Welcome to the Q3 2018 earnings call. My name is Paulette, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. During the question and answer session, if you have a question, please press star then one on your touchtone phone. Please note that this conference is being recorded. I will now turn the call over to Alicia Charity. You may begin.
Thank you operator, good morning. Welcome to Ameriprise Financial's third quarter earnings call. On the call with me today are Jim Cracchiolo, Chairman and CEO, and Walter Berman, our Chief Financial Officer. Following their remarks, we will be happy to take your questions. Turning to our earnings presentation materials that are available on our website. On slide two, you will see a discussion of forward-looking statements. Specifically during the call, you will hear reference to various non-GAAP financial measures, which we believe provide insights into the company's operations. Reconciliations of non-GAAP numbers to their respective GAAP numbers can be found in today's materials. Some statements that we make on this call may be forward-looking, reflecting management's expectations about future events and overall operating plans and performance. These forward-looking statements speak only as of today's date and involve a number of risks and uncertainties.
A sample list of factors and risks that could cause actual results to be materially different from forward-looking statements can be found in our third quarter 2018 earnings release, our 2017 Annual Report to Shareholders, and our 2017 10-K report. We make no obligation to update publicly or revise these forward-looking statements. Turning to slide three, you see our GAAP financial results at the top of the page for the third quarter. Below that, you see our operating results, followed by operating results excluding unlocking, which management believes enhances the understanding of our business by reflecting the underlying performance of our core operations and facilitates a more meaningful trend analysis. In the third quarter, we completed our annual unlocking. The comments that management makes on the call today will focus on operating financial results excluding unlocking. With that, I will turn it over to Jim.
Hello, thank you for joining our earnings call. This morning we will discuss our strong results, give you an update on the business and our areas of focus today and going forward. Reflecting on the quarter, the macroeconomic and market picture has been positive for our clients and Ameriprise. The U.S. economy is strong, that was punctuated by the Fed's decision to raise short-term interest rates again. Europe is showing signs of slower growth. Global trade issues and political uncertainty remain, including in the U.K., especially as the deadline for Brexit nears. Recently, global equity markets have been more volatile. We are navigating that volatility and are very much focused on our clients. At the same time, consumer sentiment is strong. U.S. household wealth has reached a new high of over $100 trillion, which represents a significant long-term growth opportunity for Ameriprise. Turning to the company.
Over the years, we've built a strong business. We're well-positioned based on our broad advice capability, and our integrated model allows us to leverage resources and generates consistent results through market cycles. Ameriprise delivered another strong quarter. On an adjusted operating basis, excluding unlocking, revenue increased nicely, up 5%. We continue to generate excellent EPS growth, the third consecutive quarter of 20% growth or better, building on last year's strong results. Our return on equity was also very strong, now at 32%. I am pleased with the quarter and our long-standing track record for delivering results of this caliber. In addition, our assets under management and administration are now over $900 billion. As you know, our business generates significant free cash flow, and we're disciplined in our capital allocation.
We continue to shift our earnings mix to less capital-intensive business lines, with more than 70% of pre-tax adjusted operating earnings coming from our wealth management and asset management businesses in the quarter. At various investment forums over the years, some of you have asked us when we would grow our less capital-intensive business lines to get to 50% or even 60%. Today, we're over 70%, and we have the ability to continue to invest for growth and return to shareholders at a meaningful level. Let's move to some business highlights. Very clearly, we know the mass affluent and affluent want to work in a personal, advice-based relationship with a trusted advisor. These investors need even more advice as their assets grow, their lives become more complex, and markets experience volatility. At Ameriprise, we're positioned very well to serve this growing need.
We're focused on serving more investors in our target market, those with $500,000-$5 million, and we're seeing good organic growth at the million-dollar-plus level. With good client growth and positive markets, Ameriprise client assets increased 9% to $588 billion. Our investment advisory platform is one of the largest in the industry. Net inflows into fee-based investment advisory accounts were $5.7 billion in the quarter, the fifth consecutive quarter of flows over $5 billion. Year-to-date, rap flows are 14% higher than 2017, which was an exceptionally strong year. Variable annuity sales picked up a bit with growth of 3% in the quarter. For our life and health insurance offerings, cash sales increased 5%. We only offer these products in our network to Ameriprise clients as part of a comprehensive solution set. As we discussed, we focused on targeted growth within the Ameriprise client base.
These solutions provide important benefits for clients while providing risk-adjusted returns for Ameriprise. Our client cash balances also remain high at more than $24 billion. We're earning competitive returns and spread as the Fed continues to raise short-term rates. The result of these strong client flows and increased activity is continued good growth in advisor productivity, which increased 11% to $613,000 on a trailing 12-month basis, excluding the net 12b-1 change. This builds on many years of strong advisor productivity gains. Ameriprise advisors consistently grow productivity at a faster rate than many industry peers. In addition, the level of service and leadership support we provide is reflected in our strong advisor relationships and retention rates. Regarding advisor recruiting, we're attracting productive advisors with larger practices who serve the affluent market.
In fact, third quarter was quite strong with another 87 advisors joining, their productivity was nearly 20% higher than those recruited a year ago. For the rest of the year, the pipeline looks good. The strength of our client experience and the external recognition we receive is an important differentiator. I'm extremely pleased to share that consumers rated Ameriprise number one in the investment industry for trust, customer service, consumer forgiveness, and for loyalty, according to the most recent Temkin ratings. Across the firm, we're further investing in our value proposition and putting significant resources towards our client experience to further build on our client engagement, advisor productivity, and practice efficiency. This includes enhancing our digital and financial planning capabilities, as well as upgrading to an advanced CRM system so our advisors can work in an even more integrated way with their clients.
