Earnings Call: Q2 2014

Jul 30, 2014

Welcome to the Ameriprise Financial second quarter 2014 earnings call. My name is Ellen, 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. Please note that this conference is being recorded. I will now turn the call over to Alicia Charity. Ms. Charity, you may begin. Thank you, and good morning. Welcome to Ameriprise Financial's second quarter earnings call. On the call today with me are Jim Cracchiolo, Chairman and CEO; and Walter Berman, Chief Financial Officer. Following their remarks, we'll be happy to take your questions. During the call, you will hear references to various non-GAAP financial measures, which we believe provide insight into the company's operations. Reconciliation of the non-GAAP numbers to the respective GAAP numbers can be found in today's materials available on our website. Some statements that we make on this call may be forward-looking, reflecting management's expectations about the future and 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 today's earnings release, our 2013 annual report to shareholders, and our 2013 10-K report. We take no obligation to update publicly or revise these forward-looking statements. With that, I'll turn it over to Jim. Good morning, and thank you for joining our second quarter earnings call. I'll start with my perspective on the quarter and how I'm feeling about the business. Walter will cover the numbers in more detail, and then we'll answer your questions. As you saw in our release, it was another strong quarter for Ameriprise, marking a very good first half of the year. We had meaningful operating net revenue growth, up 8% to $2.9 billion. Operating earnings were also strong at $408 million, with operating earnings per diluted share up 31% to $2.08, excluding the co-fund's gain from a year ago. Assets under management and administration reached an all-time high, increasing 15% to $810 billion, reflecting strong advisor-client flows and positive markets. We're executing our strategy well, and I'm pleased with how Ameriprise is performing. Maintaining an excellent financial foundation is core to how we operate the company. Our capital and financial position is very strong, we continue to generate significant free cash flow to return to shareholders. During the quarter, we returned $464 million to shareholders through share repurchases and dividends. Year-to-date, as of June 30th, we returned $921 million to shareholders in excess of our total earnings. With our strong earnings and capital return, we delivered record operating return on equity excluding AOCI of 21.7%, up 380 basis points from a year ago. Let's get into the business, beginning with Advice & Wealth Management, where we're achieving excellent results. Operating net revenues were up 11% to $1.2 billion, as strong fee-based growth continues to offset the weight of low interest rates. I'm very pleased with the revenue growth we're delivering. Clients are engaged and active. Total client assets increased 16% to $435 billion, we continue to have meaningful flows in our investment advisory programs. Our advisor productivity continues to grow nicely, increasing 14% to $468,000 on a trailing 12-month basis. Pre-tax operating earnings were up 29% to $194 million, pre-tax operating margin increased significantly to 16.2%. We're focusing on taking advisor productivity even higher as advisors utilize the resources and capabilities that we invest in for them. Our priority is to bring in new clients and assets to Ameriprise and to deepen relationships with our current clients. Our Real Questions, Real Answers advertising campaign continues to resonate well with our clients and consumers, brand awareness is at record levels. Our Confident Retirement approach, which we feature in the campaign, is beginning to take hold. We're seeing a terrific initial response both from clients who have experienced it, as well as its effect on advisor practices. Client satisfaction with our approach is in the mid to upper 90s, our advisors who have incorporated it into their practices are more productive. Importantly, our advisor force remains strong and they're feeling good about the company. Retention and satisfaction rates remain very high. We continue to recruit good, productive advisors and brought in another 54 in the quarter. This is down a bit from where we started the year, is consistent with the overall slowdown in recruiting that the industry is experiencing. That said, the productivity of advisors we're bringing in is very good and growing. For the second half of the year, our recruiting pipeline looks good and is building. We're also supporting our advisors to benefit from the investments we've made, especially in our brokerage platform, online and mobile capabilities. Advisors who are taking advantage of our technology platform find that it helps them save time, increase efficiency, and productivity. At the company level, we're starting to realize operating cost efficiencies from our technology. It's more than just tools. It's about the overall client experience. Temkin Trust Ratings indicate that in 2014, Ameriprise has the second highest trust rating as well as the highest forgiveness in the investment firm industry. Also during the quarter, DALBAR recognized Ameriprise as a social media all-star, giving us a five-star rating in social engagement in their rankings of