Ameriprise Financial Inc (AMP) — Q2 2022 Earnings Call Transcript

Thank you and good morning. Welcome to Ameriprise Financial's Second Quarter Earnings Call. On the call with me today are Jim Cracchiolo, Chairman and CEO; and Walter Berman, Chief Financial Officer. Following their remarks, we'd be happy to take your questions. Turning to our earnings presentation materials that are available on our website. On slide 2, you'll 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. 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 second quarter 2022 earnings release, our 2021 annual report to shareholders, and our 2021 10-K report. We make no obligation to publicly update or revise these forward-looking statements. On slide 3, you see our GAAP financial results at the top of the page for the second quarter. Below that, you'll see our adjusted operating results, which management believes enhances the understanding of our business by reflecting the underlying performance of our core operations and facilitates a more meaningful trend analysis. 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 and welcome to our second quarter earnings call. Ameriprise performed well in a significantly more challenging environment and delivered a solid quarter. Clearly, high inflation in the US and globally, as well as geopolitical uncertainty, continued to cause greater volatility in pressured markets. With the Fed raising rates and concern about a potential recession, markets are experiencing headwinds and that's weighing on investor sentiment. While the environment impacted our results, particularly in Asset Management, we delivered strong profitability, good client flows in wealth management, and strong results at the bank. We're continuing to serve clients well, managing our expenses prudently, and investing in the business to drive near and longer-term growth. Let's move to second-quarter results. Compared to a year ago, total assets under management and administration declined 3% to $1.2 trillion. We benefited from the BMO EMEA acquisition and the cumulative impact of Ameriprise client net inflows, but assets were affected by a negative foreign exchange impact and the steep decline in both equity and fixed income markets. In terms of adjusted operating financials, revenues grew 3% to $3.5 billion as good business performance offset market impacts. With that, earnings were up 4%, with EPS up 10% to $5.81, and ROE was very strong at 48.8%, compared to 37.5% a year ago. I'll turn to Advice & Wealth Management where we delivered another strong quarter. We had good activity in a tough market environment. We're serving clients well with our goal-based advice, driving strong engagement and earning strong satisfaction. Total client net inflows were $8.6 billion, down 10%, but quite good in this environment. Our wrap net inflows also declined to $6.2 billion. Cash balances were up sharply to more than $47 billion, compared to more than $39 billion a year ago. Even in a more challenging operating environment, our adviser productivity was strong, up 11% to $814,000 per adviser. We recently hosted our national conference for our top advisers and the level of engagement was terrific. They're excited about growing their practices at Ameriprise and appreciate the investments we've made and the support we provide. We're also seeing nice engagement with adviser recruits. We had another good quarter in terms of recruiting, adding 99 highly productive advisers. Our value proposition stands even taller in choppier markets. When experienced advisers join us, they routinely say our culture, technology, financial planning capabilities, and ability to grow are key reasons they make the move. We're driving meaningful momentum and I feel good about our pipeline. Now I'll give you some perspective on our growing cash business, which represents a significant future revenue and earnings opportunity for us. First, we're beginning to generate more revenue from our off-balance sheet cash as the Fed increases short rates. Second, we continue to move more assets to Ameriprise Bank, garnering additional spread, including moving $2.3 billion to the bank late in the second quarter. For perspective, total bank assets are now at $17.1 billion. Assets have more than doubled since the beginning of 2021, and we're positioned to take this further. An important takeaway for you is that as we move through the second half of 2022 and into 2023, the growth of our cash business and rising interest rates will provide an offset to equity market weakness. That leads me to AWM's financials. We continue to generate strong pre-tax income, up 16% to nearly $500 million, and our margin continues to accrete, up 250 