These capabilities are in development and testing, we will be introducing them with training and support to advisors beginning and throughout next year. We're also pursuing converting our national trust bank to a federal savings bank and targeting a launch in 2019, subject to regulatory approval. In addition, we continue to invest in the Ameriprise brand. As you may have seen, we're back on the air with new advertising, we remain at record levels of awareness. I'm energized about our opportunity and so are our advisors. Over the last few months, I've spent time with our top advisors across the country. We've had excellent conversations about the Ameriprise value proposition and their opportunity to grow. They feel very good about the firm, the support we provide, and how we're further enhancing our client advisor experience to deliver value and drive growth. What does this translate into?
Another great quarter for our wealth management business. We grew assets, increased client activity, delivered double-digit revenue, earnings, and productivity growth, are managing expense as well. As part of Ameriprise, Columbia Threadneedle is focused on delivering relevant quality products and solutions underscored by good service to retail and institutional clients while generating competitive returns. The industry is under pressure, like other active managers, our flows have been affected, we've been taking steps to address it. We have a broad set of capabilities and product offerings with good performance and global distribution. Importantly, the business benefits from the resources and scale of Ameriprise. We continue to execute a strategic shift in our asset mix with declines in lower-fee former parent assets under management and increased higher-fee third-party assets under management.
This change has helped us mitigate industry-wide fee pressures while maintaining assets under management levels and consistently delivering good profitability. Looking at the business, investment performance globally remains good overall across equities, fixed income, and asset allocation strategies. For one, three, and five-year periods, more than 60% of our funds are beating Lipper peers and related benchmarks. Where we have pockets of underperformance for the current one year, we're working to address it. We have a growth with a quality bias, with the recent market pullback, we're seeing some improvement on short-term numbers. In distribution, we have a good base of clients are working to gain traction in areas we see opportunity, while at the same time manage industry challenges. In U.S. retail, we continue to be in net outflows.
Our focus is on strengthening our presence at top wealth management firms and getting our products and models on these platforms and earning more business from advisors who sell our funds. In the quarter, net outflows were higher, and that included more than a $1 billion year-over-year negative swing in model flows. In the U.K. and Europe retail, we're in net inflows of about $300 million, but flows have been softer. We're reinforcing our strong position in the U.K. and investing and expanding key European markets, including Italy, Germany, and Spain. Brexit remains a top priority. During this period of uncertainty, we've been supporting our clients as we begin to transition certain portfolios while we continue to extend our SICAV fund range in Europe. In institutional, we had elevated outflows as clients continue to de-risk, rebalance, and seek liquidity in this environment.
We're working hard to convert opportunities in our pipeline, the funding pace remains slow. We also had $1.1 billion of redemptions in our CLO business, given a leadership transition in our bank loan office. Our outflows have been higher than we like, reflecting the rise of passive and pressure on sales as we compete for share in a very competitive marketplace. Our re-engineering discipline allows us to free up expenses to reallocate for growth, improve service, as well as for regulatory and compliance costs. An example of that is the enhancements we're making to move to a global operating platform. We completed the first main part of the work and reallocated expense saves to help offset higher regulatory expenses, including absorbing higher research costs. We're also investing in spending time advancing big data initiatives, both in our investment department and improvements to data-driven distribution.
We're broadening our product lines and adding to new structures to provide a greater access to our capabilities. This includes recent product launches that broaden our SMA capabilities in the tax-efficient space and in strategic beta. In asset management, we have good scale and distribution, broad investment capabilities, and the ability to adjust the business and leverage our integrated model while continuing to generate a good return. As I reflect on the quarter and the year so far, I feel very good about Ameriprise, the client experience we deliver, and how we're situated. We're generating strong results, see meaningful opportunity ahead, and are investing for growth as we continue to shift our business. We're executing consistently through market cycles. I also feel very good about how we manage risk at the company. Our approach has served us very well for many years.
As you'll hear from Walter, we're comfortable with how we manage our longer tail liabilities while maintaining the flexibility we need to capture market opportunities. Ameriprise is in a great position for future growth and to deliver an attractive return to shareholders. Walter will cover the numbers, and I'll be back to take your questions.
Thank you, Jim. Ameriprise delivered another excellent quarter consistent with our longer-term performance. This is led by Advice & Wealth Management, which delivered 19% earnings growth and continued strong metric trends. Our other businesses are generating good, stable earnings. Asset Management is delivering good profitability as we navigate an environment and regulatory change agenda. Protection and Annuities are generating very good risk-adjusted returns that are in line with our expectations. In the quarter, we completed our unlocking and LTC experience review, which resulted in a marginal charge well within historical ranges. As I previously indicated, long-term care will not impact our ability to deploy capital for business investments and return to shareholders. Turning to page six, Ameriprise delivered strong results in the quarter.
