Good morning, everyone. Thanks for joining us for the Ameriprise segment. I'm Jay Gelb. I'm the Senior U.S. Insurance Analyst here at Barclays. We are very pleased to have with us today, joining us, Jim Cracchiolo, Chairman and Chief Executive Officer of Ameriprise. Also, Walter Berman, Chief Financial Officer. In terms of the setup today, it will be a fireside chat. Ameriprise is a leading asset manager and financial planner with over $800 billion of assets under management and administration. Jim has been Chairman and Chief Executive Officer of the company since 2005, when Ameriprise completed its spin-off from American Express, and Walter has been with the company that long as well. With that, Jim Cracchiolo is going to start off with some opening remarks, and then we will go right into Q&A. Jim, thank you.
Good morning, everyone. It is nice to be here. Good to see a number of you in the room. I just wanted to open by saying that we at Ameriprise continue to feel very good about our position in the marketplace. As we have reported over the last few quarters, we continue to show some very strong results, which continues our track record since we have become public. Very clearly, we see a tremendous growth opportunity in our advice and wealth management business as we have more of the baby boomer population moving to retirement and more people in need of financial advice, and we are a leader in the financial planning world. We continue to invest and grow that business nicely, and we see tremendous opportunity for future growth and opportunity there.
The same thing in our asset management business, as the world continues to accumulate assets, both for their investments and to achieve certain of their goals as well as retirement, both here in the United States as well as globally. We feel that we are situated well between our Columbia and Threadneedle asset management businesses as we more globalize that business and take advantage of some of the opportunities in the marketplace. Together, as an integrated retail financial services company, we have been able to generate some very strong revenue growth, earnings growth over the last number of years, and very strong free cash flow, with our return on equity getting into double digits, now over 20%. We feel good about the opportunity to continue to generate more cash as the business continues to generate good returns on the investments that we made and return that appropriately to shareholders.
We think we are situated well. We have a strong balance sheet. We have the opportunity to both continue to invest organically as well as potential for additional acquisitions over time, and at the same time, return to shareholders as we continue to grow the earnings stream and the revenue stream of the combined firm. We feel very good about our current position in the marketplace. We feel there is a great opportunity in our advice and wealth management business with the investments we have made to continue to drive greater productivity of our advisors, greater asset flows from our clients, and actually even to go further up market and bring in more flows over time of the affluent population.
On the asset management business, we think that there's an opportunity for us, particularly as we grow our solutions business both in the U.S. and globally, to take more assets in that category. As we invest in Europe, Middle East, and Asia, we think there's an opportunity internationally. We feel like we're situated well, and we want to continue to execute against that strategy.
Great. Thanks for that overview, Jim. Really appreciate it. If we can drill down a bit, what would you view as some of the greatest opportunities and perhaps some of the challenges over the next few years for Ameriprise?
The greatest opportunities, I would say, is just if I add on a few of the points. If you look at the amount of the baby boomers moving to retirement over the last few years, but will continue over the next decade and a half, there's a tremendous amount of wealth that has to be managed on their behalf. They're looking for an income check in retirement for the next 30 years. They're looking for someone that can help them think about all their financial resources so that they can generate that income check. We are positioned unbelievably well in that area.
We already play a very large role in the retirement market, and our advice and value proposition really looks to help the client, not just for some of their current investments, but against their retirement plan assets, against how to protect those assets, how to protect their families, and how to establish the legacies they need. That's one of the great opportunities we have. I think the other opportunity really comes in is in the asset management business. I think that's not just a domestic area, but on a global basis.
We think that there is a continued need, again, similar for how we do it for our retail clients, to manage and provide solutions for institutional investors, for pension funds, as well as for intermediaries, how people are looking for their assets to be managed, not just necessarily to be a benchmark, but to achieve an outcome. We feel there's a great opportunity there, we've already managed over $150 billion of assets in that arena.
On the challenges front?
The challenges front, I think, we're continuing, even though the economies have picked up, Europe is still in a sort of recessionary borderline there. We still see the low interest rate environment how that plays out over time, how we have to get back to a more normalized situation and the effect that will have on the markets. Then the regulatory environment that continues to change and adjust, we continue to see and try to read the tea leaves there. Hopefully over time, that will become clearer and less volatile.
