Ameriprise Financial Inc (AMP) — Q1 2021 Earnings Call Transcript

Thank you, Sylvia, and good morning. Welcome to Ameriprise Financial's first 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'd 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 references 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 and on our website. Some statements that we make on this call may be forward-looking, reflecting management’s expectation 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 cause actual results to be materially different from forward-looking statements can be found in our first quarter 2021 earnings release, our 2020 annual report to shareholders, our 2020 10-K report. We make no obligation to publicly update or revise these forward-looking statements. On Slide 3, you see our GAAP financial results at the top of the page for the first quarter. Below that, you see our adjusted operating results, which management believes enhance the understanding of our business, by reflecting the underlying performance of our core operations and facilitating a more meaningful trend analysis. Many of the comments that management makes on the call today will focus on adjusted operating results. And with that, I'll turn it over to Jim.

Good morning. Thanks for joining our first quarter earnings call. As you saw in yesterday's release, Ameriprise is off to a strong start in 2021. We're continuing the positive momentum from the past several quarters, as you can see in our first quarter metrics and financial results. Regarding the environment, equity markets continue to rally in the first quarter, as vaccinations increased and activity accelerated with the U.S. beginning to open back up. The economy is gaining strength with the further fiscal stimulus, as well as better employment data. With this backdrop, key for us is that we remain focused on serving our clients. Engagement is high, activity is strong, and we're bringing in record client flows across the business. We ended the quarter with assets under management and administration of $1.14 trillion, which is a new high, representing a 36% increase. In addition, we recently announced the strategic acquisition of the BMO EMEA Asset Management business. Taking a step back to look at Ameriprise overall, I feel really good. We're executing well and delivering on our strategy for growth that we discussed with you. We continue to transform Ameriprise, with wealth management and asset management now representing over 75% of operating earnings. You've seen the financials—revenues are up 10% over $3 billion. Earnings per share also increased nicely in the quarter, up 27% excluding the NOL benefit a year ago, even with low short-term interest rates this year versus last year's quarter. ROE remains very strong at 30%. While we continue to invest strongly in the business, we are managing expenses thoughtfully. With our strong financial foundation and free cash flow generation, we’ve returned more than $490 million to shareholders in the quarter through dividends and our ongoing repurchase program, which is comparable to the last few quarters. Yesterday, we announced another 9% increase in our quarterly dividend, marking our 17th increase since becoming public 16 years ago. Let's now discuss Advice and Wealth Management, where we've been executing well and driving growth. We’re benefiting from the strategic investments we've made to deliver a differentiated client-advisor experience built on advice. We've been on a multi-year journey to enhance our client experience. A big part of that is the training and support we provide advisors and ensuring that new digital tools and capabilities are fully integrated within their technology ecosystem. One of our most significant investments, our CRM platform, is increasingly serving as the hub for advisors, allowing them to collaborate with clients while driving efficiencies. We've seen good uptake as advisors integrate these capabilities into their practices. This engagement is driving good client activity, excellent flows, and new client acquisition as we continue to build on our momentum from last year. Our total client net flows were strong at $9.3 billion in the quarter, with total client assets up 36% to $762 billion. Our investment advisory business continues to grow nicely, with wrap net inflows were more than $10 billion, up 55% over last year. This is another record for us, reinforcing our excellent client-advisor engagement and focus on organic growth. Transactional activity continued gaining strength in the first quarter, picking up 12% over last year, with good volume across a range of product solutions. Even with clients putting more of their cash back to work, client cash balances remain elevated at more than $40 billion. Advisor productivity was also strong, up 8% adjusting for interest rates. We're bringing on new advisors; our virtual recruiting program is driving good results, with 93 advisors joining us in the quarter. Advisors recognize what we have to offer in terms of our culture, technology, and high level of support. As more