We continue to make significant progress in delivering our long-term shareholder objectives, as demonstrated by strong 5% growth in revenue, 20% growth in EPS, and a 32% return on equity. Let me take you through the details beginning on slide seven. Overall, Ameriprise delivered strong revenue growth up 5% in the quarter, largely driven by Advice & Wealth Management. Asset Management, Annuities, and Protection had fairly stable revenue that was in line with expectations. Expenses continued to be well managed across the firm, with G&A up only 1%. I will go into detail on expenses in each segment on the subsequent pages. In total, adjusted operating EPS was $4.05, excluding unlocking, fueled by Advice & Wealth Management, which now makes up 46% of our pre-tax adjusted operating earnings. Year to date, we returned over 90% of earnings to shareholders, a continuation of our track record of differentiated return.
In the quarter, we returned $484 million to shareholders through buyback and dividends. Lastly, we have maintained $1.4 billion of excess capital while achieving a 32% return on equity, up 150 basis points. Let's turn to slide eight. As I just indicated, Advice & Wealth Management represents 46% of pre-tax adjusted operating earnings, demonstrating a significant upward trend from 41% last year. We have diversified sources of free cash flow from our businesses, with Advice & Wealth Management driving much of our growth, complemented by Asset Management, Annuities, and Protection. Our fee-based businesses of Wealth Management and Asset Management now make up nearly three-quarters of our earnings. Let's turn to AWM on slide nine. Advice & Wealth Management is delivering consistent, strong financial performance that is underpinned by business fundamentals that have continually demonstrated an ability to drive sustained, organic, profitable growth. Overall, AWM has substantial 19% earning growth to $355 million.
Revenues grew 11%, driven by $5.7 billion of wrapped net inflows and higher transactional activity levels, as well as equity markets and the benefit of higher short-term rates on cash sweep balances. The third quarter had lower transactional levels than the first half of the year, which is typical in our industry associated with a summer slowdown. As we move into the fourth quarter, we expect transactional activity to return to a more normal level. Expenses increased in line with revenues and included higher distribution-related expenses. G&A increased 7%, driven by higher volume-related expenses, as well as elevated growth investments. We are diligently managing G&A while investing to improve the client experience and ease of doing business. Margins continued at a record high 22.7%.
We have seen strong growth trends in Advice & Wealth Management both in the quarter and over the last several years. You can see some of these trends on slide 10. Total client assets increased 9% to $588 billion in the quarter, driven by growth in wrapped assets of 16%, reflecting client demand for fee-based products. Over the past three years, our client assets are up 11%, and wrapped flows grew 21% on a compounded annual basis. Brokerage cash balances remain substantial at $24.2 billion, down slightly from last quarter as clients are putting money to work. We are benefiting from short rates getting back to more normal historical levels, and we saw the spread increase to 1.73% in the quarter. While we have retained a high percentage of the rise in short rates to date, we are closely monitoring credit and rates to remain competitive with peers.
Finally, organic advisor productivity also continues to steadily improve, reaching nearly $613,000 on a trailing 12-month basis for the quarter. This level has grown steadily over the longer term with a combined annual growth rate of 8% over the past three years. This is well above the productivity growth experienced by many of our wealth management peers. Let's turn to asset management on page 11, where financial performance remains solid and profit margins high as the business and the industry face some secular headwinds. Earnings were $197 million. The year-ago quarter included a one-time $10 million gain on CLO unwinds. Excluding that prior year item, earnings were up slightly. Adjusting for the CLO unwind, revenues were in line with a year ago. The fee rate in the quarter was 54 basis points, slightly above our expectations in the 52-53 basis point range.
Expenses continue to be prudently managed by generating operating efficiencies and re-engineering, which is funding growth investments and higher regulatory costs in Europe to address MiFID II, GDPR, and Brexit. We are continuing to make investments in the business to build our brand, expand our product offering, and enhance our distribution capability in Europe. We delivered a 40% margin in the quarter. We continue to expect the margin to be consistently in the 35%-39% range in the near term. Let's turn to Annuities on slide 12. Annuities are a core enablement capability for our wealth management business and part of our important set of solutions tailored to meet our clients' needs. This business continues to generate good risk-adjusted returns for the company. In the quarter, variable annuities earnings were $131 million, which was essentially flat to last year.
Equity market appreciation increased account values year-over-year, but was largely offset by net outflows. Variable annuities continue to be in outflows, though at a slower pace than last year. Variable annuity sales continue to be solid, up 13% year to date, which is above the industry, and nearly 30% of our VA sales are in our product without living benefit riders. Fixed annuities pre-tax adjusted operating earnings declined to $12 million as lapses in interest rates continue to impact results as expected. Turning to protection on slide 13. Life and health pre-tax adjusted operating earnings are $65 million and included a one-time expense associated with a modification of cost within a reinsurance contract. Claims were in line with expectations, though claims were somewhat favorable to the prior year. Life insurance sales have been good with 5% sales growth and acceleration from earlier this year.
In the auto and home business, pre-tax adjusted operating earnings were $17.9 million, excluding net cat losses. Earnings were down $3.4 million from last year, primarily due to the wind down of the previously announced affinity partnership termination and delay in reducing expenses associated with this contract. We continue to reduce home exposures in severe convective storm states from the termination of our affinity partnership I just mentioned, along with other actions. This has resulted in homeowner policies in force declining 18% year-over-year. We expect this to improve our risk profile going forward. Turning to slide 14. A cornerstone of our success as a company is predicated on a proactive, integrated risk management process, which results in sustained strong balance sheet fundamentals. We have a rigorous process to identify, quantify, and mitigate risk that we use to make business decisions.
