Welcome to the first quarter 2018 earnings call. My name is Sylvia, and I'll be operating 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 touch-tone phone. Please note that this conference is being recorded. I will now turn the call over to Alicia Charity. Alicia, you may begin.
Thank you, operator, and good morning. Welcome to Ameriprise Financial's first quarter earnings call. On the call with me today are Jim Cracchiolo, Chairman and CEO, and Walter Berman, our Chief Financial Officer. Following their remarks, we'll 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 insight 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 first 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. On slide three, you see our GAAP financial results at the top of the page for the first quarter. Below that, you see our adjusted operating results, which management believes enhances the understanding of our business by reflecting the underlying performance of our core operations and facilitates a more meaningful trend analysis. I would like to point out that effective January first, 2018, the company changed the naming convention for its non-GAAP financial measures from operating to adjusted operating to more clearly differentiate between GAAP and non-GAAP financial measures. The definition of these measures remains unchanged.
The comments that management makes on our call today will focus on adjusted operating financial results. Additionally, in the first quarter, Ameriprise adopted the new accounting standard, revenue from contracts with customers on a retrospective basis. The adoption resulted in changes to certain advisory revenues that are now recognized on a gross rather than a net basis. With that, I'll turn it over to Jim.
Good morning. Thanks for joining us for our first quarter earnings call. I'll provide my perspective on the business, and then Walter will follow with our detailed financials. Let's begin. I'm pleased to share that Ameriprise reported strong first quarter results. We're generating good earnings growth in both advice and wealth management and asset management. So far in 2018, the overall operating environment has remained positive but fluid. After a strong January, market volatility increased, the markets ended down for the quarter. In March, the Fed increased short-term rates, and longer-term rates have begun to rise, though they remain at low levels. The regulatory environment is clearer, we're encouraged by that. In the first quarter, we had good growth in client assets and activity. In terms of financials, assets under management and administration were $887 billion, up 9%.
On an adjusted operating basis, net revenues grew nicely, excluding the impact of 12b-1, were up 9%. We delivered significant growth in earnings up 30%. Earnings per diluted share grew a meaningful 37%, and our return on equity is consistently among the best in the industry at 29.3%. Maintaining a strong financial foundation is core to how we operate and gives us flexibility to take advantage of opportunities. We returned 91% of adjusted earnings in the first quarter, consistent with our return over the last several years. Yesterday, we announced another increase in our regular quarterly dividend up 8% to $0.90 per share. This continues our record for consistent dividend growth over the years and marks our 13th increase over the last 13 years. Since 2012, we doubled our dividend. Let's move to our business results.
In advice and wealth management, our advice value proposition and premium client experience are important differentiators. We work diligently to earn excellent client satisfaction. Proudly, Ameriprise is also recognized in the investment industry for our trust, customer service, consumer forgiveness, and likelihood to recommend. In the first quarter, Ameriprise was ranked as a Hearts & Wallets top performer in four important areas. Understands me and shares my values, explains things in understandable terms, has defined and repeatable processes for producing results, and has knowledgeable, timely, and tactical investment ideas. This terrific recognition builds on our existing credentials and reinforces that what we do for our clients and how we do it continues to differentiate Ameriprise in the industry. In an improved operating environment, Ameriprise client assets grew 12% from a year ago as clients put more money to work.
Activity was strong. We had an excellent quarter for net inflows into fee-based investment advisory accounts of $5.7 billion, an increase of 44% over last year. Our investment advisory platform is one of the largest in the industry at more than $250 billion, growing 18% from a year ago. We continue to invest significantly in our brand, technology, tools, and training to help our advisors grow their productivity and to further strengthen awareness of Ameriprise and our value proposition. We're building on our successful Be Brilliant national advertising campaign and launched new broadcast and online advertising during the quarter, with continued high awareness levels. We're spending significant time on delivering our highly effective advice value proposition more consistently. Many advisors are taking advantage of our extensive leadership coaching programs on advice and generating client referrals.
We're serving more clients with comprehensive advice and financial planning as well as more million-dollar-plus clients. We're investing in our digital capabilities so that clients can work even more collaboratively with their advisors. We'll also continue to invest in our servicing capabilities as well as data and analytics to better understand client preferences and help advisors deepen relationships. Our field team is strong and successful. Ameriprise advisor production was up 16%, excluding net 12b-1 fee change. Our advisors have consistently increased productivity at a higher rate than most of our competitors. We had continued strong productivity growth in the first quarter. Another 79 experienced advisors joined Ameriprise in the first quarter from wirehouses, regionals, and independent firms. We had the largest number of Ameriprise advisors ever named to several top advisor industry rankings.