states reopen, we're looking forward to connecting with more advisors in person as we move through the year. We continue to build out Ameriprise Bank, with total assets growing to $8.8 billion in the quarter. Pledge and margin loan volumes increased nicely in the quarter as our advisors engaged with clients around our lending solutions from a liquidity perspective. Wrapping up AWM, even with interest rates at all-time lows, AWM margin increased 90 basis points sequentially, ending the quarter at a strong 20.7%. Turning to our Retirement and Protection Solutions business, we're off to a good start and adapting to the low-interest rate environment. We've been proactive as we serve client needs. Variable annuity sales increased nicely, up 33%, driven by our success with structured products and annuities without living benefits. As a result, the percentage of VA sales without living benefits grew to 64% of total sales in the quarter. In regard to insurance, our focus has been on our flagship VUL product rather than IUL; VUL sales were up 76%. We're ensuring we have the right product for this rate environment while maintaining strong underwriting. Overall, I'm pleased with the performance of the Retirement Protection Solutions business in this challenging environment. As part of our strategy, we actively pursue a reinsurance transaction for the remaining closed block of fixed annuities, and we feel we can execute it in the near term. In Asset Management, we're generating strong results. Our team is engaged, serving clients' evolving needs well and driving profitable growth. I'll speak to the strength of the quarter and then provide comments on BMO’s EMEA acquisition. With the continuation of positive flows in markets, assets under management were up significantly, increasing 32% to $564 billion. We're investing in the business, including in transforming how we use data, both within investments in terms of our research and distribution. Importantly, we also provide thought leadership and target the right advisors to drive meaningful engagement. Regarding investment performance, our teams consistently generate strong performance for our clients across all categories—equities, fixed income, and asset allocation strategies. As an active manager, our research expertise is a key differentiator. Columbia Threadneedle ranked in the top ten over the one, five, and ten-year time frames in the recent rankings, one of only two firms that ranked in the top ten across all time periods. We've also won several awards this year. This level of performance bodes well for earning future flows. At quarter-end, Columbia Threadneedle had 103 four and five-star Morningstar-rated funds globally, representing close to 70% of our assets. This shows the breadth and strength of our product lineup. With this type of investment performance and the strong execution of our plan, you saw that flows continued to be robust—net inflows were $4.9 billion, and excluding legacy insurance partner outflows, net inflows were $6.2 billion. Global retail net inflows were $4.6 billion, driven largely by traction in North America and increased engagement with clients and intermediaries, including larger broker dealers. We're also seeing good flows in EMEA. In the UK, we experienced outflows but saw improvement this quarter as the economy began to reopen fully, and we're hopeful that investor sentiment will strengthen. On a global institutional basis, we had net inflows of $1.6 billion, driven by our results in EMEA. We have made progress in strengthening our consultant relations and client service globally. Consultants have increased their ratings on several key strategies in recent quarters. Earlier this month, we announced our strategic acquisition of BMO’s EMEA Asset Management business. This acquisition aligns with our strategy by adding complementary capabilities and solutions, with their strengths in responsible investing, liability-driven investing, fiduciary management, and European real estate. It expands our scale in traditional asset classes, especially in European fixed income, where recent flow trends in their EMEA business have been favorable. Post-close, BMO’s North American Wealth Management clients will access a broader range of Columbia Threadneedle Investment Management Solutions. Geographically, upon close, EMEA's AUM will significantly increase to 40% of total AUM at Columbia Threadneedle, providing a good balance to our U.S. business. We've always been a disciplined acquirer, and we expect this transaction to contribute to our strategic growth and generate good returns over time. Importantly, as we execute, the team will remain focused on maintaining strong business momentum. So, for Ameriprise overall, we're in an excellent position. The business is performing really well and delivering strong results. Based on the current environment, we feel confident that we will continue to generate strong returns with a solid balance sheet and substantial free cash flow. With that, Walter will cover the quarter in more detail, and then we'll take your questions.