Over the years and across all business lines, we have been successful and avoided surprises. There are a number of underlying metrics that demonstrate our successful ERM program, including ALM, where we are short duration and positioned for rising rates, as well as credit quality and hedge effectiveness. These underlying examples support our strong balance sheet. In the third quarter, we completed our experience update as part of our comprehensive and consistent unlocking process. Overall, the impact from market assumption was marginal, and behavioral characteristics were within ranges. Unlocking was consistent with our expectations, with a $58 million total charge, with $52 million coming from long-term care. The majority of the long-term care charge related to updating morbidity experience, which was offset by actual and expected premium rate increases.
Let me remind you, our reserves do not incorporate any future improvement in morbidity or mortality, and we have a conservative approach to the level of rate increases assumed. Let's turn to slide 15. Our LTC experience is some of the most extensive in the industry, as we sell policies from 1989 to 2002. Each year, we do a granular analysis of our experience and update assumptions accordingly. Let me provide a bit more detail into the drivers of the level of credible experience that support our active life reserves. Each year, we update our experience tables to incorporate an additional year of information. We have 29,000 policies that are closed with claim activity, as well as 8,000 currently active claims. We apply this claim experience to our in-force policies at a very granular level, broken down by issue year, attained age, and benefit features.
Another critical data point is that 75% of claims experience provides statistically valid information that is used in estimating our reserve assumptions. Policies with lifetime benefits have higher claim duration, and this is incorporated into our reserves. In the appendix, we provide additional insights into these areas. Lastly, we have been pursuing rate increases since 2005 and have achieved substantial appropriate increases. As we incorporate future rate increases into our assumptions, we are conservative. In addition, based on recent industry trends, we believe there is an opportunity for additional premium increases as well as benefit changes, both of which are not incorporated into our current reserve methodology. Turning to page 16, we laid out the core assumptions for the LTC block and associated sensitivities. I want to focus on three key takeaways.
First, our best estimate reserve assumptions are conservative and consistent with our actual experience based on our granular approach. To reiterate, we do not assume improvements in morbidity and mortality. The lapse and asset yields assumptions are based on our actual experience. For expected future rate increases, we consistently assume a lower level than what we've historically received. Second, looking at sensitivities, the impact is minimal on a relative basis. As you would expect, the largest sensitivity is to morbidity, which is $127 million, significantly less than what others in the industry have disclosed. The sensitivity is overstated because it applies across the whole book rather than to the subset that does not have credible claims experience. If we apply the sensitivity just to that portion, the impact would be reduced from $127 million to $57 million.
Third, these scenarios do not reflect any potential benefits to reserves from additional premium increases and benefit reductions that are in line with industry trends. Now let's turn to free cash flow generation and capital return on Slide 17. Ameriprise cash flow generation, balance sheet quality, and capital return capability continue to be very strong. Ameriprise's excess capital is $1.4 billion, and our estimated RBC ratio is 515%. In the quarter, we returned $484 million of capital to shareholders, bringing our year-to-date total to more than $1.5 billion. This is over 90% of our adjusted operating earnings. This demonstrates our ongoing commitment to capital return as well as confidence in our risk analytics and future cash flow capacity. In closing, Ameriprise delivered another strong quarter of financial results and organic growth that is exceeding expectations with strong client flows and productivity gains in Advice and Wealth Management.
We are meeting and exceeding client needs as evidenced by our profitable growth and the recognition we received.
We are continuing to invest for future growth. Our ERM decisioning process demonstrates that we effectively manage risk and avoid surprises. Our long-term care results in the quarter are no exception to that. As we've indicated, long-term care will not impede our ability to invest for business growth and return capital to shareholders. Finally, our business model generates significant free cash flow that will sustain our differentiated capital return. With that, we'll take your questions.
Thank you. We will now begin the question and answer session. If you have a question, please press star then one on your touch tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then one on your touch tone phone. Our first question comes from Alex Blostein from Goldman Sachs. Please go ahead.
Thanks, guys. Maybe just to start with Advice and Wealth. Revenue growth 1% quarter-over-quarter, despite the fact that we got, obviously, benefit of higher rates and your asset growth and kind of core metric continued pretty good. I'm assuming it's all kind of slower activity rates, but any incremental color, what kind of slowed the sort of implied fee rates in the quarter? I guess more importantly, as you guys look into October, any sort of notable changes given the moves in the market and in terms of client allocation or any noticeable moves back into cash or anything like that would be helpful.
Alex. The third quarter was actually quite strong on a seasonal basis. As you would imagine, the summer months are always a little slower compared to the second quarter and therefore even the fourth quarter. I would actually even add a little more color to that, because it was a very strong quarter, is in our third quarter, we have our national conference, which takes our top 15% of advisors away for a week, and some extend mainly for 2 weeks. We also have our Chairman's Advisory Council, which is our very top advisors, and they were away for a week to 2 weeks as well in that quarter in addition to the national conference. That's a compounding, which is our most productive advisors, also out in the summertime for special events. We think it was an exceptionally strong quarter.
I think if you look against the industry, you'll find that the stats are quite strong.
In October, kind of how things are trending so far?
In October, listen, there's an experienced level of volatility. Our advisors are really engaged with their clients, and they're sticking to their allocation methodologies. We do not see a shift at this point. It's early in the quarter, et cetera, but it's part of the engagements that we have with the advisors, with the clients, and we give them a lot of support to work with their clients more thinking about it over a longer term.