Our insurance and annuity solutions are an important part of the largest solution set that we offer. Sales of variable annuities have picked up by about 20% from a year ago. Variable annuity account balances grew 3%, driven by equity market gains. In insurance, we're seeing continued good sales in VUL and UL, which were driven by IUL lump sum sales in the quarter. For both our insurance and annuity businesses, we're simplifying and streamlining our sales processes to help deepen advisor and client engagement and meet clients' needs for retirement income and protection. In auto and home, we had underlying improvement in profitability. The changes we've implemented are having a positive impact. We've improved claims management pricing and underwriting. The changes are working their way through the book.
Unfortunately, like the industry, cat losses, though down from prior quarters, were a bit above our expectations given the storms in the Northeast and Midwest. In asset management, we continue to deliver good financial results and competitive investment performance for investors. Our first quarter financials were strong. Pre-tax adjusted operating earnings increased 30% from a year ago. Assets under management were up 4% to $485 billion. Regarding investment performance, it remains very good. At the end of the quarter, about 70% of our funds, equities, fixed income, and asset allocation were above Lipper medians or benchmarks for one, three, and five-year time frames. Results were particularly strong in the U.S. across domestic and international equities, as well as taxable and tax-exempt fixed income.
Clients are benefiting from our efforts to establish a global investment operation, which is resulting in increased collaboration and insight sharing across a range of investment portfolios. Net outflows were elevated in the quarter. The main driver was in institutional, where we were impacted by clients' tactical asset allocation decisions, a large sovereign wealth client who redeemed for liquidity purposes and delayed fundings given the market environment. It was not performance related. We expect improved sales in the second quarter as more of our wins are expected to be funded. In global retail, the increase in outflows was driven by higher redemptions in EMEA, given volatility. We do anticipate it to bounce back in the second quarter, given expected platform fundings.
In U.S. retail, we remain in outflows as we're still experiencing pressure from redemptions in equities like the industry, though sales at major intermediary clients have improved from last year. In each quarter, we expect the level of outflows from our closed block of low-fee former parent assets, and the flow rate in the quarter was in line with our expectations and improved a bit from a year ago. With regard to what we're doing about our flow situation, in institutional, we're working to have more strategies approved with consultants and deepen relationships with current clients while we continue to further expand internationally. In regard to retail, in February, we added a new head of North America, which aligns our regional leadership similarly to EMEA and Asia Pacific.
We're working hard to get more strategies on platforms, enhancing our segmentation strategies, and ensuring our wholesalers are engaging their clients about their particular needs. In EMEA, we're investing more resources to expand our distribution reach in key markets in Europe to complement our U.K. strength. We're also investing to strengthen our Columbia Threadneedle brand awareness across our regions, including in key markets in Europe, as well as in the U.S., where we're seeing a good lift from our television ads and digital strategy. In the quarter, we completed a significant portion of the planned integration of our front, middle, and back-office operation platforms that will increase our flexibility and ability to offer customized solutions. We continue to prepare for Brexit, and that work is going well. In asset management, we have more work to do, and that's where we're focused. Overall, Ameriprise is in a strong position.
We have a great foundation upon which we can build. Very few financial services companies are generating this level of consistent performance returning to shareholders like Ameriprise does while continuing to deliver good earnings. We have an excellent financial foundation and balance sheet that we manage very well. Our diversified business provides important flexibility, and our wealth management business is one of the best in the industry and has significant growth potential and is responsible for driving approximately 75% of the company's overall revenue. We're confident on the investments we're making as we focus on serving more clients and growing the business. Therefore, we believe Ameriprise is undervalued and represents a compelling opportunity both today and for the future. Now Walter will review our financials, and I'll be back at the end for questions.
Thank you, Jim. Ameriprise delivered strong results in the quarter. We continue to make significant progress in delivering our long-term shareholder objectives with strong growth in revenue, EPS, and return on equity. Let me take you through the details beginning on slide six. Ameriprise reported adjusted operating EPS of $3.70, fueled by our strong growth businesses. AWM and asset management earnings were up over 25% in the quarter. Overall revenue growth was strong, up 9% in the quarter. Strong growth in client assets, particularly in wrap accounts and market appreciation, drove substantial 16% top-line growth in AWM. Asset management revenue was up 7% from markets and a vendor credit relating to completion of our front, middle, and back-office integration. Annuities and protection stable revenue was in line with expectations.