Thank you, Jim. Ameriprise delivered a strong quarter of financial results and excellent business metrics, which are a direct result of our continued execution of the strategic priorities. We continue to demonstrate strong performance in our core growth businesses of advisor wealth management and asset management, driven by ongoing organic growth and expense discipline. At the core, we remain focused on accelerating our mix shift through specific actions. For example, our recently announced strategic acquisition of BMO’s EMEA Asset Management business will expand key capabilities in attractive and growing market segments, while also adding to traditional asset classes. This provides a larger combined capability to meet client needs. We have high confidence in the financial benefits from the acquisition, as it will be accretive on a cash and operating basis by 2023, generating a 20%-plus IRR and having a payback period consistent with the Columbia acquisition of eight years. In addition, we have established a strong partnership with BMO in North America, which we expect to generate strong profits. We are actively engaged in a fixed annuity reinsurance process and anticipate finalizing the transaction shortly. Lastly, we continue to effectively manage our risk profile and shift towards lower risk and higher margin protection solution offerings. A diversified model continues to generate robust free cash flow and strong balance sheet fundamentals. We remain on track to return approximately 90% of adjusted operating earnings to shareholders in 2021. Let's assess Ameriprise's strong underlying business performance and activity levels in our core growth businesses continues to neutralize headwinds from short-term interest rates. As a reminder, this will be the last quarter where we have a reduction in short rates distorting the year-over-year comparison. Excluding the impact from interest, Ameriprise's adjusted net operating revenue grew 13%. Advice & Wealth Management and Asset Management profitability continues to increase, with adjusted pre-tax operating earnings up 35%. General and administrative expenses also continue to be well managed. Excluding the impact of share price appreciation on compensation, G&A expenses were only up 2%, as we remain disciplined, executing reengineering initiatives. We delivered excellent underlying EPS growth of 27%, excluding the net operating loss tax benefit, and very strong margins in the quarter. Turning to Slide 7, as Jim mentioned, Advice & Wealth Management continues to deliver strong organic growth during the quarter, with total client assets increasing by 36% to $762 billion. In response to many of you, we are now disclosing total client flows, which increased 21% to $9.3 billion. From a product perspective, we had terrific growth and wrap flows, up 55% to $10.4 billion. Cash balances remain elevated at $40.4 billion, providing substantial opportunities for clients to put cash back to work in the future. Financial results in Advice & Wealth Management were strong, with underlying adjusted operating earnings up 30% to $389 million, despite the $78 million headwind from interest rates. Adjusted operating net revenues rose 16% to $1.9 billion, driven by client flows, improved transaction activity, and higher market levels. Sequentially, revenues increased by 6%, despite having three fewer days in the current quarter. Expenses remain well-managed, and we continue to exhibit strong expense discipline. G&A expense increased only 2%, including higher volume-related expenses, bank expansion, investments for future growth, and elevated share-based compensation. Pre-tax adjusted operating margin was 20.7%, with this margin being 215 basis points higher when adjusted for interest rates. Sequentially, pre-tax operating earnings increased 11%, and pre-tax adjusted operating margin expanded by 90 basis points. Turning to asset management, the significant growth is attributed to our investment engine, which is driving revenue growth through consistent performance and compelling thought leadership, leading to increased client engagement. Net inflows for the quarter were $6.2 billion, excluding legacy insurance partner outflows—a favorable improvement of $8 billion from a year ago. Adjusted operating revenues increased 21% to $828 million, reflecting cumulative benefits from inflows, favorable mix shift towards equity strategies, and market appreciation. General and administrative expenses grew 12% due to higher compensation expenses related to robust performance and share appreciation as well as costs associated with increased activity levels. Adjusted for compensation-related expense, G&A increased only about 5%. Together, pre-tax adjusted operating earnings grew 45%, with a margin of 43.9%. We continue to be encouraged by the sustained positive flow trends and strong profitability in our businesses. Turning to retirement protection solutions, we have maintained our performance in line with expectations in this market and rate environment. While we have a solid book of business from a risk perspective, we continue to execute our strategy to improve it further. This quarter, 64% of retirement product sales did not have living benefit guarantees. We anticipate that these shifts will have ongoing impacts on our enforced law. The net amount of risk remains among the lowest in the industry, and our hedging strategies remain effective. In total, the corporate and other segment had a $21 million loss in the quarter, which was a $29 million improvement year-over-year. The year-ago quarter experienced the benefit from share price depreciation, while this year included a $15 million investment gain, largely offset by higher share-based compensation expenses. Long term care produced earnings of $46 million in the quarter. The mortality and terminations we observed in January declined in February and March, and we are nearing pre-COVID levels by the end of March. This improvement was somewhat offset by COVID claims in life insurance. As I mentioned, we are progressing on our fixed annuity reinsurance transaction. Now, let's move to the balance sheet. Our balance sheet fundamentals remain strong, including our liquidity position of $2.3 billion at the parent company, substantial excess capital of $2 billion, 96% hedge effectiveness this quarter, and a defensively positioned investment portfolio. Adjusted operating return on equity remains strong at 30%. We returned $491 million to shareholders through dividends and buybacks this quarter. We recently announced a 9% increase in our quarterly dividend, and we are on track with our commitment to return 90% of adjusted operating earnings to shareholders this year. With that, we'll take your questions.