Got it. Here's my second question around asset management. Obviously the industry continues to be under a lot of pressure and frankly, the market volatility is only adding fuel to the fire here. We've seen some deals in the space. You saw Invesco Oppenheimer. You guys have been, in the past, thinking about potentially pursuing acquisitions in the space. Given the fact that scale is becoming more critical, and you guys have your own flow problems, but thinking about opportunities to consolidate in the industry given that, because capital position and just kind of updated thoughts around M&A in the space?
We continue to do a lot to improve the way we operate at Columbia Threadneedle with the capabilities we're installing the front, middle, and back office globally to give us efficiency. We do believe as we continue this journey, we'll be able to add more assets to our platforms in a more efficient and effective way. We do look at opportunities that do arise, but we are very practical and appropriate in understanding where we can extract some really good shareholder value as well as add strategically to the business. We'll evaluate those things as they come along. We have the means, capability, but more importantly, we want to ensure that we can really execute something, whatever we do, appropriately and leverage it appropriately.
We will keep our eyes out for opportunities that may make sense for us that we can extract an appropriate return, and add value to the business longer term.
Okay. Thanks.
Our next question comes from Nigel Dally from Morgan Stanley. Please go ahead.
Great. Thanks, and good morning. With long-term care, we've seen one of your peers into a transaction to reduce their exposure. Given your block is seasoned with very credible experience, is the sale of your block also a possibility? Second, you provided all the GAAP sensitivities to the various factors, which is very helpful. Just wanted to check whether the statutory impact would be roughly similar. Thanks.
As it relates to looking at alternatives, certainly we will evaluate it from that standpoint. Our statutory reserves are higher, but the impact will be pretty much the same, but the stat is a little higher than the GAAP.
Okay, great. Thank you.
Our next question comes from Humphrey Lee from Dowling & Partners. Please go ahead.
Good morning, thank you for taking my questions. In terms of the fees in AWM, you've talked about for transactional fees, there's some seasonality in the third quarter. How should we think about the financial planning fees? In your disclosure, there seems to be some volatility throughout the years. Just wondering if there's some kind of seasonality there that we should be thinking about going into the fourth quarter.
No. On actual financial planning fees, it really depends on how the advisor, on a rotating basis, they do their annual fees and renewals with their clients. It does vary based upon the time of year that they've actually executed those. I have not looked at that. We can look at it, but I don't see there is any material changes that we would expect from year to year.
Okay. Got it. Then in terms of the productivity, I do believe being able to do more financial planning is one of the drivers to get to stronger productivity numbers. I was just wondering, is there any kind of metric that you can share in terms of kind of the penetration of financial planning activities in your customer base?
Yes. To your point, it's an excellent question. We are investing even more today so that we can ensure that we can deliver a consistent level of advice to even all of our clients as we go forward. What an advisor does today is they'll do an annual plan at some time in that relationship. Roughly 40%-plus of our clients have a full comprehensive plan, then there are a lesser percentage of that do that on an ongoing annual basis. What we're looking to do is increase the number of clients and the consistency of that financial planning methodology being applied, and we think that's a great opportunity.
We're investing a bit more in our capabilities to digitally enable all that advice with online goal tracking, and ensuring that in an interactive way, our clients can deliver that seamlessly to more of their clients, because it does take a bit more work and engagement. This is one of the things I'm really excited about as we move into 2019, and I think it could be a big opportunity for us.
Just to kind of put some context into that opportunity, if we were to think back a couple of years ago, where would that number be in terms of clients with comprehensive financial plannings?
Yes. Our annual increase in the planning activities is more in probably the high single digits a year increase. We're looking to see if we can get that even up stated a bit more. That's sort of it. It's consistent with our overall productivity. We do have a good penetration compared to anyone in the industry in that regard. It's one that I think is still an opportunity for us based on our value proposition.
Got it. I appreciate it the color. Thank you.
Our next question comes from Thomas Gallagher from Evercore. Please go ahead.
Morning. Just a few long-term care questions. Walter, when you think about capital allocation, and you think about potential risk transfer for long-term care, do you think you'd be able to fund that with current excess capital, or would you likely have to slow or stop the buyback?
I think we do not have to use excess surplus. I believe we are adequately covered, certainly, as I indicated, we feel comfortable with where we are at that position. I have no assumption on using excess capital at all.
My question is for potential risk transfer, not for the current maintaining the book. Do you think-
If you're referring to the CNO and doing risk transfer through that sort of method, obviously again, different discount elements are used, but that would be one of the evaluation elements. We certainly have the capacity if that was something one wanted to pursue. The answer is, again, we would have to evaluate the facts and circumstances associated with any of those transactions.
We don't foresee, even in a risk transfer, that it would affect our buyback capability on any quarter basis.
No, that would be a consideration that we would certainly evaluate, and we don't feel that's an implication.
Got it. That's helpful. In terms of the morbidity experience that you are seeing, can you give a little more color for what's going on below the surface, or is it frequency? Is it claim durations? Is it severity? A little more color there would be helpful.
Yeah, that's fine. Again, as we talked about, this is a meticulous process that we use, looking at it on a consistent basis. It's all of the above as they move through their issue age to attained age. It's a combination of all of it. This is actually progressing exactly what we thought, but it's all those components together. There's no one factor that stands out. It's a combination.
Okay, just on the morbidity, the fact that you're not including morbidity improvement in your reserves, but you're actually seeing adverse morbidity trends. Is this informing you that your baseline morbidity assumptions are too aggressive? Is that something you're going to have to revisit, or you still feel comfortable with those?