Expenses continue to be well managed across the firm, with G&A up only 1%. I'll go into the details on expenses in each segment of the subsequent pages. We returned more than $500 million to shareholders through buyback and dividends. Given the lower share price in February and March, we increased the amount of share repurchase to the highest level over the past five quarters. Let's turn to AWM on slide seven. Advice Wealth Management delivered another outstanding quarter across all dimensions. Revenue was up 16%, driven by strong wrap net inflows and improved transactional activity levels, as well as higher equity markets and interest rates. Expense growth was primarily driven by higher distribution-related expenses. G&A increased 6%, which included higher volume-related impacts due to strong growth, increased investment for business growth, and the addition of IPI.
AWM had substantial 27% earnings growth and 230 basis points of margin expansion in the quarter. The adoption of the new accounting standard impacted margins in both periods by approximately 40 basis points. I'd like to take a moment to review the quarterly drivers of earnings. First, there are only 90 fee days in the first quarter, 91 in Q2, and 92 in Q3 and Q4. Given the growth we've seen over the past years in our wrap business, the impact of each fee day has increased to approximately $14 million of revenue and $6 million of PTI. Second, there was one fewer E&O day, which negatively impacts revenue by $3 million. Lastly, we have some seasonality in our expenses that we have discussed in the past.
As it relates to the first quarter, we had higher payroll tax expense of $7 million. Let's turn to asset management on page eight. Asset management financial performance remained very strong. Revenues were up 7% from strong market appreciation, the acquisition of Lionstone, as well as the vendor credit I mentioned earlier. In addition, the fee rate was consistent with our expectations in the 52-53 basis points range. Expenses continue to be prudently managed. Excluding the acquisition of Lionstone, G&A increased 3% and included elevated research and regulatory costs in the U.K. and Europe. We delivered a particularly strong margin of 40% in the quarter. We continue to expect the margin to be in the 35%-39% range in the near term. Let's turn to annuities on slide nine. Variable annuities were flat at $116 million.
Equity market appreciation increased account values year-over-year, but earnings were flat due to lower mean reversion than a year ago. Variable annuities continue to be in outflows, though at a slower pace than last year in both our internally distributed block and the closed block that was distributed by third parties. We've also seen a 20% increase in sales of our variable annuity product. Fixed annuities pre-tax operating earnings declined $7 million as lapses and interest rates continue to impact results as expected. Turn to protection on slide ten. Life and health pre-tax operating earnings declined 4% from the pressure of continued low interest rates. Total claims are in line with expectations, though we did see a slight uptick in mortality in the first quarter that was offset by an improvement in the disability income.
We had good sales momentum as we started the year, particularly for our indexed universal life product, which is up 9%. In the auto and home business, pre-tax operating results in the quarter were impacted by elevated net cat losses of $14 million that were concentrated in the Northeast. We continued to reduce home exposure in Colorado and Texas from the cancellation of one of our affinity partnerships. This has resulted in our home policies in force declining 6% year-over-year and 3% within the quarter. Let's turn to slide 11. We are continuing to grow our Advice & Wealth Management and asset management businesses at a faster pace than insurance and annuities. Advice & Wealth Management made up nearly 45% of the earnings in the quarter. Combined with asset management, the fee-based businesses made up 72% of our earnings for the quarter.
This mix shift supports our strong fee cash flow generation. Next, I'd like to spend a few minutes on our risk management framework and inferences that have been drawn about the reserve adequacy of our long-term care businesses. As you're aware, we have developed a sophisticated ERM program that utilizes analysis and stress testing to inform our risk appetite and understand our capital return capability across a range of potential scenarios. It is this framework that supports the recommendation I make quarterly to the board regarding the level of our share repurchase, as well as the amount of our annual dividend increases. Long-term care obviously is part of our ERM framework, and we remain very comfortable with our exposure. There are three primary levers to manage the long-term care business. First, premium rate increases. We have taken a balanced but active approach to steadily increase rates since early 2005.
