Ameriprise Financial Inc (AMP) — Q2 2023 Earnings Call Transcript

Thank you, and good morning. Welcome to Ameriprise Financial 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'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 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 2023 earnings release, our 2022 annual report to shareholders and our 2022 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 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, everyone, and thank you for joining today's call. As you saw in our press release, Ameriprise overall delivered a strong second quarter to round out a very good first half. Given our complement of businesses, we consistently generate good returns and strong earnings. Advice & Wealth Management continues to lead our growth, where we had another quarter of solid client engagement and flows. We also saw good earnings from our bank, reflecting our ability to create a sustainable and attractive revenue stream in this interest rate environment. In our Asset Management business, we continue to experience headwinds in this environment and remain focused on adjusting appropriately. In terms of the market environment, the S&P 500 and international equity markets have rallied more recently through the end of July. However, they were only up 2% year-over-year on average for the quarter. Fixed income markets remain unfavorable, particularly in Europe. While inflation has come down, it's still above the Fed's targeted rate. As we saw yesterday, the Fed increased rates by 25 basis points and said it would continue to assess additional information in determining the extent of additional policy firming that may be appropriate to return to a 2% inflation rate. With that as a backdrop, Ameriprise continues to benefit from our diversified business mix as well as higher interest rates in our bank and certificate companies. Assets under management and administration increased nicely, up 9% to $1.3 trillion, reflecting our organic growth and positive markets. Total adjusted operating net revenue was up 10% to $3.8 billion. The combination of strong revenue growth, particularly from our spread business, as well as well-managed expenses, drove earnings to $807 million, up 23%, with EPS up 30% to $7.44. Our return on equity was outstanding and reached a new record of 51%, a level that few financial firms have achieved. Now let's turn to business highlights. In Wealth Management, we delivered another excellent quarter as we serve clients well with goal-based advice and deliver a highly satisfying experience. We continue to drive very good asset growth with total client assets up to $833 billion and total client flows of $9.4 billion, up 10% year-over-year. Our client acquisition growth was also strong, especially in the $500,000 to $5 million client range. This is an area where we consistently had good momentum, and it's a key growth opportunity for us. We're leveraging our strategic investments to help advisers engage clients and prospects, provide a great client experience and run highly successful and efficient practices. Our fully integrated technology suite streamlines many of our advisers' administrative tasks and frees up their time to go deeper with clients and to navigate the complexities within their financial situations. For example, we introduced an important capability that enables advisers to generate highly personalized presentations centered on client goal achievement. Since the launch, it has helped to build on our already strong client satisfaction, net flows, and practice growth for our advisers who are incorporating it into their practices. It's also reduced meeting prep time by as much as 70%, allowing more time for client acquisition. We're also beginning to use AI and analytics to further enhance how we engage and work with clients. With AI, we can serve up real-time information to help advisers identify possible next best opportunities for clients based on their needs. Backed by our exceptional support, adviser satisfaction, retention, and growth are all excellent. Ameriprise advisers consistently have some of the highest productivity growth in the business. In the second quarter, it increased nicely again, up 7% to $874,000 per adviser. We're also incorporating the use of data and analytics in how we identify productive advisers who are a good fit to recruit to the firm and more likely to make the switch. It was another strong quarter for recruitment with the addition of 99 experienced advisers. We're consistently bringing in large, highly productive adviser practices from across the industry. In the spring, I spent time with our top 10% of advisers, both tenured at Ameriprise and more recently experienced advisers who have joined us. They repeatedly shared that our advanced capabilities and technology combined with our excellent leadership coaching and marketing support give them a tremendous advantage in how they serve clients and run successful practices. They are very proud to affiliate with Ameriprise and energized about the direction of the company and the opportunities in front of us. During the quarter, clients remained cautious, seeking yield as they continued to maintain higher balances in cash-oriented products. Cash continued to increase as clients continued to hold cash, and we ended the quarter with about $70 billion in cash and cash equivalents. Wrap assets under management increased 14% to over $450 billion, reflecting positive flows and market appreciation that occurred at the end of the quarter. The recent increase in markets will be a benefit as we go through the quarter. For the first time since the beginning of the year, we saw signs in June that clients are starting to move some funds back into the market, which brings me to the bank. Ameriprise Bank continues to perform well with assets growing to nearly $22 billion. It's a strong complement to our business and an attractive way to gain spread revenue in this rate environment. Bank and certificate balances grew over 50% to $33 billion. The cash balances in these accounts are very rational today, and we feel comfortable with our position. We will continue to build out our banking capabilities and are in the process of introducing other savings products later this year. This will help advisers further deepen client relationships and bring in more assets from other banking institutions. With our latest research, in addition to our core client