I guess the short answer, we feel comfortable, this is actually the process that we follow. We don't anticipate improvement, we evaluate the actual experience, we feel very comfortable. This is the way we derive the best estimate with that knowledge.
Okay, my final question. Just given what's going on with Genworth, and your reinsurance program, or reinsurance on long-term care with them, I understand that if Genworth does go bankrupt, you've commented that you have enhanced asset protection. What if Genworth needs to bolster its reserves backing the long-term care reinsurance contract? I'm assuming that's where there would be a potential shortfall for you, in the event of a Genworth bankruptcy. Am I thinking about that correctly, or is there any other offset to think about?
I guess the short answer is no, I don't think you are thinking about it correctly because we are comfortable with their reserves, we understand it, we work well with them. We don't think that is a major exposure.
Walter, my one reaction to that is the company is selling themselves and saying this is their best option, which to me, they're signaling very clearly to the market that there's an overall very big reserve deficiency. Just based on what their actions, I think they're implying to the market that there's a very big deficiency there. Is your block different than the rest? I'm just a little confused on how to interpret that.
Well, again, you're making a lot of assumptions on that basis. I do look at certainly they are sitting on surplus, and certainly we work with them. They do all our claims handling. They do our claims administration. We certainly work with their actuaries. We feel comfortable that, and with the process that we have in place with them, that that should not be a major issue.
Okay, thank you.
Our next question comes from John Barnidge from UBS. Please go ahead.
Good morning. I'll go away from long-term care. Can you speak about your expectations for G&A growth in advice and wealth management? I think last quarter you had indicated that for the full year we should expect a range of G&A growth versus 2017 of about 4%-6%. If I've got the numbers right, you're running maybe a touch above 7% through the first nine months. Should we be thinking about that 4%-6% range as still a good way to think about the full year, or should we think about being maybe above that range?
I think, listen, these are difficult areas, especially when you talk about splitting a difference between 1% on an effort. We think it's totally consistent. We've had good volume growth, a lot of those expenses are tied to that volume, and certainly we are investing. I think it is totally consistent with the outcome that we believe it will be. It may go up a little, it may go down, but we certainly feel that range is good, whether it's six, seven, or the deviations of factors are pretty small when you get to that. The ability to drive our margins and really drive and having good growth, that's the factor.
Okay. Jim, I've got a bigger picture question for you. As you look out over the next couple of years, what are your strategic priorities? I ask this, Jim, because a good part of the narrative on your company and on your stock has really been about potential structural opportunities with a few of your businesses. Already earlier in the Q&A, some discussion about long-term care, potential risk transfer. You've talked about the auto and home business and the improvement needed there to maybe pursue something, maybe something that can be done in combination with your annuities business as we think about companies like Apollo and Athene that have openly talked about a willingness to do multiple product line kinds of transactions. With the continued discount in your stock valuation, I know it's early today, but your stock is underperforming again.
Is there any increased sense of urgency to pursue any of these kind of paths?
Yeah. First of all, thank you for the question because I think it's a very important one as we think through it. As we have highlighted to you a number of years ago, and I tried to mention that in my opening comments, what we continue to do is be very much focused on the strategic growth of our business and generate really good returns for shareholders. We have a 32% ROE, one of the highest in the industry, with all amortization, all costs included in, and others look at EBITDA and everything else. From our perspective, we're doing exactly what we told you we would do a number of years ago, and we've executed quite well on it. Our growth has been consistent. Our growth as our business is really in the forte is the Advice & Wealth Management.
That's almost 50% of the total business earnings right now and continues to grow nicely. We have a nice complement with the asset management that we manage assets for advice, as well as in the same thing with the insurance and annuities. We have a good complement with the insurance and annuities that are solutions against our retail client base. No additional acquisition costs per se. We got the client relationship. We've reduced, as I promised we would do, reduced the INA business on the balance sheet requirements tremendously over the years. It's less than 30% of our total earnings. The balance sheet is quite well risk managed, and it generates a reasonably good return with cash generated. We actually did what we said we would do and will continue to do. Now with that, to your point, we'll always evaluate strategically opportunities.
We have very good discussions with our board to see what would generate longer-term shareholder value, not a quarterly basis, but longer term. We will make those as informed decisions as those opportunities can arise or that we think there is a structure that makes sense for us for a risk transfer. Definitely we'll evaluate that as we continue to move forward. Clearly, I would say, I think sometimes we overlook what we're generating overall, the type of earnings, AWM, just as an example, excellent quarter. I know models are there for a certain reason, but consistently strong performance. The business itself is generating great cash flow that would returning to you and investing. We have the opportunities for inorganic growth.
Yes, we will look at some adjustment to risk transfer in some of the businesses you mentioned, if it makes sense from a shareholder perspective. We do evaluate that. We both bring people in to evaluate, and we do it internally. It's exactly what we do. It's a good question, and I can understand why you're asking it. If an opportunity comes along that makes sense strategically for us longer term, we will evaluate it.
Jim, I totally appreciate the response. Thank you.
Our next question comes from Erik Bass of Autonomous Research. Please go ahead.
Thank you. Deposit betas have been a big as your deposit balance. Any pressure to share more of the benefit?
We can't hear you. Could you?
Sorry, is that better?
Yes. Thank you.
Much better.