The average approved cumulative rate increase is 138% on our nursing home only indemnity business and 63% on our comprehensive reimbursement business. This has mitigated some of the need to build reserves. Second, investment income. Here we have prudently managed our investment portfolio. Third, our reserve processes, which I will go into in a bit more detail. We have a rigorous process of diligently reviewing our long-term care reserves on an annual basis. Our reserve levels reflect the policy features and risk characteristics of our book of business as well as ever-increasing credible claims data, so policies with richer benefits have higher reserves. We have complete reviews with our auditors, and no concerns have been raised about our reserve adequacy. Also, we periodically engage an independent actuarial consulting firm to validate our conclusions. We have been setting our reserves using over 20 years of actuarial data.
In the third quarter of each year, we add another year of experience and incorporate any deviation from our assumptions into the reserve calculation. The annual adjustments have been very small percentage changes of the total reserve. Material changes to reserves are not consistent with our approach or the process that I just described. We have not experienced, nor do we expect to experience sizable reserve increases on this business. Let me be very clear, I can confidently say that long-term care will not impact our ability to return capital to shareholders consistently. Turning to slide 13. Ameriprise balance sheet quality, cash flow generation, and capital return capability remain very strong. Ameriprise's capital position remains strong with $1.4 billion of excess capital and an RBC ratio of over 500%. In the quarter, we returned over $500 million of capital to shareholders, which was over 90% of our operating earnings.
We announced an increase in our quarterly dividend of 8% to $0.90 per diluted share, reflecting our ongoing commitment to capital return and confidence in our future cash flow capacity. 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're 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 Ryan Krueger from KBW.
Hi, thanks. Good morning. First question was on buyback. Walter, you mentioned that you stepped it up from the last few quarter run rate. Is this something that you think can be sustained going forward or did you view this as more of an opportunistic increase in the quarter?
It can be sustained. Again, we will evaluate it each quarter, look at it opportunistically, and certainly, we have the capacity on that basis to continue to buy back at the levels that you saw. Again, we will evaluate it each quarter.
Okay, thanks. One on G&A expenses and Advice & Wealth Management, the 6% increase. How much of that was driven by IPI, I guess what would be your general expectation for G&A expense growth going forward?
IPI is a small part of it. It's probably on the expense side because it's new and added. It's about $4 million. Going forward, I think as we talked about, it's in the 3%-5% range. You do know we're investing for growth, certainly we feel that is a reasonable range that you should anticipate.
Okay, great. Thank you.
Our next question comes from John Nadel, from UBS.
Hey, good morning. First off, a question on the SEC's announcement recently regarding fiduciary standards. Jim, any sort of early thoughts there? Your reaction or the firm's reaction to what's happening now?
Yeah. First of all, we're going through the real details of it. There's over 1,000 pages. On the surface, it looks very good in a sense that it is a bit more principled based. It's more appropriate against what would be supportable regulation that's out there in case that's out there that is appropriate for us to, and the industry to conduct business. Still serving people in their best interest, which we fully support. We're very encouraged by it. Always you got to read the details of it and figure out how that looks in reality. We think it is appropriate for the SEC to take the broader role and have it consistent across all activities. We're very favorable to that. As you also saw, there was a major court ruling there. Unless the DOL appeals it, then that rule will be out.
Yep, understood. On the wrap flows, Jim, exceptional results. I guess the question, sort of using Ryan's term, can we talk about sustainability there? What you think is really driving that increase in wrap flows? I know productivity's improved, experienced financial advisor recruiting, all these things. At the core of it, do you feel like this level of flows is really a sustainable level?
Yeah. I would say we feel very good about the productivity of the system and the advisors. I think they're focused. They're back to work. They're not worried about the next regulatory overhang. Remember last year, we had to convert a huge amount of their business, eliminate 12b-1s. We had to put them on the best interest standard consistent with the DOL. There was a lot of work and a lot of activity and training. Now the advisors are much more focused. Now what we're doing, to Walter's point, is we're investing real strongly back into the core of the business. Our advice value proposition, our digital capabilities. We're enhancing our ability for our advisors to really seek out and serve more clients and clients that have more wealth. We're feeling really good about that. Client inflows are really good.
Our productivity of the advisor base is strong and growing. That's really what we're continuing to be focused on. Our transaction activity also picked up in the quarter, so it wasn't just flows into wrap. We saw a good flow situation coming in from clients. Even with the volatility, people have been very disciplined about how they're working and engaging their clients.