segments, we found that the Ameriprise value proposition and brand are very appealing to high-net-worth investors as well as millennials who are hungry for advice and seeking guidance from advisers who truly understand them and their priorities. These are market segments we're looking to serve more in the future. This was also reinforced by the complement of external accolades and recognition we continue to earn. The way we work with clients defines Ameriprise, and I believe our reputation is a competitive advantage. During the quarter, Ameriprise was named by Kiplinger's Readers as the overall winner in the wealth management category. We earned the highest ratings for each of the four criteria: the trustworthiness of our advisers, the quality of financial advice provided, the likelihood to recommend the firm to others, and we earned the highest rating in overall satisfaction. Ameriprise also ranked on Newsweek's Magazine 2023 most trustworthy companies in America list for the second consecutive year. We earned top performer recognition and understand me and share my values from Hearts & Wallets. And speaking of values, Ameriprise culture is another very important positive. Advisers who have joined us with decades in the business tell us that our company is unique and not like any other they've been part of. They're impressed by things like our supportive growth culture and their accessibility to senior leadership. Finally, in terms of profitability for Wealth Management, it was another strong quarter across the board, and that includes margin, which reached a new record of 31.2%. Moving to Retirement & Protection. We have high-quality, well risk-managed books, and we're generating strong consistent earnings of 13%, driven by the repositioning of our investment portfolio last year given the rate climate. Our free cash flow and return on capital remain excellent. The team is concentrated on accumulation products that align with our clients' needs and the business. In our life business, we're focused on our variable universal life and disability products that are appropriate for this environment. Protection sales were up nicely, increasing 18% with the majority of sales in higher-margin accumulation VUL products. In variable annuities, our structured product continues to attract strong interest, combining with our variable annuities without living benefits. Sales are down from a year ago, in part due to the decision to exit guarantees. Here again, we're using intelligent document processing and robotics to make processes more efficient, automating our processes and underwriting decisions. We're seeing the benefit and the pickup in sales. As we discussed, we feel good about our product portfolio, both for clients and the business, which consistently delivers good returns. Moving to Asset Management. As you know, we manage the business prudently, and like other active managers, we're facing reduced flows in this environment. The business continues to operate well and generates good fees, and we're adjusting for headwinds accordingly. In terms of investment performance, we continue to have excellent longer-term performance in equities, fixed income, and asset allocation strategies, with over 75% of our funds above the median for the 5-year and over 85% for the 10-year period. Our one-year performance has improved across the board. This includes some of our larger franchises, including in U.K. equities, where we're benefiting from our quality positioning, and in fixed income given our strength in credit. In terms of flows, I'll start with global retail, where we continue to experience a level of outflows. In North America, we remain in net outflows, but we had nice improvement in fixed income. In fact, we are better than the industry in taxable bonds. Meanwhile, we continue to see outflow pressures in equities, largely from lower gross sales as redemptions have improved. We continue to focus our adviser segmentation strategy to drive good engagement in North America. In EMEA, retail flows in both the U.K. and Continental Europe remain under pressure. However, in institutional, we were in net inflows, excluding legacy insurance partner flows as we garnered nice wins in high yield and investment-grade credit that more than offset large redemptions and LDI strategies given the market dislocation. Now I'd like to give you a brief update on our EMEA acquisition and executing the integration in Europe. I wanted you to know that it does take time due to the complexity of the legal entity structures as well as regulatory and employment considerations. We made it through a number of important steps, and we have now moved to the next level of consolidation, including the colocation of our teams through our existing real estate and the near completion of some of the major technology migration work. Given the environment, we're taking a very focused look across the business globally to further reduce expenses. This includes identifying and stopping less growth-driven activities and also redeploying resources where we see opportunities to support our margin. In summary, we're controlling what we can control and making the necessary changes to adjust in this environment. Reflecting on the firm overall, Ameriprise delivered a strong first half of the year, and we're well positioned to continue to navigate and grow. Our complement of businesses provides nice contributions and synergies. We consistently generate good, appropriate earnings in total and good cash flow to invest and return to shareholders at attractive levels. We returned $638 million of earnings to shareholders in the quarter, which represented nearly 80% of our earnings. In addition, as you saw, our Board approved a new $3.5 billion share repurchase authorization that reflects the strength of the business. Across the firm, we continue to make good investments in our businesses. And as always, we are sharply focused on execution. While we manage expenses very well, we will be looking for additional expense opportunities as we move into 2024 to adjust to the environment. From a people perspective, our team is highly engaged. In fact, in the quarter, Forbes Magazine named Ameriprise one of America's best large employers. The list ranks the 500 U.S. companies most highly recommended as a top place to work. With that, I'll turn things over to Walter to provide his perspective in more detail on the quarter, and then we'll take your questions.