Thanks. Just had a question on sort of your deposit betas as that's been a big theme for banks, and realizing your deposit balance was relatively flat quarter-over-quarter. Just are you seeing any pressure to share more of the benefit from higher rates with clients? Do you have an estimate for how much of the benefit from additional rate hikes you expect to drop to the bottom line going forward?
We continually evaluate that. We have extensive reviews of competitive elements, and we have not seen any particular pressure at this stage. We're still evaluating it. We do anticipate maybe in the future, more will be shared, as we indicated. Right now, we are not seeing that.
Okay. You mentioned the plans to launch a federal savings bank next year. Can you just provide an update on your thinking about the revenue opportunity there and potential bottom-line impact, both near and intermediate term?
Sure. Yes. Our intention are to certainly start the bank next year, as Jim has indicated. We've indicated when we exited the bank several years ago, at that point, we were earning around $60 million pre-tax. Our best estimates now, again, for internal sources to serve our clients in a very prudent way, that we could get up to in five years in the range of $100 million pre-tax.
Okay. Thank you.
Our next question comes from Ryan Krueger from KBW. Please go ahead.
Hi. Thanks. Good morning. I had a follow-up on asset management M&A from the earlier question. I guess in recent years, you've been primarily focused on adding pretty small bolt-on deals that give you new capabilities. Is that still your focus, or would you contemplate something that would be more financially motivated that had cost savings opportunities but was less strategic when it came to new capabilities?
You're correct. We've been looking at more of bolt-on strategically in product areas that we were not playing in, and we will continue to do that. We think that will be appropriate for us to continue to build out rather than organically build some areas where we don't have the expertise. No, we would entertain an appropriate larger deal. As we said, we're putting in the capabilities so that we can put more assets onto the platform more efficiently. We've been able to execute those larger deals like Columbia and get real good efficiencies. We've globalized now Threadneedle, so even there, gives us an opportunity as we think about adding international capabilities more easily. Yes, we would entertain that.
Of course, it always looks at what the seller's looking for. We want to make sure that it's appropriate for us what the seller is requiring versus just the idea that we can do an acquisition.
Understood. Just on debt capacity, how do you evaluate how much debt capacity you have? Because I think if you look at your balance sheet like a life insurance company, your debt-to-capital ratio is not particularly low. If you look at it more like a fee-based company and debt to EBITDA, it would look like you have a fair amount of capacity.
We do have a fair amount of capacity. Obviously from that standpoint, this is reviewed with the agencies once a year. You're correct. You can look at it both from the insurance standpoint and each agency has their own, we do have a fair amount of debt capacity.
Okay. Thank you.
Our next question comes from Adam Klauber from William Blair. Please go ahead.
Thanks. Good morning. This year and last year, you're doing a great job of growing earnings per share, obviously +20%. It's a very good growth rate. What about next year? If the asset growth slows down or flattens, what additional levers can you pull to get earnings growth or EPS growth at least in the low to mid-teens?
I think we have a few levers as a gamut. If the markets slow down on a more consistent that we believe is going to go into a slower environment, we've been very able over the past, as we've reflected to you, to adjust our expense base appropriately, slow down investments, slow down some of the things that we just execute on ongoing basis, like our advertising and various things such as that. There's those levers we pull. We actually can accelerate our re-engineering, which gets to some more structural and other things that we've been able to execute as well, and we can ramp that up. Right now, we wanted to be a little more in the investment mode because we had spent a bit amount of time on the regulation compliance over the last few years, we've re-energized the machine there.
We could definitely make adjustments and still keep those investments going. That's part of the lever. We also have very good balance sheet right now, and we have a good excess capital that could be utilized as well if the price of the stock even goes lower on a more appropriate basis. We could do some acquisitions as prices drop. There's a few different levers that we would look to apply.
Thanks a lot.
Our next question comes from Andrew Kligerman from Credit Suisse. Please go ahead.
Hey. Finally. All right. A couple of quick questions. Brokerage sweep fees. You came in at 173 basis points this quarter versus 157 last quarter and 111 last year. Where do you think a good normalized number could settle in?
That's strictly dependent on where the Fed goes, right? Again, they've talked about doing two or three more. Certainly, I think the trajectory is up, but I can't tell you how high, Andrew.
Yeah, I would just say, Andrew, as we continue to see rates go up, we will be passing more on to the client. We look at that very competitively, as Walter has said. They started so low, the increases that you usually see offer a base that usually was there would've been greater sharing. Because you're sort of recovering from what that low point is, it hasn't been shared as much. I see as those rates continue to rise now, getting into the little higher two to 3% range here, that you'll start to see a greater round to share in. We'll pick up some, I don't think we'll pick up to the extent that we picked up previously.
Got it. In the auto and home area, you mentioned favorable reserve development. Could you elaborate a little bit on maybe how much potentially there is in favorable reserve development?
Yeah. Listen, I can't get into the exact number. What I can say, as we've looked at this and certainly looked at our prior year and looked at the redundancies there, they have built, and we're seeing actually very favorable trends across both the auto and home aspects of it. We're feeling very comfortable that the rates that we've set up, and certainly looking at the frequency and severity trends that are coming in, some are longer tail, some are shorter tail, we have built reserves. Now we have to assess when to say they are a redundancy. We are in a very good position at this stage.
Got it. Lastly, the consolidated tax rate, it looks like it's trending to about 16% this year. Where do you think it could go next year?