Changing or moving on to business mix, Ameriprise Financial now derives over half its operating earnings from the advice and wealth and asset management businesses, which are both growing faster than annuities and protection. Do you think this trend will continue over time?
Yes. We see the advice and wealth and the asset management businesses growing at a greater rate. We will continue to look to grow our insurance and our annuity businesses, but they are more solution sets for our retail clients in our own business. They are a part of our value proposition in helping clients to protect their assets for their families and their income, as well as to ensure that they can derive a sort of level of guaranteed income over time. They will grow. We generate very good, strong returns because they're part of a relationship. We have a deep relationship with the clients, and they're part of it, and it gives us the ability to generate that incremental revenue and profitability at a good return.
Having said that, the growth of the business is really as we expand and try to serve the broader needs for the baby boomer generation retiring and all of their investment needs and the management of assets globally.
Do you feel over time there might be any potential to exit lower return on equity businesses, say, within annuities and protection?
Well, we already are transitioning. We have one block of business, our closed block of business. We closed it a good number of years ago, the long-term care in a different interest rate environment. We could probably free up the assets there. We will constantly review the businesses that we currently have. As an example, in our fixed annuity business, we've been bringing down that business. We're not adding to flows in this environment. We only take that up when we can generate a very good margin and spread on that business and a good return. There are certain aspects of that business shrinking as the rest of it grows. Our P&C business, we like that business right now as a diversifier. We're investing to gain greater scale.
We think that we'll get that back to very good returns. We do have flexibility in the business that's not central and core to our company.
I see. Let's talk about the advice and wealth business. Broadly, what is the strategy to grow assets under management? Let's start there.
Well, I think it's a few areas of opportunity. One is bringing in more clients, particularly further moving up market for us. We're mainly focused on the mass affluent. Our average client has roughly, that we bring in today, a half a million dollars of assets. We think that we can easily take that up into the million-plus category with the value proposition that we have and how we serve our clients. Many of our advisors are already venturing there. We can bring in a lot more assets, even if we don't grow the number of clients we're bringing in. That has gone up over the last years as well. Second, with that, the productivity of our advisors. Our Confident Retirement approach, having a focus on the more of the broader aspects of a client's life really develops deep relationships.
More clients today are looking for that. They understand the volatility of the markets. They don't have pension plans anymore serving a larger part of their needs. They understand the issues that they face with medical care, et cetera. They're looking for someone to help them in a more comprehensive fashion. That's how we built our business. We built it over many years serving our clients that way. There is a greater desire and a greater need for more of those services from potential clients today. The third is leveraging what we've invested in in our infrastructure. We've invested hundreds of millions of dollars in our technology, our brokerage capabilities, our planning capabilities, our online capabilities.
We have the ability now to serve more people, for our advisors to become much more efficient in how they engage their clients, how they transact activities, and how they manage their client activities. A combination of those factors will free our advisors to actually do more for their clients and serve more clients.
Great. Now, in the Advice and Wealth segment, the ability to expand the margin seems to be one of the key earnings drivers for Ameriprise. The pre-tax margin is currently at 16%. What's the potential to get that up over 20%, as I believe was outlined during the investor day? Taking into account, especially if money market interest rates were to increase, what type of potential is there?
Well, I definitely believe there's a potential to get over 20%. There's a combination of factors. One is we're continuing to get leverage off of the infrastructure that we have in place and the technology we've invested. As we add more client activity and more flows and increase our advisor productivity, that will add to greater margins because we're leveraging a fixed base and the variable is a bit less in that side for particularly our employee base of advisors. Second really comes to the ability for interest rates to improve. We have roughly $20 billion of assets, short-term assets that we hold. If we get to a more normalized interest rate, even if it goes up somewhat from here, most of that will go to the bottom line, and that will add to the margins in a pretty significant fashion.