If I can sneak one more in, just going back to slide 12. I really appreciate the color on the long-term care business. I think that's clearly been topical of late. The last bullet on the slide talks about significant protections in place to effectively mitigate counterparty risk. I guess specific to that, excuse me. In the event that your counterparty suffered significant downgrades of its credit or claims paying ability, is there protection in place against the incremental capital that RiverSource Life would potentially need to hold against a lower-rated reinsurance recoverable?
Basically, the issue is it would have to be a tremendous movement in it. We feel with the protections that we have that we keep on talking about, that the impact to us would be minimal.
Even under rating agency capital models like S&P?
Yes. Because you're dealing with, again, what we feel the protections are and then what the net exposure would then be. Listen, it's a complex process, as we indicated, we feel very comfortable for those protections, and the net amount of that exposure we think will be certainly very manageable.
Thank you very much.
Our next question comes from Kenneth Lee from RBC Capital Markets.
Hi. Thanks for taking my question. Just had one on the asset management side. In terms of the institutional flows, wondering if you could give us a sense of the recent trend of the unfunded institutional mandate and where they stand right now.
We actually, again, you can't necessarily with certainty always say exactly when, but we do have a nice number of wins that are waiting to be funded. We do believe that some of the investors held off in the first quarter in some of the disciplines that we had that were approved. We feel the institutional business should be much more positive than what we've seen in the first quarter.
Would have bounced back in some of those wins and fundings. We do have a good number of products that have been approved on the consultant side and more that are in the hopper. We're having good discussions with our clients, including on some of the multi-asset solutions that we have. We're hoping that will continue to trend in a more positive direction as we move through the year.
Got you. Just one more follow-up. Any way that you could break out by asset class, just the total outflow, whether there was any particular concentration in specific asset classes? Thank you.
Yes. We'll look to see if we can do that for you.
Great. Thanks.
Our next question comes from Adam Klauber from William Blair.
Thanks. Good morning. Your revenue growth, the change in revenue growth is pretty impressive. In 2016, it was roughly negative 2%. 2017 moved up to 4%. This quarter jumped up to 8%-9%. Is a revenue growth level in the high single digits, is that sustainable, or is this quarter just better than we should expect going forward?
No. Again, if you look at the business drivers that are there, certainly with the markets and with our growth, I can't say that it's going to be at the same levels, but certainly with also the changing interest profile. It'll certainly be higher than we've experienced, the ones you talked about, and we're quite confident of that. We always have then the situation from that standpoint with the insurance which grows and annuities which grow at a slow pace, but the asset management and the Advice & Wealth Management businesses are on a good trajectory. I can't give you it's going to be at that 9% level, but certainly it's going to be higher than we've seen.
Okay. Then the last year or so, you've done two more bolt-on acquisition/deals. How's the pipeline, and could we see one or two more deals in the next 12, 18 months?
Yeah, I think the activity in the industry has picked up a bit. We very much have the capability and the ability to continue to bolt on. We're seeing a nice fit with Lionstone that we acquired. We think there are some additional capabilities that we would like to add on to our asset management capabilities.
Okay. Thank you very much.
Our next question comes from John Barnidge from Sandler O'Neill.
Thank you. Just a housekeeping question. In asset management, when have flows on an ex-former parent company basis been this bad?
You meaning other than the ex-parent?
Yes.
Right. I would say they're probably, if we go back, it really depends on the cycle. Unfortunately, in the first quarter, we were sort of hit with fundings being held, and at the same time, people relocate out of some of the disciplines like high yield and other things like that because of the market pullback and change in the fixed income area. Equities, the same way with the volatility that picked up. Europe moved into nice inflows last year, and again, the first quarter was a little bit of holding. You got the redemptions coming without necessarily the sales. The sales right now are starting to pick back up again, and the redemptions are calming again. We did face a level of volatility in the first quarter.
You also in the first quarter always have people that review their portfolios and make some reallocations, which we did have. We think that will bounce back. We didn't expect it to be that high. Having said that, I do believe we are making good focus and good progress in certain areas, but it's not something we're happy about, but we're diligently trying to work to improve that situation.
Related to the protection segment, the pricing environment for auto and home has improved. Underwriting margins and protection are trending in the right direction. Your ex-cat combined ratio has averaged a couple points below 100 for the last seven quarters. How much further improvement do you think is needed before the company would consider exploring strategic alternatives for that business? Because there's obviously a clear push towards more asset management-like businesses at the company.