financial services firms. Our advisors are feeling good about the value proposition and growth opportunity they have here. I've just returned from a national conference with our top 1,500 advisors. I've heard from many of them about how energized they are about Ameriprise, the marketing, technology, and leadership we're providing, and importantly, their ability to grow even further. Overall, it was another excellent quarter for Advice & Wealth Management. We're delivering nice growth and profitability across the business. The business is consistently generating the results we expected and that we told you we could achieve. Our focus is to continue to execute well and maintain our momentum. Let me turn to Asset Management, where we're delivering competitive financial results and gaining some traction. Our assets under management grew to $518 billion, up 13% from a year ago, mainly driven by positive equity markets in the U.S. and Europe. The combination of solid revenue growth and good expense management drove operating earnings up 21% to $199 million when adjusting for the prior year gain. We're delivering competitive investment performance with the exception of a few areas which we are addressing. With regard to flows, we generated net inflows of $4.4 billion in the quarter compared to $2.1 billion of outflows last year. Walter will take you through the details, but at a high level, we continue to experience strong net inflows in the U.K. and Europe, which have offset outflows from a manager change last quarter. Domestically, we're working to expand our presence on key platforms and other distribution channels. While we remain in net outflows, we're seeing some improvement, most notably in our former parent-affiliated channel, and we're addressing challenges in DCIO. In institutional, the pipeline looks good and continues to build. The St. James's Place mandate funded in the quarter. We're making very good progress in the traditional third-party business with a number of wins in the quarter that reflect a healthy pipeline. In addition, we're making good progress in a number of other areas, including in investment solutions as well as global products. We're adding to our product capabilities. A great example is the Columbia Adaptive Risk Allocation product that recently launched, managed by Jeff Knight and the team. We have a similar product for retail clients. In addition, Columbia Flexible Capital Income Fund just reached its three-year anniversary, and Threadneedle launched a global corporate bond fund that benefits from the fixed income capabilities of both Threadneedle and Columbia. We're also adding talent. We recently hired industry veteran Bill Landes to lead the strategic plan for Columbia's multi-asset solution business. We'll soon be announcing a new head of our U.S. intermediary organization. These are two important growth opportunities for us. I feel good about the team we're putting in place. As I've discussed, there's more work to do. We're moving in a positive direction. Let's move to Annuities and Protection, key businesses and central to our Confident Retirement approach. Our annuity business is well-positioned. We're generating good returns with lower risk and volatility. We built a differentiated business that we're growing at the moderate pace we want. In variable annuities, client account balances grew 10% due to market appreciation. We had $1.2 billion in new sales in our channel. As we noted, about a quarter of those sales were without living benefits. In addition, clients and advisors continue to move assets to our Portfolio Stabilizer funds, which enhances our clients as well as our overall risk profile. We're making enhancements to our VAs without living benefits. We're adding four new investment options at the end of the quarter and helping advisors and clients understand the benefits these income solutions can provide through our Confident Retirement approach. We're also developing additional services to support income management that we plan to release later this year. In fixed annuities, while earnings are down, results are in line with what we expected. As we stated, our focus remains on the overall profitability of the book. As these products come out of rate guarantee periods, we're able to reprice to mitigate the rate impact. In protection, our financial results in the quarter were flat to last year. Let's start with life insurance, where earnings were up and continue to reflect good claims experience. Variable universal life sales picked up year-over-year, and VUL/UL ending account balances were up 10%. In auto and home, premiums are up nicely, and we had good policy growth, up 12% from a year ago. We're working to deepen our relationships with our affinity partners and our own advisors and seeing nice progress. Auto and home is rated one of the best firms for client satisfaction, and retention also remains very high. As I've mentioned, auto and home earnings suffered because of weather-related losses in the quarter, consistent with others in the industry. Overall, Ameriprise had a strong second quarter and a very good first half of the year. We're executing our strategy well and realizing the benefits as we continue to invest for further growth. Overall, revenues are growing nicely, and we're delivering excellent operating return on equity, excluding AOCI, that is now almost 22%. Our