Third is we know that we today can move further up market. We know very clearly that if we bring in more on the average asset side, we already have all the costs for maintaining what we do. As we increase the asset base alone, that leverage will add. The combination of that leverage plus the productivity of the advisors deepening those relationships will all add to the margin, and interest will be right on top of it.
Great. Turning to asset management, can you discuss the trend in net outflows before reinvested dividends, and when this situation may reverse, looking at both Columbia and Threadneedle?
Yep. I think what we all have to do is take a step back and see how we built the business. We had our core asset management business, then we did a number of acquisitions. The acquisitions that we did, the larger ones actually had very large installed bases with their own parent companies. Threadneedle is a perfect example of that. Great relationship we've maintained much longer than the original agreement was, which was over a 7-10-year period. That relationship continues with Zurich. Having said that, there is a number of books of business that we manage for them. Those are closed books of business, there's always a constant runoff of the asset base. Even though we have the reinvestments of that, we also have the ability to maintain the strong asset base that we once had.
Over time, what has occurred is we book a few billion dollars of outflows every year from Zurich. Having said that, we generate roughly around the same amount of revenue that we once had from Zurich, and asset base. As we've grown that business, we've diversified it. Where they used to make up probably almost 60% of the assets, it's down now to 30 some odd %. As far as revenue is concerned, it's only in the teens as far as where it used to be a majority of the revenue. Very clearly, we'll always have some outflows flowing through our line. At the end of the day, we've still generated good revenue base there, we have built and diversified that business. We've added to good inflows over time.
When you look at it net of the outflows, it doesn't look that significant. Today it is, and that is a very good, strong, profitable business that we have at Threadneedle. The same thing with Columbia. When we acquired Columbia, they had a lot of relationships with their institutional bank, as well as their pension funds for Bank of America itself, as well as the U.S. Trust business. We maintain a very good core part of that business, the U.S. Trust activities, our relationship with Merrill Lynch. A lot of the institutional activities have gone out, and even in U.S. Trust, there's a level of balancing those flows since it's no longer the proprietary part of that business. We'll always suffer a level of outflows. Most of those outflows for Columbia has gone and passed.
We generate and have a good business with Bank of America. Again, now a lot of that rebalancing has occurred and will continue to occur over the next number of years as we maintain those relationships. We now have to grow and diversify the business beyond that. That's what we're doing. Our institutional business has grown nicely. Pipeline has increased tremendously, not just domestically, but internationally. We're adding a lot of capabilities and building out our solutions business. That will take hold over the next few years. Our retail business, we've diversified to being more of a third-party provider. We have to really build the relationships there with many of the larger houses on The Street, building off what Columbia had in place and what we had started with our own business a number of years ago. That's beginning to take hold.
I do believe over the next number of quarters and years, we'll get into inflows overcoming any of the ex-parent outflows, and on a revenue basis, it'll be much stronger.
Just so we're clear on that, excluding the former parent company outflows, the Zurich-related assets at Threadneedle, the Bank of America-related assets at Columbia, you're saying that excluding those factors, we should see inflows? Or you're saying including those?
No, we're already seeing inflows. In Threadneedle, very clearly, even after the Zurich, we see very strong inflows and have seen them. The institutional pipeline is now overcoming some of those outflows that we faced, and it's starting to grow. Now what we got to do is overcome that in the retail intermediary distribution in the U.S.
Okay. All right. On the margin front for advice and management, it's already very attractive on an adjusted basis at around 39%. As that revenue environment continues to improve along with expense controls, can margins move higher?
Yeah. We have very good competitive margins now. If you look at it on a mix of business on a basis with retail and institutional assets, again, it has an opportunity to go up. We're not focused purely on the margins. We needed to do that at the beginning to right-size the business. Now what we're doing is we're trying to invest a bit more in building out our solutions, expanding our distribution, both domestically, but also internationally in a number of regions and markets, and build out our brand. You'll see some further investment there. There is an opportunity for further margin expansion. We have a good mix of equity assets, as equity markets continue to grow and improve its performance, that will add to the margin basis.
As we also add some of the newer inflows that have a bit of higher margin like we're doing in Threadneedle, that will add to the margin.