Great. Good morning. Thanks for taking the question. Jim or Walter, I was hoping to start with some trends you see in Advice & Wealth Management. Another really strong quarter, particularly in the wrap account flows, over $10 billion, and thanks for the new disclosure on the $9 billion total. I guess the first question is about sustainability, particularly in the wrap flows. Could you give us a breakdown of how much of this is from existing clients re-engaging and how much is new assets from either recruiting or same-store sales?

Alex, this is Jim. Good morning. I think we're seeing good growth coming from all the areas you mentioned. We see solid flow coming from current clients as we're deepening our relationships through our Advisors. We also see good new organic growth from client acquisition as our Advisors bring in new clients. In addition, recruits we've added over the last year are bringing some clients with them. However, much of the growth is coming from organic expansion with our core client base.

Got it. That's great to hear. Shifting gears, let’s talk about the BMO acquisition. I'm hoping for more details on that. What is driving flows in that asset? Are there any potential risks from attrition that you typically see in asset management acquisitions? What financial expectations should we have with respect to operating earnings?

What I can say is that we know right now that the EMEA BMO area has been in inflows for the last several months through the first quarter. Their core programs and initiatives are showing strength. We believe the capabilities we add with this acquisition will enhance and strengthen our presence in the area, and we shouldn't suffer attrition as we are not fully merging investment processes. We're focusing more on integrating the back and middle offices, enhancing their capabilities with our advanced technologies. All of this would lead to a win-win outcome for both entities. We have factored in some degree of attrition, as we always do, but hope it will not be significant for this deal.

So, as we discussed, the BMO division is generating EBITDA, but commenting on specific numbers could be problematic. The main reason for the expected accretion by 2023 is the one-time expenses we will absorb between now and then. We have established good bookend expectations for its IRR and payback, and will update you as we receive more information.

Gotcha. So, are the integration charges going to be backed out of your operating reported results?

Yes, as we normally do, we will back them out like most firms do.

Thanks. I wanted to start with Asset Management and the very strong margin reported in the quarter, 43.9%. Was there anything unusual in there that we should normalize moving forward? And how might investment spending affect this?

There is nothing unusual in this quarter. Suneet, we are benefiting from our leveraging, and we do not have negative factors like outflows affecting us. So this is solid performance. We anticipate expenses to remain well-managed as we go forward.

From our perspective, the current performance should be sustainable in the near term as markets stabilize. One factor affecting margins going forward could be related to the acquisition of BMO as its institutional business may have different margin characteristics. Still, we anticipate that overall margins will remain stable.

Thanks for the total net new assets disclosure. How indicative is the roughly 5% total organic growth rate that you disclosed? How does this compare historically?

Walter, you can provide further insights. We believe the figures are representative of a sustainable growth path, but any historical comparisons may have definitional inconsistencies that we need to reconcile.

Yes, we are actively working on this and will provide updated historical comparisons as we standardize the definitions used across the industry.

Hi, good morning. I wanted to understand the $10.4 billion in net wrap flows. What's the normalized range for wrap net flows? Given the current $40.4 billion in deposits, what should we look toward in the near term?

I appreciate the question. The increase in flows can be attributed to a robust economy; clients feel more comfortable investing again. We're focused on deepening client relationships, using technology effectively to enhance advisor engagement, which has likely contributed to sustained high levels of flows. I can't predict exact numbers, but I see a good trend enforced here.

Yes, we're seeing positive continued growth; however, it’s tough to predict exact levels moving forward given market conditions.

Thanks. Can you give us a sense of whether transactional activity remains elevated as you go through April?

Yes, I believe it is continuing; we are seeing a sustained level at this time.

Hi, good morning. Can you remind us about Ameriprise's earnings sensitivity to potential Fed funds rate increases? What immediate benefits could we see?

Earnings sensitivity is significant for AWM. If we see a one percent increase, we could potentially see an additional $250 million over a year, but it would depend on several conditions and how we choose to return value to clients.

Hi, thank you for the color on the BMO Wealth Management relationship in the U.S. How meaningful can incremental flows and AUM potentially be?

In the U.S., we aim to provide our platform capabilities to BMO Wealth Management. We are looking to convert some of their activities over to us. This partnership opens the door for revenue synergies without experiencing attrition, moving in a positive direction. However, I don't have specific AUM figures or potential flow details as those discussions are ongoing.

As Jim mentioned, we know BMO's AUM levels, but it's too early to discuss what's likely to transfer over until we finalize those discussions.