Thank you. As Jim said, results this quarter continue to demonstrate the strength of the Ameriprise value proposition as adjusted EPS increased 30% to $7.44. Results reflect wealth management core and cash business momentum as well as continued expense discipline. In total, our Wealth Management business grew to 68% of the company's earnings, up from 56% a year ago as a result of a 49% growth in Wealth Management earnings. Asset management faced headwinds similar to the industry in terms of flows and fixed income market declines. Retirement & Protection Solutions delivered good 13% earnings growth primarily from our decision to reposition the investment portfolio late last year. Across the firm, we continue to manage expenses tightly relative to the revenue opportunity within each segment. While we continue to make investments in the bank and other growth initiatives, particularly in wealth management, we are taking a disciplined approach to discretionary expenses across our businesses. Excluding mark-to-market impacts on share-based compensation, G&A was up only 4%. However, G&A in the first half of 2022 was unusually low as a result of the pandemic. Our G&A expenses remain on track with our expectations. Balance sheet fundamentals remain strong. Our portfolio is well positioned. Our hedging remains highly effective, and we have strong capital and liquidity positions. This allowed us to return $638 million of capital to shareholders as a strong return of 79% of our operating earnings. Let's turn to Slide 6. Assets under management and administration ended the quarter at $1.3 trillion, up 9%. AUM benefited from strong client flows and equity market appreciation, partially offset by lower fixed income markets. Revenue growth was strong at 10% from higher interest earnings and cumulative benefits from client net inflows. With average equity markets up only 2%, the impact of 6% equity market appreciation in June will be reflected in our third-quarter AUM results given the ability of our wrap business to base on beginning of the month balances. Pretax earnings increased 24% from last year, with meaningful benefits from strong client flows, higher interest rates, and well-managed expenses. Let's turn to individual segment performance beginning with Wealth Management on Slide 7. The Wealth Management client assets increased 13% to $833 billion, driven by strong organic growth and client flows along with higher equity markets. As you are aware, there has been significant volatility since Q1 of 2022, which we have navigated well. Our client and wrap assets have remained consistent with our industry peers over this period. Our client flows continue to be strong at $9.4 billion, up 10% from last year. Client money has gone into a combination of wrap and non-advisory accounts as clients continue to be in a defensive posture. Our flexible model and broad offerings allow advisers and clients to pivot as market and client preferences shift. While the money stays within the system gives us potential upside going forward. Revenue per adviser reached $874,000 in the quarter, up 7% from the prior year from high spread revenue, enhanced productivity, and business growth. Turning to Slide 8. I'd like to provide an update on client cash levels. Our client cash balances comprised of cash sweep and certificates have returned to more historic levels at $42 billion, which translates to about 5% of total client assets. The financial benefit from cash remains unchanged despite a lower volume of cash as we have seen a significant lift in the interest rate earned at the bank and certificate business. Our fee yields have increased nearly 350 basis points from a year ago and picked up 40 basis points sequentially, resulting in very strong interest earnings growth. I would like to note that we continue to see new money flows into money markets and brokered CDs, albeit at a lower level in June, which brought our total cash level to $70 billion. This creates a significant redeployment opportunity as markets normalize for clients to put money back to work in wrap and other products on our platform. While there is some seasonality with cash levels, particularly with tax payments in March and April, cash remains an important component of the client asset allocation. Like others in the industry, balances are stabilized. Our sweep cash has an average size of $7,000 per account, and 65% of the aggregate cash is now in accounts under $100,000. We have seen very limited movement out of these accounts. In the quarter, we moved approximately $1 billion from off-balance sheet cash onto the bank's balance sheet. We continue to evaluate the opportunity to bring additional balances onto the bank balance sheet as we move forward. Lastly, we continue to manage our investment portfolios prudently. Our bank portfolio is AAA rated with a 3.4-year duration. The overall yield on the