strong business results and ability to generate significant free cash flow provide us the ability to continue to return to shareholders as we have in the past. We are maintaining the capability to do that through our newly increased buyback authorization. With that, I'd like to hand things over to Walter. Thank you, Jim. Ameriprise delivered another quarter of excellent financial results. Let's start with operating net revenue growth on page three. In total, operating net revenues grew 8%, excluding the gain on the sale of co-funds last year, driven by strong operating fundamentals. This was led by particularly robust growth in Advice and Wealth Management. Revenue growth, combined with continued expense discipline, resulted in a record 16.2% margin in AWM and a 38.7% margin in Asset Management. Together, Advice and Wealth Management and Asset Management operating earnings grew 25%, excluding the gain on co-funds, and account for over 60% of the earnings, demonstrating a continued business mix shift. Turning to slide four. Operating return on equity reached another all-time high of 21.7%, up nearly 400 basis points, and solidly within our targeted range of 19%-23%. Operating earnings per share also reached a new record level of $2.08, up 31%, excluding the gain of the sale of co-funds, a credit to solid business growth and continued strong capital management. Moving to slide five, we continued to deliver excellent business metrics and financial results in Advice & Wealth Management, with 11% top-line growth. Pre-tax operating earnings were up 29% to $194 million due to improved advisor productivity and continued strong asset growth. As we have discussed previously, we are seeing continued improvement in the earnings and margins in both the employee and franchise channels. In total, margins reached a new record high of 16.2%, up 230 basis points. These results were achieved with no benefit from interest rates on over $22 billion we have in short-term funds. The spread earned on the $18.5 billion of brokerage cash was just 17 basis points this quarter. There remains a substantial upside potential from an increase in short-term rates going forward. Overall, it was another excellent quarter for AWM. The business continues to deliver consistently good results, demonstrating the strength of our business model. Turning to Asset Management on slide six, revenues increased to $844 million, primarily from growth in assets under management from strong markets. We continue to manage expense tightly, with G&A up only 1%. This resulted in an underlying earnings growth of 21% and margins of 38.7%. Assets under management increased 13% from market appreciation and net flows, which I will cover in more detail on the next slide. In the quarter, we had a total of $4.4 billion of net inflows, with inflows in retail, institutional, and alternative assets. We had a total net inflow of $600 million in retail. At Columbia, we had $700 million of retail inflows, including $3.5 billion of reinvested dividends. We had outflows in several areas we have discussed in the past, namely former parent-affiliated distribution, the RIA channel, and a sub-advisor. In addition, we continue to face some challenges in the retail intermediary channel at Columbia, particularly in the DCIO channel. At Threadneedle, retail flows were break even with strong underlying inflows offset by outflows in the U.S. equity product, where we had a portfolio manager change earlier this year. Performance has been solid under Diane Sobin's leadership, and we had added a few resources to round out the U.S. equity team. Institutional net inflows of $3.5 billion were driven by the funding of St. James's Place mandate and third-party institutional flows at Columbia. Partially offsetting this were outflows from several former parent-related areas at both Columbia and Threadneedle, as well as a one-time outflow from Corporate Liverpool Victoria Assets. The third-party institutional pipeline looks quite solid as we look over the next few quarters. Turning to annuities on slide eight, pre-tax operating earnings were $170 million. Variable annuity pre-tax operating earnings grew 79% from a year ago, driven by the impact of clients moving to managed volatility funds, as well as higher fees and mean reversion from improved equity markets. We continue to see existing policyholders moving to managed volatility funds at a higher level than anticipated. Since the inception in quarter four of 2013, over $5 billion of account value has moved to these funds. The in-force book is solid, with account values up 10% to $78 billion. Our net amount at risk as a percent of account value is only 0.1% for both living benefits and death benefits. Variable annuities remain an important solution for our clients. We continue to write new business with very attractive risk profile, offering products with living benefit guarantees using our managed volatility funds and products without living benefits that provide tax advantage accumulation for our clients. In fixed annuities, pre-tax operating earnings were $30 million, down 6% from a year ago. These results are in line with our expectations, particularly given low overall market sales and the repricing of a large block of policies. Fixed annuity account values declined 7% to $12.6 billion, primarily reflecting continued elevated lapse on products sold through third