Again, as we talked about this when this first came out, that we would be between 17% and 19%. Again, it's based upon that range is probably a good range. Might tend for the lower end of it, certainly, I would keep the 17%-19% as until we refine it, we will try and give some view of it.
What's keeping it lower right now, Walter?
We basically had discrete adjustments which came in from that basis. As we tell you, these are part of the way we operate the business. You get it whether it's settlements of different things or estimates. They come in, they're part of the effective tax rate, and that's what happened. We picked up a large one in the third quarter.
Okay. 17 to 19. Thanks a lot. Have a great day.
You're welcome. Thank you.
Our next question comes from Suneet Kamath from Citi. Please go ahead.
Thanks. Starting with long-term care. Walter, I think to Tom's question earlier, you'd said you'd be able to do a reinsurance solution without any excess capital, if I'm understanding your response correctly. I guess, what's the hold up? If it doesn't cost you any additional capital, the sensitivities here don't look that significant. Why not pursue something? I would imagine it's already being overhanging on your stock.
Let me clarify. What I'm saying is, listen, I can't tell you, we've watched, certainly saw the CNO, and certainly discount rates there. What we're saying is, obviously, you're going to evaluate from the standpoint, they'll evaluate the book, they'll look at the discount rates. We will assess then the improvement that you can see. We have the capacity because again, it depends on what it takes to make the deal correct. We believe right now we are appropriate. Therefore, the issue is at some point, depending on whether to make the deal, it could have some impact, and we don't know. We have the capacity. That's all I was saying. I'm sorry. I didn't mean to, if that was the interpretation.
Yeah. Suneet, I think to just complement Walter, and clarification, it would not affect our ability to buy back. Would it use some of the excess capital? Yes, depending on what the discount is in this marketplace for this time as people are perceiving what that risk is. We feel very good about the risk we have in the book and how we're reserved for it. Doesn't mean that if you executed a deal today, there wouldn't be a discount based on other factors that are out there. You'd have to think about long-term interest rates, as an example. If they continue to rise, that's a benefit. If you factor in rate increases above our very conservative, that's a benefit. On the other side, do you factor in certain risk, as people say, the unknown? Those are the things that we take into account.
We also look at the complement of who we're doing that with to make sure strategically it makes sense for us. Those things, it's more of at a point in time rather than the idea that over time, the book has a certain level of value. Yes, even if there was that discount factor applied, we can afford it out of some of the excess capital without an issue that it would affect our buyback as well to continue, as an example, and still leave us a good level of what we would call conservative nature of our balance sheet.
Yeah. The only thing I would add, and just to make clear, because obviously we understand the asset earning rates, we understand discount rates. You can't understand why the discount rate would be applied on an acquisition or an acquiring of the book. That's why it's a variable. I'm sorry if there was a misunderstanding. Hopefully, that clarified it.
No, it does, and I could follow up. Just slide 22, I thought was really interesting, where you show the policy count and how much it's come down. I guess, over what period is that? How many years as we think about, say, over the next five years, where does that policy count number end up going? I would imagine it comes down at a faster clip, just given the age of the block, but any just sensitivity around that?
I can't give you a sensitive, I can tell you clearly that will happen, and certainly I can't just give you the precision of the numbers of what's going to happen. That's obviously detailed actuarial, it will happen. The question, obviously, they factored that into as we set up all our estimates here.
I think you're all asking very good questions. We're not opposed to a risk transfer. We will evaluate it depending on what the opportunity and the interest that's out there in the marketplace. We're also, as I said, even for some of the other business lines you mentioned, we'll always evaluate if there's a good opportunity that strategically makes sense for the business and for Ameriprise. There's not the idea that we would not. We just want to make sure that it's in the long-term interest, and strategically, it's good for our clients, it's good for everyone involved. That's the way we would look at it. If there's a risk transfer on this particular piece of the business appropriate with appropriate party that would buy it, we'd be open to have a good discussion.
Last one, just on the overall environment. I think there was a question on this earlier, but just to clarify, if revenues are flat in 2019, do you think you have enough leverage on the expense side to reduce expenses? Are these investments that you're making of the type where it's really hard to pull back now that you've started them?
I guess it's more of a timing. If you recollect, as we went into a previous down market or period where things soften up, the revenue comes about a little quicker than the expense. On a quarterly basis, you got a lag effect. It's more of making a decision of whether that continues and then what you adjust going forward. I would just say, over a reasonable period, we're able to adjust, but in a one-quarter period or two-quarter period, you're going to have a timing lag where the revenue hits you quick because you're managing assets. Your expense base, you have to make adjustments and slow down. You can't just say all the expense goes away that period.
I know you know that, but I'm saying it's more of a timing issue and more of what your length of view is on that slowdown.
As a reference point.
I was asking about 2019. I get your comment about the quarter. I was actually asking more about 2019.
The answer is, listen, our expense base is quite large, and as you're aware, but there's a very large portion of variable in there that is dealed for different sort of growth initiatives or different initiatives that we have flexibility to certainly do. As Jim said, depends on when it happens in the year. If assuming coming into 2019, we certainly have the capacity. I'll just remind you, doesn't mean its history will be. Right after 2008, we actually took out a substantial amount, which we demonstrated to everybody that we had that capacity without impacting customers. We basically, as it relates to growth initiatives, we reengineered it, and it was a reasonable amount. We really do have capacity to do it. Can I say it will negate everything? We certainly have capacity.
All right. Thank you, guys.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating, and you may now disconnect.