portfolio is 4.6% and rising with the new money yield on investments in the second quarter of 6%. Our certificate company portfolio is highly liquid with over half of the portfolio in cash, governments, and agencies. It is AA+ rated on average with a 1-year duration. As I noted last quarter, the portfolio yield lagged decline crediting rates as new money moved into this business. This quarter, the portfolio yield increased 33 basis points. In total, the certificate company portfolio is now yielding 5.5%, with new purchases in the quarter at that level as well. On Slide 9, we delivered extremely strong results in wealth management on all fronts. Profitability increased 49% in the quarter, with strong organic growth and the benefit of higher interest rates. Pretax operating margin reached a new high of 31.2%, up 730 basis points year-over-year and 60 basis points sequentially. As I mentioned before, the benefit from the June market appreciation of over 6% will be a tailwind for third-quarter results given we build our wrap business based on the beginning of the month balances. Adjusted operating expenses increased 3%, with distribution expenses up 1%, reflecting higher asset balances. Consistent with our expectations, G&A is up 9% in the quarter. This is off a very low base last year given the impact of the pandemic, and we continue to make investments for growth. We expect AWM full year 2023 G&A growth to be in the mid-single digits. Let's turn to Asset Management on Slide 10. We are managing the business well through a challenging environment that is impacting the industry. Total AUM increased 3% to $617 billion, primarily from higher equity markets, partially offset by lower fixed income markets. Asset management, like other active managers, was in outflows in the quarter. Reinvested dividends were $2 billion lower in the current quarter. However, underlying net new sales were fairly consistent to last year. Like others, we experienced pressure from global market volatility and a risk of investor sentiment. Investment performance has been another critical area of focus, and we are seeing improvement, including in fixed income strategies. Overall, 5- and 10-year performance remains very strong. As Jim said, we had improvement in the one-year numbers. On Slide 11, you can see asset management financial results reflecting the market environment. As anticipated, earnings declined to $162 million as a result of deleveraging, net outflows, and lower performance fees in the quarter. The margin was down sequentially to 30%. Importantly, we continue to manage the areas we can control. Expenses remain well managed. Total expenses declined 2%, with G&A up only 2%. As Jim said, given the environment, we are taking a very focused look across the business globally to further reduce expenses. This includes identifying and stopping less growth-focused activities and redeploying resources where we can see an opportunity to support our margin. Let's turn to Slide 12. Retirement & Protection Solutions continued to deliver good earnings and free cash flow generation, reflecting the high quality of the business. In the quarter, adjusted operating earnings were $189 million, up 13% from the prior year, primarily as a result of higher investment yields from the portfolio repositioning we executed last year. However, earnings in the current year were unfavorably impacted by $7 million from a model update resulting from a system conversion and timing of earnings recognition for payout annuities, which is expected to normalize. We continue to view normalized annual earnings of $800 million as a reasonable expectation for this business. Overall sales declined 10% related to our decision to discontinue sales of variable annuities with living benefit riders a year ago. However, protection sales improved and remain concentrated in high-margin acid accumulation VUL, which now represents over 1/3 of the total insurance in force. Now let's move to the balance sheet on Slide 13. Our balance sheet fundamentals remain strong, and our diversified high-quality investment portfolio remains well positioned. In total, the average credit rating of the portfolio was AA with only 1% of the portfolio in below investment-grade securities. VA hedge effectiveness remained very strong at 98%. Our diversified business model benefits from significant and stable free cash flow contributions from all business segments. This supports the consistent and differentiated level of capital return to shareholders. During the quarter, we returned $638 million to shareholders and still ended the quarter with $1.3 billion of excess capital and $2.1 billion of holding company available liquidity. We remain committed to continuing to return capital to shareholders and announced a new $3.5 billion share repurchase authorization through September 30, 2025. With that, we'll take your questions.