basis points to nearly 24%, even after the impact of substantial market declines. Moving to Retirement & Protection Solutions. The business is performing well in this environment and reflects our strategy to focus on our core products. I'll start with variable annuities. Overall, sales were down 29%, given our move away from living benefit guarantees. We continue to prioritize annuities without living benefits in our structured products. In Protection, life sales declined 23% given the climate and our move away from fixed insurance. We remain focused on our VUL and DI products, which have good profitability and are appropriate for our clients. In terms of earnings, they were in line with our expectations and our financial results and free cash flow look good and our risk profile remains well managed. Now let's turn to Asset Management. We've already referenced the challenging operating environment that has resulted in asset declines and tough retail flows for the industry. We're experiencing that pressure too. However, we feel like the business is performing well and we're making appropriate adjustments as we move forward. Assets under management were up a bit year-over-year as a result of the BMO acquisition and the cumulative impact of net inflows offset by market declines and a significant foreign exchange impact in the quarter. Revenue was essentially flat overall. Let's start with investment performance. Our long-term numbers continue to show good consistency for our three, five, and 10-year time periods with over 75% of our funds above median on an asset-weighted basis. Regarding one-year performance, it's been a tough period in both equities and fixed income. Domestic equity results were good driven by our larger funds moving back above the median. In international equities, our quality positioning has been more of a challenge in these markets. In fixed income, results have been solid in Europe, but in the US were impacted by our longer-duration positioning in our quality focus and credit. We do feel with market conditions beginning to stabilize, we should see some improvement. Let's turn to flows, where we had outflows of $3.1 billion in the quarter that included $1.2 billion of legacy insurance partner outflows. This reflects the pressure you've seen in retail, but was partially offset by positive institutional results. In retail overall, we had lower gross sales and higher redemptions resulting in $5.8 billion of net outflows. This was driven largely by weak conditions in the United States and to a lesser extent in EMEA. In US retail, equity outflows were generally in line with the industry, and the fixed income results were behind given our product mix. Compared to the industry, we did not participate nearly as much in short duration. As interest rates stabilize and investors see opportunities, we believe our product position will improve flows. In EMEA, retail flows also remained under pressure. However, we did see some improvement in Continental Europe. Turning to Global Institutional. Excluding legacy insurance partners, net inflows were $3.9 billion. We had some good inflows in fixed income and other strategies. In addition to our broad lineup of traditional institutional strategies, we're bringing more focus to multi-asset and solutions as well as alternatives. I was with the team in London in June, and they're feeling good about the core business, the integration, and the extensive capabilities we offer clients. In fact, just a few weeks ago, we announced the rebranding of BMO strategies to Columbia Threadneedle, which was an important step as we move forward. I'll close Asset Management with the financials. Our margin was 38.5% and that incorporated the BMO business, which has lower margins based on their mix. Given market decline and impact on revenue, we're taking steps to continue to control discretionary expenses thoughtfully. We'll be paying close attention to the market environment as we move forward. So overall, Ameriprise remains in a strong position. We have a proven track record of navigating tougher times and will continue to do so. We're highly engaged with our clients and helping them stay on track. And from a financial perspective, rising interest rates will act as an offset to compressed markets as we move through the balance of the year. We will be focused on managing our discretionary expenses even more tightly as we move forward. Importantly, our balance sheet fundamentals remain very good. We continue to generate strong returns and substantial free cash flow, which provides flexibility. In the quarter, we returned $600 million to shareholders and are on track to return 90% of operating earnings to shareholders in 2022.