parties where rates have been reset. This repricing initiative is largely complete and proceeding in line with our expectations in terms of lapse and the favorable impact on spreads. Moving to protection on slide nine. Pre-tax operating earnings were flat at $91 million due to cat losses in auto and home. Our life and health businesses remain solid and earnings are in line with expectations. Account balances grew for VUL and UL by 10%, and life and health claims experience remains good. Auto and home earnings were below expectations as a result of cat losses of $33 million. While this is consistent with the industry, cat losses were $12 million higher than anticipated. Let's turn to capital on slide 10. Our balance sheet remains strong with over $2 billion of excess capital and our RBC ratio is approximately 530%. We continue to return capital to shareholders with $464 million distributed through dividends and share repurchase in the quarter. Our significant return of capital is an important driver of our ROE expansion. We reached a record 21.7%, which is solidly in line with our targeted range of 19%-23%. With that, we will 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 speaker phone, 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. The first question is from Alex Blostein with Goldman Sachs. Please go ahead. Hey, guys. Good morning. First question on the flow dynamic. I guess we've seen the legacy parent related outflows for quite some time, and in your prepared comments sounds like at Columbia in particular, maybe they've gotten a little bit better, but flows are still fairly, I guess, disappointing. It implies, I guess the rest of the business may have gotten a little bit worse. Can we just get, I guess, an update on what do you guys still think is at risk and help us parse out the outlook for flows from here? On the flows, looking at the quarter, obviously, you saw that from our standpoint, the activity levels slowed. Basically, that was where we evaluated the situation that the rebalancing was slower, which resulted in lower gross sales, and also basically you're seeing with the redemptions and the sales, basically a complacency. These people are pretty content where they are. We've checked through, and we've seen this trend with the industry or several of our peers. We do see that we are making progress, and as we indicated, the flows from the former parent and certainly related are within the ranges and actually performing. Again, we're on track. It's again, work to be done, but I think we are making progress and still progress to be made. Yeah, Alex, I think to Walter's point, we saw a bit slowing in the sales. Outside of the ex parent, the Zurich, we're always going to have that, and we also will always have part of the outflows from the large base that we have for the affiliated. That's more of a natural rebalancing that will continue to occur. We're not concerned about that. In fact, those look like they actually, similar to what Walter said for the industry, sort of slowed a little bit because the redemptions weren't as high, and even though the sales were a bit lower. I think the two things that probably affect us a little more in the second quarter was we continued to get the outflow from the U.S. desk that we had in Threadneedle. That's in the retail side. We had booked the St. James's as an institutional mandate. In the U.S., a bit more as Walter said in his comments and I said in the DCIO, where there was a little bit more of an outflow that we experienced there in some of the Wanger product in one of their funds. I think adjusted for that, we would have saw some improvement. We did see across the industry a bit of a slowing, and we did have a bit of a slowing in sales in the second quarter in retail. No, I totally appreciate just the slower flow dynamic for the industry as well this quarter. But I guess if we were to think about the three buckets, one being Columbia former parent related AUM, how much is there still at sort of risk? The same comment, I guess on Threadneedle from the U.S. team that left, how much AUM is there and how much is at risk? This way we can kind of ring fence- Yeah what should be potentially in the runoff versus the progress that you're making on the core franchise. In the affiliated at Columbia, there are, I don't know, a few billion dollars left, some Bank of America, some Balboa, et cetera. That will flow out a little over time. We should see a bit of that come out in the fourth quarter. Again, we don't know exactly. The Balboa, as an example it's a little lumpy. That has come down a lot. That would be one area. We have what would be ongoing distribution with Bank of America, and just based on the natural evolution of those assets as they further diversify from some of our mandates Whereas when the new sales go into a broader group of mandates, we're going to continue to see some outflow there. We mentioned over the course of the year, $3 billion-$4 billion in total. Again, that actually got a bit better in the second quarter. That will continue. The Zurich, we roughly tell you, is going to be roughly about $4 billion a year U.S., and that's just the natural flow. Having said that, those assets have good retention of what's there with appreciation. It's not as though we're losing the fee, but it will still go through the flow line item. Where do we see uptick? We