Again, I think we're well on our way to showing good progress in the business. I think the unfortunate point over the last number of quarters have been the level of cat activity, and we've actually done some good work to minimize that. We've actually adjusted some of our affinity relationships so that we can reduce the extra exposure there. We'd like that to continue to work through the book because at the end of the day, we built this book over a long period of time, and it is one of the best, we think, affinity direct players out there, and we really would like to get it back in a good situation for our partners, and ones that can sustain and start to excite the growth there. Then we'll evaluate it. I'm very clear on that.
Having said that, I think we just want to continue to make some good progress there that shows true through the earnings.
Thank you for the answers.
Our following question comes from Erik Bass from Autonomous Research.
Hi. Thank you. Can you provide some additional detail on what drove the increase in your RBC ratio this quarter? I guess what were the discretionary reserves you released related to, and what's changed in your thinking about the need for them?
Well, actually, since last year, I think we discussed that we had discretionary reserves as we looked at both the tax situation and others. Those reserves clearly were discretionary, and they have been reversed. Obviously we also declared a dividend. We feel comfortable at the current NAIC levels that the RBC ratios are in the level that we think are appropriate.
Okay. Then on the last call, you alluded to potential interest in getting back into the banking business. Can you just provide any update there on your thinking, and discuss what you see, I guess, as the potential incremental benefits to your interest margin from owning a bank? Also, I guess, would having a bank change your capital requirements or have any material impact on excess capital?
Yes, we are certainly continuing with our interest and as we evaluate that, and we feel that will be a beneficial situation to expanding the scope of our product capabilities, and it will add a reasonable amount of margin as it does with certainly some of our peers. As it relates to capital, we feel based on initial evaluation, it should have a minimal impact on the consolidated excess capital position other than the capital that goes into the institution.
Got it. It'd be both an expansion of kind of product capabilities as well as an increase in the interest margin as you would be able to keep more of the economics, I guess particularly as rates if they continue to move higher?
Absolutely. That's exactly.
Okay. Thanks, Walter. Thank you.
Our following question comes from Suneet Kamath from Citi.
Thanks. Good morning. I wanted to start with long-term care, just given your confidence in the level of reserves and frankly the lack of reserve builds, on an absolute basis and relative to peers. Is there any hope that maybe at some point you could sell this business or exit it? Are there any sort of structural limitations in terms of your ability to do it, or is it just boiled down to price?
I think there's no structural limitations for us to do that. Obviously, interest rates play an important part of it, but also, yes. The answer, if an opportunity came up, we would certainly explore it that made economic sense. We understand the book, and like I said, this book is something that we feel like a lot of our products has been managed in a very effective way, that's why we feel as confident. Yes, if the opportunity came up for the right situation and interest rates certainly would help going up, we would certainly listen.
We've been reading a little bit about interest from third parties in these types of blocks. Is it sort of crickets out there in terms of conversations, or are you actually getting some feedback in terms of interest without naming specific partners?
I think we've seen more interest lately, and certainly in that block. Yeah, I can say we've seen more interest.
Yeah. Suneet, one of the things I would say is there's a lot of activity out there for books that may not have been of the quality of ours. I think what has to occur a little more is people understanding really the differentiation. I think you'll find whether it's in our protection or in our annuities book, these are asset accumulation, good strong clientele, built over decades, very good returns, very low risk, very good hedging, very good in the way we reserve, et cetera. I actually believe this is a very high-quality portfolio, and as people start to evaluate that, there'll be a differentiation.
I know, Walter, you mentioned interest rates need to be higher. Is there a rough sense of how much higher they need to go before such a transaction makes sense?
It's an interesting question. Certainly if you get into the five to six range or the four and a half to five and a half range, it gets to the point where you can make an intelligent evaluation about it.
That's on the 10-year, or is that something longer?
That's more on the 10-year. Yeah.
Okay. Just one last one for Jim. In the past, you'd given us sort of periodic updates on the margin in the employee channel versus the franchisee channel within AWM. Can you give us a sense of where those two channels are today?
Yes. We continue to create a margin and build it in the employee channel. It's up in the mid to upper teens, I think, roughly around this point. It's tracking very good. It's also off a larger base, meaning that the size has grown. We feel very good about that and the continued progress that it makes. We continue to build utilization in that system with the recruits that we've brought on board. It's tracking very well.
Suneet, it's Walter. Just let me make sure. I'm talking about not 10-year Treasury, I'm talking about 10-year corporates, okay?
Oh, 10-year corporates. Okay. That's helpful. Thanks.