Thank you. As Jim said, results in the quarter were strong with earnings up 4% to $665 million and EPS up 10% to $5.81, in face of substantial market declines. This demonstrates the underlying strength of our business model and highlights the diversification benefit each segment provides across market cycles, as well as initial interest rate benefits and overall expense discipline throughout the firm. As we move into the second half of the year, benefits from rising rates and higher cash balances are expected to offset the realized pressures from the market volatility. Our high-quality, diversified investment portfolio and headcount continue to support strong balance sheet fundamentals and our business is generating good free cash flow. Despite the elevated level of market volatility in the quarter, Ameriprise returned $600 million of capital to shareholders and maintained significant excess capital of $1.6 billion. We are on track to return approximately 90% of adjusted operating earnings to shareholders this year. Let's turn to Slide 6. We ended the quarter with assets under management and administration of $1.2 trillion, down 3%, reflecting equity and bond market depreciation and as well as foreign exchange. We are executing our growth strategies, including the integration of the BMO business. The BMO business contributed to our geographic diversification, with international assets now representing 36% of asset management AUM, up from 27% prior to the BMO acquisition. And we continue to benefit from strong underlying organic growth momentum with $69 billion of wealth and asset management flows over the last 12 months. Total flows in the quarter were $6 billion, with $9 billion of inflows in Wealth Management offset by $3 billion of outflows in asset management. Let's turn to individual segment performance, beginning with Wealth Management on Slide 7. Wealth Management client assets declined 9% to $735 billion. Despite the exceptional market depreciation in the quarter, with equities down 15% and bonds down 10%, we generated strong client flows from new client acquisition, excellent experienced adviser recruiting, and deeper client relationships. Our advisers had strong productivity growth, with revenue per adviser reaching $814,000 in the quarter, up 11% from the prior year. On Slide 8, you can see Wealth Management profitability benefited from organic growth and the initial rise in interest rates. Adjusted net operating revenues increased 4% or $76 million to $2.1 billion, as market depreciation and lower transactional activity during the quarter were more than offset by rising interest rates and client flows. Cash balances increased to $47 billion, up 21% from last year. At the same time, the gross fee yield doubled versus last year, driving higher interest earnings in the quarter. Expenses remain well managed. G&A expenses increased $15 million or 4%, primarily from higher volume-based expenses over the past year. Overall, Wealth Management profitability remained strong with pretax adjusted operating earnings of $492 million, up 16% from last year, and our pretax operating margin reached 23.9%, up 250 basis points. As you can see on Slide 9, we are well positioned to realize significant incremental benefits from rising rates on our cash products this year and going forward. In the quarter, we transferred $2.3 billion of brokerage sweep balances onto the bank's balance sheet in two- and three-year duration strategies, with yields above 4% on average. In July, yields on new money purchases at the bank increased further and are in the 4.5% range. We continue to feel good about the credit quality of the portfolio with most of the portfolio in the AAA-rated structured assets. We plan to bring an additional $3 billion of assets onto the balance sheet during the third quarter, bringing the full year increase to $7 billion. Our model leverages both broker-dealer suite programs and the bank to optimize earnings from cash products. Currently, we have about one-third of the client cash balances at the bank and we expect it to be nearly 40% by the end of the year. In addition, our certificate business is another area that benefits from rising interest rates. In total, we expect to generate substantially more interest-related revenue in 2022 relative to 2021, which would offset current market-related impacts. Based upon our current assumptions, the interest rate benefit will increase further in 2023. Let's turn to Asset Management on Slide 10, where performance was in line with the macro environment. Total assets under management increased 1% to $598 billion. As the acquisition of the BMO business was largely offset by market depreciation and foreign exchange translation. Asset Management flows were negative in the quarter, with continued strength in our global institutional business offsetting a meaningful portion of retail outflows. Like the industry, we continue to experience pressures from global market volatility, a risk-off investor sentiment, and geopolitical strain in EMEA. Margin in the quarter declined to 38.5%. It should be noted that BMO reduces our margins by approximately 400 basis points. Going forward, our new margin toggle will be in the 31% to 35% range, reflecting the addition of BMO, which is primarily an institutional business. On slide 11, you can see Asset Management financial results were a reflection of the challenging market backdrop. Adjusted operating revenues were essentially flat at $881 million, as the addition of BMO offset the impact of double-digit market depreciation, foreign exchange rates, and outflows. Likewise, earnings in the quarter declined by $31 million. Importantly, we are managing the areas we can control. The underlying fee rate remained stable in the quarter at 48 basis points. Expenses remain well managed with G&A expenses down 6%, excluding BMO. We are currently in the process of evaluating all discretionary spend and high rate. We remain committed to managing expenses very tightly in the current revenue environment. Let's turn to slide 12. The Retirement & Protection Solutions continued to deliver stable earnings and free cash flow generation as a result of its differentiated risk profile. Pretax adjusted operating earnings were $179 million. Sales in the quarter declined as a result of market dislocation and management actions to reduce the risk profile of the business. Most notably, variable new sales declined 29%, reflecting the uncertain market environment, as well as our decision to exit manufacturing products with limiting benefit riders, which was completed in June. Account value with living benefit riders represents less than 60% of the overall book, down nearly 3 percentage points from last year. Our risk profile remains strong with 94% VA hedge effectiveness in the quarter and an estimated RBC ratio of 530%. Now let's move to the balance sheet on slide 13. Our balance sheet fundamentals remain strong, and our diversified high-quality AA-rated investment portfolio remains well positioned. These strong fundamentals allow us to deliver a consistent and differentiated level of capital return to shareholders, even during periods of market volatility that we experienced this quarter. During the quarter, we returned $600 million to shareholders, and excess capital is at $1.6 billion. We remain on track to return approximately 90% of the adjusted operating earnings to shareholders in 2022.