Okay, great. Let's switch up to annuities. There's tremendous demand in the marketplace for variable annuities for individuals to address concerns about outliving their savings. Can you talk a bit about how Ameriprise is addressing this market opportunity?
Yeah. We today have built a very good, stable business. We did not grow that business in leaps and bounds when people got aggressive. We did it over many years and built a book of business that has been very consistent. We try to provide our clients with both good benefits, but we also try to do it with features that make sense for our company so that we can generate appropriate returns and balance the risk. In so doing, since we understand the behavior of our clients very well, we've been very able to hedge that risk because we don't have a lot of churn in our book, in our portfolio. We see that continuing.
We see that as a very clear part of our Confident Retirement approach, which really looks to manage and help our clients manage their life around those essentials, as first and foremost. What's the level of minimum income that they need to sustain the basis of what they need to do when they don't have an income check coming in? In complement to that, we look to help them with their lifestyle. Beyond that, to protect themselves. To ensure a legacy. Very clearly, as part of our Confident Retirement approach, our annuities factor into two places. One is on a guaranteed basis in that essentials, and then on a lifestyle basis, not necessarily with a guarantee, but to generate a certain level of income that they can also do with an annuity without a guarantee.
That's a part of our formal basis of the value that we look to provide the client in understanding how they can satisfy a certain amount of income that they need to derive, and our annuity products help along those lines. We see that continuing. As I said, we try to approach this more as part of a solution set rather than to aggressively market a product when the product is in.
Okay. If you can give us a bit more insight on the risk management component of that, I think that'd be helpful too, given we're now at equity markets at all-time highs, interest rates still plumbing the lows. How can investors get a high degree of comfort in the risk management function on the variable annuity portfolio?
One of the things, clearly, that we have done from the very beginning, and you can track this through the last downturn, is as we put on our annuity with a guarantee, we try to hedge that to its full sort of economic life rather than just on a short-term basis. We actually take out hedges. We manage the risk profile. We've converted a lot of the product that we have in market now to managed volatility funds as well. We feel like we have an excellent risk profile for those products that we can generate very strong returns. I'll let Walter complement what I just said with a little more information around the risk management side of the process there.
Well, Jay, the new products, obviously the managed vol products, we've expanded those, and again, we've shifted the pricing and the risk within that because the hedges are within the basic product. We've offered multiple implied volatility products, and from that standpoint, the hedging is incorporated and is geared towards the solutions that Jim was talking about from a client base. As it relates to the previous products, where the living benefits were more of on the EPN type, Enhanced Portfolio Navigator type, those have been hedged to a logical point, and actually we've expanded the hedging on those. You saw when we just actually made an offer for people to exchange, there has been exceptional acceptance of it.
We feel on all fronts we've managed the exposure profile extremely well, both by the features and the hedging, and now with the new product, it's all incorporated within it.
It's interesting that the company recently announced a distribution partnership with Allstate to provide variable annuities. For Allstate being a company that essentially exited that market probably on the order of about 10 years ago, Ameriprise now having a product to offer through that distribution channel. Can you describe that a bit and then also talk about other opportunities may exist?
Yeah, you're catching me a little bit.
Yeah, Yes.
We don't have anything with Allstate.
What?
I'm sorry. I must be mistaken.
I mean, I'll go check, it'll be an interesting way to find out about partner distribution.
Must be my mistake. Moving on. All right. Let's talk about protection. There's been very strong policy in force growth in personal lines property casualty for Ameriprise. How is Ameriprise able to generate these type of results? My sense is it has a fair amount to do with the strength in the affinity channel, maybe you can talk a little bit about the differentiated strategy there on the direct channel.
If we focus really on our property and casualty business, it is all affinity based. What we do is craft long-term relationships with partners. Including we have it with Ameriprise, we think of it in a similar fashion. That gives us a better overall sort of access to a client base at a lower cost, but also we can craft the product appropriately and the pricing appropriately based on the behavior of the clientele. Our P&C business is A very good affinity-based model. It has a lower cost of operation. It's a direct business, we don't pay for a lot of marketing and advertising upfront and a lot of agency activities. With that, we have built that business organically over time, and it is a reasonable size player and actually one of the larger ones in the direct channel today.