Maybe we could start with a question on AWM. I want to zone in on the interplay between net new asset growth, Jim, that you talked about in cash. So to your point, capital, obviously sitting on the sidelines in money market fund treasuries and as Fed funds peak, it's likely that some of that cash is going to make its way into investment products. So what are your expectations for AWM net new asset growth into the second half, particularly with an advisory? And then at the same time, do you think any of that reallocation of cash could put incremental pressure on the $30 billion of brokerage sweep balances, which I think were down about 10% sequentially, or are they pretty kind of troughy sort of at operational levels at this point? So as part of that, maybe just an update on kind of where that $30 billion sits in July as well.

Okay. So Alex, we've continued to see strong client flows each quarter, with a 10% increase from last year this quarter. However, keep in mind that the second quarter often involves adjustments due to tax payments, which impacted the cash sorting we observed then. A substantial portion of those flows in April was connected to these tax payments. Despite this, client flow activity remains positive, and our client engagement is robust. As you noted, many clients have shifted towards cash holdings due to the current yields. The market has performed better than anticipated, surprising many with its significant gains and becoming less reliant on just a few stocks. If this trend continues and fixed income yields stabilize without further increases, we could see a move back into fixed income products beyond just cash, as well as into equities. We believe that the cash balance we currently hold, which is around $70 billion or about 9% of our total assets, will eventually be reinvested back into these areas. However, we maintain a certain level of cash in our accounts for operational reasons, similar to how one uses a checking account. We don't expect a large amount to return immediately and foresee the cash sorting slowing as we enter the third quarter. I think the return will primarily come from our cash positions. While I can't predict the future perfectly, when funds do return, we'll likely manage more in a sweep for transactions. That's how we are approaching the situation.

I got you. That's helpful. Any update on where that $30 billion is in July, just tactically?

Well, in July, yes, we saw it has slowed the way we anticipated; we're just observing now, but we feel comfortable with the slowing that we're seeing.

Okay, great. And then my second question, just around the asset management dynamics that you described. Obviously, it sounds like you're adjusting the expense base to the sort of headwinds we're seeing across the industry. I mean, maybe put a little more granularity about what that means? What are your expectations for G&A growth within the asset management business for the second half, and it sounds like that will continue into 2024? And I guess bigger picture, flows a challenge that's been the narrative for some time. But the markets, to your point earlier, are upright, so the revenue base could actually grow despite the flow challenges. How does that inform this quarter kind of G&A reallocation dynamics? Could G&A be sort of flat to down even in that scenario, or the upward market will just naturally put some pressure on the cost base?

Yes. Our main focus is on the fact that in the second quarter, general and administrative costs were actually reduced by 2%. However, due to share price appreciation and our plans, it ended up being flat. The underlying expenses actually declined. We anticipate this trend will continue as we are now taking a more comprehensive approach to our global expense structure following some major integration activities in Europe, even though that process isn't fully complete. We believe there are significant opportunities to target expense reductions as we move forward into 2024, which is our primary objective.

I would like to start with the pending Comerica deal. Can we get an update on that? Are the assets still around $18 billion, or have they changed due to market conditions or other factors? Is the asset base similar to other bank deals we've seen, with a greater focus on brokerage compared to advisory, or cash allocations like what you have in AWM?

So it's Walter. As it relates to Comerica, it's still on track, and the activity levels and certainly the assets that we announced when we consummated the arrangement are also on track. Yes, cash is a component, but it is within the ranges of the transaction. So we feel very comfortable with it, and we're targeting for the fourth quarter.

Okay. So has it really changed from where...

It's Walter. As it relates to Comerica, it's still on track, and the activity levels and certainly the assets that we announced when we consummated the arrangement are also on track. Yes, cash is a component, but it is within the ranges of the transaction. So we feel very comfortable with it, and we're targeting for the fourth quarter.