Good morning. Thank you for taking my question. I love to start with the bank and the yield. You provided some great color on plans to continue to shift balances. I believe, Walter, that you indicated that assets moved to the bank late in the second quarter. So considering that and considering where reinvestments are, how should we be calibrating for the potential yield upside, not only from averaging in the late shift in the quarter, but then further deployments of the $3 billion that you're considering in the third quarter? Thanks.

Okay. So if I understand the question, we weren't really shifting in the $3 billion. We believe it will be in the early part of the quarter that we will do that. Obviously, we will continue to invest in our structured AAA investments, which currently are yielding in the 4.5% range. And so that will make a total of about $7 billion of new funds into the bank, deployed in, like I said, in the second quarter it's 4.2% and now at current rates, it's 4.5%.

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

Andrew, yes, thank you for the question. We continue to see good recruits. I mean, actually, second quarter was stronger than the first. And the pipeline continues to look good. We are speaking to more people. I think people are recognizing what we bring to the table in combination with the support we give, the technology, and how we help them really grow their practices. We're getting really strong reviews from people who have joined us. And so, we feel that this is a continued good opportunity for us. And even as you go through these volatile markets, based on the type of support we give and helping advisers to actually achieve more in regard to their productivity and how they manage their businesses, we feel it's a good opportunity for us.

That's great. And then just on the wrap flows, if you'd asked me three years ago when you were doing $4 billion to $5 billion in net flows and you said you did $6.2 billion like this quarter, I would have thought that was an outstanding result, and probably it still is. But recently you had peak numbers around $10 billion. And my question is, is this $6.2 billion a good base now, or do you think that could continue to be pressured even lower just given the market volatility?

I believe what you're asking is a great question. Our total client activity has increased over the years, as you may have noticed. Even in this last quarter, we secured nearly $9 billion in new client inflows. However, with the current market conditions, the deployment of both new and existing funds is a bit cautious, as people are waiting for more stability. While there are still funds being deployed, it's not to the extent we would see in a rising or stable market. Given the pullback we've faced, with bond markets down 20% earlier this year, I think the $6 billion figure is quite strong considering the market environment. I believe money will continue to flow back into the market as stability returns, particularly in the fixed-income sector. I don't anticipate any significant changes. While I can't predict if there will be major market disruptions in the upcoming quarters, I believe that if market conditions remain relatively stable, we should continue to see positive inflows.

Hey, good morning everybody. Thank you for the question. So maybe just to start with some of the cash balances dynamic within Advice & Wealth. Walter, I was wondering if you can give us an update on how the cash balance is holding up so far in the third quarter given obviously pretty strong trends in Q2 with cash balances being up? And as we think about the deposit betas, it looks like you guys passed through almost nothing to the customer in the second quarter. So any updated thoughts around sustainability of such slow deposit betas as you progress through the rest of the year would be helpful.

Hey, Alex. They are holding up. And from that standpoint, so the trend you've seen is holding. As it relates to the crediting rate for clients, we go through an extensive competitive review. And on that basis, we did increase some of the rates as it relates to it based on that review and we will certainly continue to evaluate that which we do weekly. So we see that obviously we will start crediting as if the Fed basically increases on the 75 basis points that we anticipate at the end of the month. And so right now we feel there is certainly opportunity as rates increase and to certainly credit, and those are in our assumption base. Yes. Listen, it's a good question. But if you go back to the first quarter of 2020, certainly we were earning a good short-term return and then it disappeared. So the bank gives us the ability to really have a steady earnings stream from high-quality investments. So we are balancing that. And the spreads we're getting right now we feel is very good with the risk profile. So we will continue to do that from that standpoint. We feel it's a critical part of our overall cash strategy. So we're very fortunate to have the bank not only to offer to our clients new products and capability, but also the ability to have the stabilization of having the spread income come through.