see good uptick in our institutional mandates. We have a good pipeline that's being built. Some of that's starting to win. We won and will fund. We feel good about that, both domestically and internationally. We still have good retail sales in the U.K., in Europe, and Threadneedle, so that we feel good about. We have more work to do in the U.S. intermediary. We're making some changes there, both from a leadership perspective as well as from a product to marketing and various things of how we align that to get on various platforms. That, we're putting a lot more focus and concentration on with a new leadership lineup there. We feel good about that. We also feel good about some of the new solutions business that we're putting some time and effort in, that we think will pay some good dividends over time that would even build the institution and even retail for some of the products that we'll come out with. The retail is still a bit of more of a work in progress in the U.S. It's actually built momentum in the U.K. and Europe, and institutional is moving along nicely. Alex, as I said in my prepared remarks, the other thing that's related to the U.S. equities, for TAM Retail, they actually were flat, absorbing $1.5 billion on the U.S. equity outflow. We're having strong inflow performance. We've seen it slow, obviously, in the June timeframe, and Diane's performance has been quite good. We're gauging it right now, but I think we have a little ways to go, but we just don't have an exact number. It's tracking, I guess, in the range where we thought at this stage. Got it. That's helpful. Thank you guys for all this color. Second question on the margins, I guess both AWM and the Asset Management business. You guys continue to put up really strong results in AWM, and I think this is the question that kind of comes up every call. You guys continue to, I guess, surpass even the expectations of the layout for yourself. Where do you guys see this margin shaking out, I guess, towards the end of the year as some of these new FAs come in? Because it does sound like the cost control in G&A front was pretty good. Okay. Obviously, last quarter, I was talking about being in 15.5%-16%. The markets really rallied. We have a solid base of assets and certainly a strong flow performance. I would say, again, I hate estimating these things, but certainly, this level seems comfortable. Again, subject to market changes, everything of that nature. All right. I think what I would say, Alex, with that is you always get it just quarter to quarter of various things, but our expense trends and what we're doing there is holding. We are getting good leverage off of the investments we've made. We're continuing to make good investments. I want to be very clear, we're not doing that because we stopped investing. We're still investing nicely in a number of new capabilities and products and services including just what we launched last quarter and what we're putting behind. We're making good investments, but we're managing our expenses well. We're getting leverage of the investments that we mentioned to you previously that we invested in technology. That's also deriving some savings for us as we lower call volume and other activities, transaction, manual efforts that we used to do. Our advisors are seeing productivity lifts from taking up these things, including our Confident Retirement approach and our focus in the market. I think a combination of factors, we feel good about the margins. We're going to continue to want to grow our productivity, which hopefully will add to margins as we go on. As you still know, we're probably at an all-time low in interest rate effect just because old contracts have rolled off, and we're probably at a very low level now. Any pickup there will be a benefit over time. No, we feel very good about the progress we're making. We're going to continue to look to make progress. I'm not saying we'll stop here. On the other side of it is our focus has been on driving our asset levels and our productivity, which will then, as we maintain and leverage the expenses and the investments we've made, will build the margin. Understood. Great. Thank you guys. Thanks for the question. The next question is from Seth Tenen with Citigroup. Please go ahead. Your line is open, sir. Sorry. Yes, can you discuss your current interest in M&A and the type of properties you would be most interested in? Would you be looking at another large asset manager or more focused on filling specific product gaps? As we continue, we're investing in new product and capability and building out some of our solutions area right now with the talent we've been adding and some of the global product that we're putting out between Columbia and Threadneedle. We're going to continue to push forward there. We also launched a new fund in Asia. We have now three or four up. We're going to continue to do that. We will continue to look for in product areas and certain disciplines that we don't necessarily have here at Columbia, so we'll look around in some of those areas. They wouldn't be major acquisitions. In regard to anything larger, it really would depend on whether it would add some larger capability to us or distribution that would make sense strategically. As we continue to operate, I would probably put it more in the first one I mentioned, which is more of product areas that