Got it, perfect. As we begin to navigate the changing environment and look ahead to potential lower rates in 2024, I was hoping to get an update on the maturity profile of the CDs in the certificate company. How are you planning to manage those balances, and will you consider either reducing rates or increasing them based on the outlook, especially since some of these rates and funding may be locked in during a potentially declining rate environment?

So if you mention certificate, I would probably focus more on the bank because the bank is really where we have now the advantage of investing and having duration. As you've seen, our yield right now is 4.6%. We certainly see that increasing as we have maturities and other things. So we feel quite comfortable that as the environment goes, I don't know where it's going to go, up, down, or stay the same, but we are well positioned to have that stability of earnings there and that the yield that we see at the bank, which is the majority of where we've gone out for investing, will prevail as we look over the near term. So we're in a very good position from that standpoint.

Yes. No, I totally appreciate that, and I hear you. I was more thinking about managing on the cost side of it.

On the certificate side, as we would say, we sort of match us sort of like based on the yield we provide for those things. So we sort of look to sort of keep a certain spread on that based on when the money is coming in or where we look at it when it's matured.

Yes. The spread, as I indicated, increased because, obviously, where our investments are catching up with the rates, and it's a short duration of one year. From that standpoint, we will adjust it, both from the rate crediting rate and certainly our investments, but we feel very confident with the spread there as it's incorporated.

For Asset Management, do you still think a 31% to 35% margin is the right target to think about near term? And given the expense actions you've talked about as well as the benefit from rising markets. Do you think you could get back to that level in the second half of this year?

Yes, I can't predict the third quarter specifically, but we're not changing our targeted rate, and we definitely believe we can stay within that range. While I can't provide details on a quarter, I would say that we feel comfortable as we move into the second half of the year and into 2024.

Perfect. And then can you update us on the plans to launch a brokered CD product and any other bank products for the second half of the year and what your expectations are for the type of assets that those could attract?

Yes. So we did a soft launch of a brokered CD in the second quarter, and that's starting to take hold here. We also put out a basic savings product. Again, that's beginning to take hold. We have plans for the end of the third quarter to actually put some incentives-type activity there to bring in new cash from outside the firm. And also a preferred type of savings product in the fourth quarter. We're sort of getting how they are positioned on the platform and then how we sort of rolled those out from soft launches, etc. But yes, we will have a set of those types of savings products as we go through the rest of the year into next year. We will then target to bring in more cash externally.

And how would you sort of tier the margin expectation on that relative to the other cash products or certificates?

So what I would say, first of all, you've got to separate the suite, which is a different animal from various savings products, but I'll let Walter...

The margin, as we have set a reserve count that at search and the margin in the bank is similar. It's a little harder, but the margin is good. We remain competitive on each of the products as we look at the CD, and certainly, the rates there are driven by regional banks and others, but we will remain competitive. But the margins there are lower, as you would expect.

Just going back to the bank for a second. So our understanding is that you'll have, I think, $1.4 billion of assets sort of maturing and rolling into new assets in the second half and then a similar amount in the first half of next year. So would it be possible to get sort of the current yields on those assets just so we can kind of think through when that reinvestment occurs, how much upside you guys would have?

Yes, you're correct. It will likely be around the 4.6 range. With that, we're entering the high 5s and low 6s. That should increase. I can't predict exactly where rates will go, but if they remain stable, we could see a movement of around 50 to 60 basis points by the end of the year.

So you're saying an incremental 40 to 50 basis points?

It's around 5%. I just want to clarify that since rates stay the way they are today, okay? And spread.

Got it. Okay. And then I guess you're talking about this now $70 billion cash number. I think last quarter, that was maybe $60 billion. Obviously, there's a portion of that that you guys have kind of in that $42 billion range. So as we think about that incremental $28 billion, I know some of that is in other companies' products, but what's a reasonable expectation in terms of how many of those assets you guys think you could ultimately have in your own products?

So I think what I would say is a good amount could come back, but not just into our own savings type products, but more importantly, into the wrap type of business again. If you recollect, before the period where people got a little more concerned, we had roughly a majority of our client flows going into wrap. I believe right now, we're at a sort of a low point of the amount of cash being deployed into wrap. I do believe part of that went to positional cash. That position of cash will start to come in. The investments in fixed income are much lower than they've been in a long time because of the yields going up on the duration and people not wanting to get whipsawed. That money will come back in, and that does go into wrap accounts as well, as it’s a more balanced portfolio that they utilize.