Great. Just a quick one for me at the end here. As we think about G&A that's held up really nicely in the quarter. Particularly we've seen you guys bring down expenses in G&A in the asset management business. But when you think about the firm-wide G&A run rate for the back half of the year, given obviously fee challenges on the back of low markets, how are you thinking about the G&A run rate for the back half? I heard your comments qualitatively about pausing maybe some of the initiatives and looking for ways to save. But I guess relative to the $880 million G&A run rate we saw in the second quarter, what does the backup look like?

Number one from a company standpoint, certainly we look at it, but we are going to be very well managed on our G&A overall as you indicated certainly asset management Jim indicated they are looking at discretionary spend. So, overall from a company standpoint, we are going to be in the range that we talk about and we're performing well. As it relates to AWM with the good revenue growth we see and everything it's going to be managed, but we are certainly trying to garner and increase basically and take advantage of this situation to invest. So, it's going to be well managed early within expectations to the revenue growth that we see which we think is going to be good.

Good morning. Walter wanted to revisit what you are broadly investing in regarding banking deposits. I believe you mentioned AAA structured assets. Are those CLOs? Can you provide more insight into why you feel confident about the quality on the asset side?

It is structured in CMBS, specifically as a retail MBS, and the CLOs represent the highest tier within that structure. All of these investments are rated triple A. In fact, 88% of our investments are in those AAA structured securities.

Okay, that's helpful. Question on your capital. I think excess capital went down by $300 million this quarter. Can you talk a bit about what drove it? I assume it was variable annuity-related in your life insurance business maybe a little bit below the surface sort of what happened there with hedging? Was it higher required capital? And what kind of drove that?

You saw a $300 million drop again, which was within our expectations. It was related to tolerance reporting, and it fell within total tolerances. This impacted reserves and capital on the variable annuity side, contributing to a 15% drop in the quarter. From our perspective, the hedging was effective at 94%. While the drop was substantial, it aligned with our modeling, affecting both reserves and capital. We are continuing to evaluate and have interest in that. To be direct, it is clear to us that the value and quality we have is being recognized. However, as you know, these evaluations take time and are ongoing.

Thanks. Good morning. Just a couple for me. Walter, I think last quarter you talked about a $200 million benefit from the bank. And I know we talked about a bunch of moving pieces so far on this call, but can you give us a sense at least based on where we sit today kind of how you're feeling about that $200 million number? Did it contemplate future rate hikes and that sort of thing? Just some color there would be helpful.

Sure. Based on the latest estimates from the Fed, we expect an additional increase of 175 basis points, and we'll see how that develops. Consequently, we anticipate starting distributions at a higher level. Currently, the overall change compared to last year is expected to be in the range of $400 million. Therefore, the $200 million we previously mentioned falls within that $400 million range for the total year.

And that's for 2022? So as we think about 2023.

First 2021, yes.

Hey, thanks, good morning. Just following up on the $400 million increase from interest rates for the full year 2022. Since a significant portion of that is likely occurring in the latter half of the year, can you provide any insights on how that might appear in 2023 as well?

It should look pretty good.

Okay. It's Walter. You're going to see normalization. If the Fed increases occur, which is expected at 175 towards the end, normalization in calendarization will happen. This will depend on the cash balances and the crediting rate, so there are many variables. But as Jim mentioned, an increase is expected, and we anticipate it will be significant based on our modeling. From our perspective, it will be substantial.

Got it. Regarding the asset management margin target, you were still significantly above that new target in the second quarter. Should we consider this a longer-term target, or do you expect to be within that new target in the near term given the current environment?

I think what you have to sort of factor in. And again, it depends on what happens with markets, right? You had a bit more of a dislocation of the markets in the second quarter. And so as you look at that probably compared to where the averages are between the first and the second quarter going into the third, you will continue to have a little bit more of that margin compression as is depreciation on the asset base, if you roll it over. But having said that, I would say that we still feel good about being within those margins after you take that into account. So remember, markets depreciated and it's not just equity markets, the fixed income market, which is not normal in the sense where you get both of them depreciating at the same time.