hit quicker than expenses. In a longer-term view, we can adjust expenses while maintaining investments.