Got it. And then if I could just sneak one more in. Jim, I thought your comment about high net worth and millennial opportunities sounded like it was new. Is that an opportunity something that you can attack sort of organically? Or are there capabilities that you'd need to acquire in order to capitalize on that growth opportunity?

No, Suneet. We are already attracting high net worth clients effectively, but we haven't fully focused on it within the franchise yet. We are now enhancing our approach in that area. We possess most, if not all, of the necessary capabilities, and although we continually add improvements, we have expanded our product and alternative platforms. The advisory services we provide have proven to be successful for high net worth clients. Our research indicates that we are viewed similarly to private wealth firms and major wirehouses by high net worth clients and prospects, so we do not have a disadvantage there. We're working on building our advisers' focus in this area so they can better target these clients. Additionally, we are investing in our digital capabilities and engagement strategies to attract younger clients, either through younger advisers or through direct offerings, as we have set up remote channels to serve clients effectively. I am optimistic about these opportunities and the potential for further expansion.

It's Michael Anagnostakis on behalf of Steven. I just wanted to circle back to the rate sensitivity picture here. I guess given the shape of the curve. Maybe you could provide some updated color on your rate sensitivity. Can you help us size the impact to your earnings from rate cuts on the static balance sheet? And how do you expect your deposit betas to differ on the way down versus the way up given your certificate percentage and low-cost sweep deposits funding the bank?

From the perspective of declining rates, we now have significant amounts in the bank, providing us with protection against the impact of potential short-term Fed fund reductions. The calculation is straightforward; for every percentage drop, it's incorporated into our analysis. We've experienced cycles of increases and decreases, but we have between $6 billion and $7 billion off balance sheet to consider. You can estimate the impact of a 1% change. Regarding our certificates, they adjust accordingly. When rates rise, we may lose some until they catch up, but when they fall, we benefit. We have the liquidity to manage this situation, so a decline in rates is advantageous for us regarding certificates due to our investments, similar to how we had to adapt when rates were increasing.

Got it. And then I just want to flip on to expenses here. How should we be thinking about long-term G&A growth for the firm given some of the reduction efforts you're undertaking, a more fully funded bank, and progress on BMO if you could help us think about the growth between the wealth segment and the firm as a whole, that would be great.

I would like to start, and Walter can add to that. Overall, when we discuss general and administrative expenses, I would say it will remain relatively flat. Keep in mind that there are merit increases and other factors involved, but overall, we expect it to be flat based on our plans. If we consider where there might be slightly more or less, we anticipate a bit more in the asset and wealth management sector due to growth in that area, and possibly a reduction on the asset management side leading to some expense cuts. All in all, looking across the firm and including all groups, expenses will remain relatively flat while we manage inflationary increases and continue making solid investments in the business.

The first question is why Ameriprise withdrew its application earlier this month to convert to a state-chartered industrial bank and a national trust bank. Have there been any changes in regulation or rules related to your current structure? Can you provide some perspective on that?

I think it's a matter of certainly the situation as you look at the FACA Board and what they felt about with the regional bank situation, would they really want to now expand into a state? We just felt the probability was not there. We're quite confident with the FSB at this stage. So we withdrew it, rather. They were working on decisioning it, and we felt that we would withdraw based on the circumstances. We still have the capability, so it doesn't really affect us, but that's the story. With the regional bank and the other situations, the environment just felt was not there.

Walter, do you expect there to be any changes on capital where you might have to hold more? Or is that less certain? Just any perspective on that?

Yes. From our perspective, as part of our ongoing planning, we don’t expect any changes. If anything, we might see a slight increase in certain state situations, which we were aware of. But in short, we do not anticipate any issues because of the state or the FSB. We believe the Federal Reserve is assessing the situations they have observed, and we would be affected like any other institution given the size of our balance sheet.

Next question, can you provide any updates on risk transfer in the RPS area? It seems like you went through a detailed process and decided against the pricing, yet many competitors in life insurance are pursuing more risk transfer deals, suggesting that trend is ongoing. Some recent deals are actually priced well. Has this changed your view at all regarding competitor pricing or your overall stance on risk transfer?