Our next question comes from Alex Blostein from Goldman Sachs.
Hey, Jim, Walter. Good morning. Question for you guys just to follow up around the bank strategy. I guess maybe just a little more color on A, what kind of ROE threshold you guys would need to see in the business when you're considering to kind of pull the trigger or not? I guess would you guys have to acquire, or is that something you guys can just build internally and just start a new bank charter?
Yeah. As you recollect, we had a bank charter before. We still have a bank trust.
It's really building out our capabilities, getting the approval and the right licenses in place, et cetera. There's a level of work and activity that you have to do appropriately in that regard. It would really be around wealth management product. We're not looking to do commercial lending like some other institutions have, et cetera. We really want this to be more around supporting our clients' activities and their individual asset loans, et cetera. We have the capability in the past to have done that. We have the knowledge, we need to put that back in place and go through the appropriate approval and set up the various systems and capabilities for it.
Yeah. As it relates to the return, certainly the book would have to build, but again, it's internal and with the products we're building. Certainly we'll expect to get into the teens.
Yep. Any sort of timeline we should be thinking about as you guys are considering this?
Probably as we look out to next year.
Yep.
Got you. My second question, just around the broker trends and the cash. It looks like the implied betas, deposit betas on the business remain quite low, something, I think, in the 30%. I guess as you progress through the rate cycle, and again, this is not just you guys, we've seen it across the industry. As you progress through the rate cycle, where do you guys see these deposit betas going? Again, feels like they've held up much better than expected. Ultimately, I guess, where do they peak out?
Again, it's dependent on the competitive situation as we go. You're right. Certainly, the level for the increases that have taken place have been at a higher level because it's competitive and certainly it's been evaluated. Actually, a lot of that, even the one in December, has not worked its way totally through the quarter. The issue is, we see it at some point it will stop being shared. Again, it's a highly competitive situation, and we've seen in the last two that the majority of it has been retained. It's tough to really estimate, but it's certainly at some point when you get to much higher levels, I assume it will stop being distributed in a more, basically more to a higher % to clients than it is today.
Got you. Where you stand today, you're not seeing a material change versus what we've seen over the last kind of three to four months?
We scanned this quite thoroughly. No, we are certainly in lockstep with our competitors and certainly look at it, and we feel it's a fair rate that we're offering.
Got it. Great. Thanks very much.
Our next question comes from Thomas Gallagher from Evercore.
Thanks. Few questions on the long-term care, Walter. In terms of the reinsurance that you have in place, do you have protections over and above the assets that are currently in the reinsurance trust? I guess what I'm getting at is if there was a shortfall of assets in the trust, and your reinsurance partner suffered further financial difficulty, do you have extra protections to fill that asset need?
Okay. The issue is, let me just go straight to it. Our protections are geared towards what they estimate the reserves that are necessary for. We certainly work with them and understand it because we've been in partnership with it. Certainly, we feel we follow a protocol, they follow a protocol that those reserves are adequate. I'm not going to speculate if it's not. It is something we are constantly monitoring and basically reviewing, and certainly reviewing the strength of GLIC and the firms that support it. I feel comfortable at this stage that certainly we are well protected.
Got it. I guess another issue that I've heard out there that's a concern related to that, I just wanted to see if you could shed a little light on it, is that I think your counterparty is viewed as using more aggressive reserving assumptions than everyone else in the market. From the disclosure we've been able to see, it looks like you guys are holding about the same amount of reserves for that business that's been reinsured to that company at around $2 billion. Am I right on that, or is there a difference between the reserves you're carrying for that book versus what your reinsurance partner is, if you're able to comment on that?
Well, I can comment on ours. We do our own calculation on our reserves, and certainly feel confident. We are also aware of what they're doing, and candidly, in discussions with our actuary, we are not concerned.
Okay. My final question on this topic is, your 10-K indicated that your analysis of long-term care reflects one or two additional rate increase rounds over a four-year period. I just want to be clear I understand that. Is that what's embedded in your GAAP and statutory reserves are one or two additional rounds of rate increases over four years?
I believe-
Is that something different? I just want to be clear.
Well, which is based on evaluation, and that is what we felt is appropriate and based on what we feel that we would be able to garner.
Walter, that's for both GAAP and stat?
No, that was for GAAP.
That's just GAAP. Okay. All right. Thank you.
You're welcome.
Our next question comes from Douglas Mewhirter from SunTrust.