As with anything, as the world has changed in the P&C business, we have been dealt with a lot of catastrophe losses based on the environment and the storms, but we don't take an exceptional risk. In fact, we reinsure most of that risk. As you're getting hit with those catastrophe losses, et cetera, it does affect your losses. The other aspect that we've been working on very clearly is on the auto side. As you know, there's a level of litigation that has picked up. There are certain states and certain environments that the underwriting risk has increased. What we're doing now is very clearly focused on how to manage that risk and bring that back down in certain of the various areas that we do business in. That's well on the way.
We feel like as we go through the next number of quarters, that business will get back to the good margins that we once had and the good returns that we once had as a direct provider to the affinity channels.
The only thing I would add to that is we've also, I think you're aware, diversified the portfolio. We now have a travel program with a major credit card company and a credit feature program which diversifies the risk and has a much lower risk profile. That has also taken place.
Is that separate from personal auto and home?
That company has the expertise to do it because it used to do it for American Express, and we have now launched it with Barclays .
Thank you. Jim, on the litigation environment, just to clarify that, is that on personal auto bodily injury or-
Yes.
Okay.
More heading to litigation.
All right. On the severity side?
Yes. There are a number of different states where you have uninsured motorists and certain other hiccups in activity there on the bodily injury. Again, a lot of companies have gotten a bit more aggressive, and that's what we're doing here.
Okay. All right. Switching gears to capital management. If I look at peer companies in the sector I cover as well as outside, Ameriprise has to be right at the top of the list in terms of raising the dividend more than annually and also being aggressive on share buybacks, buying back well in excess of annual operating earnings. Can you discuss your capital management philosophy and where you see that headed over time?
Well, as Walter and I have said, we have a strong philosophy since we became public of generating a good return that we can then ensure that we appropriately return to shareholders through a combination of dividend and buyback. We've raised our dividend every year and sometimes multiple times during the year, particularly after the financial crisis. There was only one year that we didn't raise the dividend, and that was 2009, and you understand why, but we never cut the dividend. We feel that we have an opportunity to continue to grow the dividend over time with annual increases.
We also feel appropriately that as we generate very strong cash flows based on the type of business that we have and the mix of business continuing to grow in the asset-light areas, that we'll be able to continue to generate good cash and that we can return that appropriately to shareholders. We have a consistent philosophy that share buyback is part of our return. We always maintain a good capital position, so it gives us flexibility to deal with unforeseen environments like the downturn. We also think that, just like we've had success in a number of acquisitions that we did over the years, that that cash can also give us the ability to acquire certain things and complement to what we have in our organic business, that we have the cash to do that without affecting our returning situation in a major way.
Yeah. Probably the only thing I would add is, as you mentioned before, how we manage risk and looking at the quality of the balance sheet, both from an asset standpoint, the asset liability matching, the derivative hedging that we do. The velocity of change is well managed, and we understand it, and its fundamental foundation is quite strong. When we look at and we look over multiple periods, we feel comfortable with, we are not on the margin, so to speak. We certainly have a solid core analytics as it relates to the ability to meet our obligations and to continue to buy back and/or give dividends and meet business needs.
Okay. On the M&A front, Jim, what types of businesses or geographies do you feel would be attractively accretive to Ameriprise's franchise?
Well, what we are doing is looking at a number of areas that would be complementary to the core base of assets that we manage today. They could be a bit more in the solutions alternative area. They could complement us a bit more growth in some of our international activities. We continue to look around and kick the tires. There's the ability now with what we've already done and what we've invested in our core capabilities and technology, to add to the asset base, even, if we wanted to look at it that way. What we're also looking at strategically is how to diversify the business a bit more and add to some of these other solution type sets.
This is Predominantly in the asset management space?
Predominantly in the asset management space. In the advice and wealth space, we are doing practice acquisitions. We are adding experienced advisors that we bring on board. We will look at smaller broker-dealers that may be complementary to add to our network. Those are nothing major as one big deal.