would continue to build against our portfolio capabilities. Again, we don't rule out something wonderful pops up, but having said that, we don't necessarily count on those things happening. As a reminder, ladies and gentlemen, for any questions, press star then one on your touch-tone phone. The next question is from Suneet Kamath with UBS. Please go ahead. Thanks, and good morning. I don't want to take anything away from the strong AWM margins or the good flows in Asset Management, but I wanted to hit on protection in two places. First, on long-term care. Another insurance company just reported a pretty weak result in long-term care, and I believe you've reinsured some of your business with that carrier. I just want to get a sense of what your block looks like, how you're feeling about that block, and do you have any comments on how much of that business has lifetime benefits and when it was originally written? Sure. Again, looking at our block, as we've been talking about, we have started a program of appropriately raising rates for a while now, and our claims performances have been within our target ranges. Again, we've been dealing with that, and it's relatively small to our situation. These policies, I believe we're in the late 1990s. I believe most of them were done back then. I don't recall the percentages on the lifetime side of it, but we've been certainly monitoring, looking, and taking a program. We are feeling that it's, number one, as I said, it's small relative to as we talked about before, and that it's been performing again within ranges and within the levels that we anticipate. We don't see a concern at this time. Okay, got it. Then wanted to shift over to the auto and home business, because that's a business that I think it's fair to say has been underperforming for several quarters now. I know, Jim, in the past, you've talked about your commitment to the business and all of that, but I'm just wondering if you've given any more thought as to whether or not you need to manufacture that product or whether you can outsource manufacturing to some other P&C companies and allow your advisors just to sell their products. Yeah. We don't own the P&C business because of the sales per se to our advisor channel. It's one of the affinity channels that the product is sold to. It's not necessarily, I would say, core against our franchise channel. We have and are continuing to focus on that business. We have been underperforming for the last few quarters. This last quarter, the underperformance really came from the cat losses. It was solely driven by that, as you saw our experience in the industry, and it's the nature part of that business. From that perspective, we feel like we can continue to get appropriate rate there. We know that there are things that we can continue to do that we're very much focused on that would enhance our various pricing and various underwriting and risk in certain areas that cause some of the underperformance in certain states based on changes that have occurred out there, both in the legal environment as well as with various other competitors. We actually feel like there is a lot that we can do to get that business back to a more higher performing in its bottom line results. We also know after further study externally by external sources that this is actually one of the better businesses out there in the type of model that we have in the cost structure of the business and how we operate it. If we can fix a few of the things that we know we can fix, which we will be working on, we could have a very high-performing business. Now, that doesn't answer your question necessarily of whether it's a business that is long-term integrated and core. We like it because of its level of diversification. We like it that we're building appropriate scale in it, and if we can operate it to generate the type of dynamics, it will give us a lot of choice of what we do with it. It is a little bit more of a work that we have underway. We already start to see signs that that will come to fruition. At the same time, we're growing the business nicely and diversifying it. We're very happy with the business. I know it hasn't been reflected because of whether it's cat losses and storms or some of the extra reserves that we took recently. We feel that reserving situation is behind us, now we'll be focused on really dealing more with the external environment a little as the industry is. I think we'll start to see better bottom-line returns coming over the next number of quarters. Got it. Okay, that's helpful. Maybe just one quick one for Walter on the variable annuities. How much more of your VA book could move potentially to these managed volatility funds? It seems like every time that happens, you get an earnings benefit. I'm just wondering how much more could be in front of us here. Well, actually, we've so far $5 billion has moved. We are seeing it slowing again within anticipated levels. It will be slowing as we head through the cycle, but there's a continuous element to it. We think it's actually a very good thing. It's good for the customers and it's good for our risk profiling. It works for both of us. It is definitely slowing, and we're seeing it from that standpoint. It will be coming through, but I think it will be certainly at a lower level. All right. Thanks. 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.