Hi. Good morning. First question on the MiFID. I know you've been working especially on the Threadneedle side, but also maybe also in your North American business. Have you zeroed in on what kind of expense impact that might have for the balance of the year?
Well, okay. On the research fees relating to MiFID, it's around $2.5 million that we had in the quarter. You can go out there. We're constantly looking and evaluating, but that is something that we experienced that basically, we had in the first quarter. We are doing some development, but again, that's in our development plan as it relates to meeting certain other requirements as we go forward. That should be, I would say, $1 or $2 million, in that range, as it relates to MiFID.
Okay, thanks for that. My second and final question. With the middle and the longer the interest rate curve finally inching up a little bit, have you seen increased interest in your annuity products? I know it looked like you had an increase in sales. I didn't know if that was just a better marketing effort, or if it was more comfort with the regulatory environment, or if they're more attractive because of higher interest rates. Do you think there's a level where you would actually hit an inflection point where you could actually turn the negative variable annuity flows into positive flows?
We have seen in the last two quarters a pickup in annuity sales. Again, I would probably say it's a combination of factors. I can't point to one. It could be where people are more comfortable now that they understand what is appropriate from a regulatory best interest, et cetera. As we said, we haven't really changed. We've always had very comprehensive compliance practices. Nothing in that regard has changed. I think it's more of a comfort of where the annuity fits back in that regard. I think there was a bit more of a focus of a little bit of a hesitation there. Having said that, I also believe that the advisors are back to looking at where the annuity fits as part of a holistic solution. That, I think, is how we think about it.
We have always had annuity sales in the $4 billion-$5 billion range, unlike a number of competitors that really turn on the faucet and then turn it off when something happens there. We have been very consistent. We have a good core product capability and benefits that our advisors understand. We complement that with other products from other providers on our shelf as well. We're not necessarily looking for sales of the annuity to rise tremendously. There is a level of redemption in our book or pay downs because of the client portfolios in drawdown, but that's appropriate for us. We look at this more holistically, and as you can see, we have good client flows, we have good flows going into a combination of products which include the wrap, includes annuity protection, et cetera. That's really what we look at.
We don't necessarily look that the annuity business has to grow by leaps and bounds. I think part of the sales coming off also has to do with the fixed side, where the interest rates aren't there at this point for us to get the spread that we're looking for. That could change longer term as well. We're feeling very comfortable about that book and the sales that we do get, and it does sort of go up and down within a good range. It's a good client persistent portfolio, and that's really what we look for.
Okay, thank you.
Our next question comes from Humphrey Lee from Dowling & Partners.
Good morning. Thank you for taking my question. On asset management, in terms of the fee rates that you charge on the asset that is coming in versus the assets that are going out, can you update us in terms of the differential between the fee rates?
The fee rate is higher, certainly for the activity coming in versus going out. I'm trying to remember. It's around four or five basis points, I think. We'll get back to you on that, but that's what I think it is. It's certainly been higher.
Okay. Yeah, I think last quarter you said it's kind of roughly 15% higher for the inflows versus the outflows. I'm just trying to see if there's still somewhat kind of in that ballpark.
That sounds a little high to me, but let me check.
Yeah, I think it was that way in the fourth quarter. Again, it varies based upon what the fundings are in the redemption. It's not like a perfect science.
Okay. Understood. Then you talked about some of the expected funding in the coming quarters, given the wins that you have. In terms of the redemptions, do you anticipate any more kind of liquidity related redemptions or kind of rebalancing in the coming quarters?
Again, you can't speak to what was going to happen in market conditions, et cetera, we did see a bit more of that sort of rebalancing and reallocation than we've seen in other quarters. I think you can see that with interest rates backing up with the markets, particularly in February, with how the volatility spiked. I would probably say we don't expect it to be at that level going forward. We see that sort of have calmed down tremendously as we got through March and into April.
Okay. I think the single client that has a redemption for liquidity reason, they took money out last first quarter then some in the second quarter. Would you anticipate something similar in terms of pattern?
That's hard to. The client was very clear that it had nothing to do with the performance of the product, et cetera. I think those are decisions that they have to make, and we're informed like others. I don't think we're an isolated case on that type of liquidity from this type of client. I think that's more of what others have experienced as well.
Yeah. It's Walter. The fee in versus the fee out is about 6% higher.
Okay. Thank you.
You're welcome.
We have no further questions at this time. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.