On the M&A front, do you envision more of these bolt-on type deals, or would it be something perhaps more transformational?
Right now, we're looking at the marketplace. Again, what we do is we evaluate those things that could be a strategic fit, that fit culturally, that we can add value to, and they can add value to us. We don't rule out anything larger. We just know that there's a higher hurdle rate if we wanted to look for something larger or do something larger. It has to work operationally, it has to work culturally, and it has to work from a strategic perspective. Most likely, as we say, we'll look at those things that will fit in more neatly. If a better opportunity, a larger opportunity came along, it doesn't mean that we wouldn't look at it. It just means that it has to hit higher hurdle rates.
Okay. The company's repurchased around $1.5 billion of stock in the first half of 2014. Should we view that as a reasonable run rate? I'm sorry, that was a billion and a half all of last year. My apologies. A billion and a half for fiscal year 2013.
It's on track.
Yeah, it seems like it's on track. Should we view that as a run rate?
Not to forecast it, but certainly we look at a multitude of factors, and we have the capacity. Again, we feel we still are undervalued, and that, as we indicated, 100% or increase where the situation warrants. We certainly feel we will continue to buy back. I think right now, I put per share, it was over $700 million.
We're feeling comfortable where we are with our buyback program progressing.
Okay. Excellent. Why don't we move to the audience response system? Everyone has a, I believe, a small keypad in front of them. We're going to put up a question here, and please feel to key in your response. The question is, if you currently don't own shares of Ameriprise or are underweight, what would cause you to change your mind? We've got 10 seconds for folks to key in the response here. Okay, the result overwhelmingly would be improved net flows in asset management with much smaller responses for faster top-line growth, lower valuation, or none of the above. With regard to that net flow perspective, I know you already touched on it, but anything else you'd like to add on that in terms of perspective?
No. What I would say is this. We have been generating very strong inflows in our wealth management business. We're looking for that to continue. Our international flows have been good. Institutional, we think, is picking up. We think there's a greater opportunity there for even stronger flows. In the retail side of the business, we think there is an opportunity. We're hard at work to make some changes. We've made some changes organizationally. We're making some changes in how we go to market there, and deal with some of the platforms, and what we need to do, but also with the product mix. Very much our focus is to get those flows stronger and to convert that business into a stronger inflow.
Okay. Next question. We'll open it up to the audience. Which should Ameriprise pursue more of? We can start the countdown now. That's either organic growth, share buybacks, dividend increases, or all the above. More than half of respondents saying Ameriprise should pursue more organic growth, with around 30% saying dividend increases, and a smaller percentage saying all the above. Is that consistent with what you would have thought?
Yeah. Very clearly our focus has to be we look at organic growth as the first and foremost for our reinvestment with share buyback and dividend increases. Those come after. It's interesting that the acquisitions weren't on the list. I don't know if that would change the mix a little.
Interesting. Okay. I also find it interesting that no one said more share buyback. I guess you already do a lot. All right, let's open it up to the audience for questions in the remaining time we have left. Questions from the audience? All right, well, maybe we have time for one more on my end. Of the return on equity already at an industry-leading level of 22%, what do you feel are the most important levers to perhaps drive that higher over time, given we've seen steady and persistent increases, particularly within the past few years?
Probably you would say, listen, you know we are constantly evaluating how to manage a requirement and ensure we have the effective mitigation capability. I would say probably one of the most important aspects is the mix shift that we keep on talking about as it progress, because as we move higher and higher with advice and wealth management, which doesn't do underwriting, which has lower capital requirements, and doesn't have a bank, it clearly will generate higher returns, and the same thing with the asset management activity. The insurance, I think we're managing, and protection, and annuities, clearly that will keep on driving up the return.
As the company moves more towards asset-light or less asset-intensive businesses, that frees up more capital available for buybacks.
Yeah, the other thing I would probably add as well is the comment you made at the opening. Also more normalization of interest rates, particularly on the short end of the curve.
That was going once controlled.
All right. Excellent. Well, with that, please join me in thanking Jim Cracchiolo and Walter Berman from Ameriprise.