I think that more importantly where we stand with holdings. Certainly, we feel very comfortable with what we have. As we look at it, yes, we've evaluated situations. We've always looked at it. Many of the past has been distressed. Yes, we've seen some changes there. Certainly, we are not going outbound; well, certain inbounds come in, we evaluate them. So, we are very comfortable where we are right now.

Yes. I mean, we haven't gone through an in-depth look at what's recently occurred and what may happen in the market. From our perspective right now, we have a very solid business there. We have a very low risk profile for that business, as Walter said. It's going to continue to generate roughly $200 million of PTI a quarter, $800 million for a year. Most of that is free cash flow for us. That's how we think about it. But if there are opportunities that arise, we'll always have to entertain them.

Thanks. Good morning, everyone. Next quarter, you're going to have your annual insurance liability unlocking exercise. Last year resulted in a large negative adjustment with the bear market effect on the variable annuity book. This year, markets are up a lot and interest rates are up a lot. So my question is, should we get a reversal on unlocking last year just given the bull market that we're in? Could there be a release in the long-term care block just given that interest rates are a lot higher?

Yes, interest rates will tighten, but there is a balance between the equity and interest markets. From that perspective, our available capital is why we established a ratio. We are navigating the situation and feeling very confident. As circumstances change, we have the capacity to adapt. If we gain benefits, we will assess our positioning.

Thanks, Walter. My follow-up, and I think I know your answer here, but I just kind of want to hear it anyway. You stopped some fixed annuities, you insured your book to KKR's Global Atlantic. We've watched the industry acquire these books pretty aggressively, and now interest rates are back to healthy levels. ROEs on these portfolios are higher, and the product isn't that complicated. It's really just credit quality. Don't you have a competitive advantage with your large distribution channel in wealth? And you seem pretty happy with their decision. But don't higher interest rates versus the last 15 plus years, change the calculus on the fixed annuity business too?

Well, yes, listen, fixed annuities have certainly gotten back in favor from that standpoint. And we will evaluate it. But it also has implications from a balance sheet standpoint in surrender and portfolio. We feel very comfortable with, like you said, with the reinsurance situation there, but we are constantly evaluating. We'll go back to manufacturing or not. Right now, I think we're comfortable where we are, but certainly, yes, there are advantages to it, and it ebbs and flows. As rates go up and down, you have implications from liquidity and other standpoints with that portfolio. That's why we felt very comfortable reinsuring it, but we are evaluating.

You mentioned the 40 to 50 basis points of yield uplift within the bank. Would you expect much, if any, higher deposit costs or interest costs along with that? Or should that predominantly drop to the bottom line?

That factor I was explaining was actually the asset earning rate. We will simply add the cost of funds for the bank as we assess the situation regarding its sourcing, which mainly comes from the sweep accounts.

Okay. And then you've seen the certificate balance increase this year. I think you're rolling out more products within the bank. At some point, should we expect some of the certificate balances to roll off the group into the bank? And if so, is there much of a margin difference between the two?

If you look at it from that standpoint, the large bound on certificates in the bank should be comparable. Yes, we have built up. As Jim indicated, we launched our bank certificate product. We will certainly have that offering to people. Right now, we're not anticipating big shifts coming in, but we're certainly giving them the capability within a short product.

I have another question on brokerage sweep rates. They appear to be pretty flat from last quarter, and the deposit beta seems to have slowed for the industry. Just wondering if there's potential for you to increase your sweep rate if the Fed keeps raising interest rates? Or are competitive levels such that you may not need to raise it much anymore?

Listen, we have a very robust valuation system that goes on to ensure we offer competitive rates in that. The team is evaluating; yes, you will see, as we look at the competitive environment and landscape that we will evaluate our deposit beta and increase rates accordingly to ensure that we offer our clients competitive rates. That's a very focused program we have.

Yes. Okay. And then just on capital return, I think it's running at 80% of operating earnings in the first half. I know in the past you've sort of targeted 90% for the full year. Should we expect it to move up to that? Or is there any reason it's sort of running below that long-term target?

Well, right now, we established this year that our target for this year is going to be 80%. Obviously, you can go up and down a quarter from that stand. We're still comfortable with that right now staying with that guidance.