阿默普萊斯金融 (AMP) 2015 Q2 法說會逐字稿

Welcome to the Q2 2015 earnings call. My name is Vivian, and I'll be your operator for today's call.

(Operator Instructions)

Please note that this conference is being recorded.

I will now turn the call over to Alicia Charity. You may begin.

Thank you, and good morning.

Welcome to Ameriprise Financial's second-quarter earnings call. On the call with me today are Jim Cracchiolo, Chairman and CEO; and Walter Berman, Chief Financial Officer. Following their remarks, we will be glad 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 future events 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 2014 annual report to shareholders and our 2014 10-K report. We take no obligation to update publicly or revise these forward-looking statements.

And with that, I will turn it over to Jim.

Hello, everyone, and thanks for joining us for our second-quarter earnings call.

This morning I'll provide my perspective on the quarter and the progress we're making in the business. And Walter will follow to discuss our financials.

The Company is performing well in a more challenging market environment. We're delivering meaningful results across a number of dimensions to mark a good second quarter and overall first half of the year. However, we still have work to do in a few areas that I'll discuss. As you know, equity market volatility did pick up in the quarter. The strong dollar has also been a headwind in terms of foreign exchange, translation and asset management. And we have the ongoing pressure of low interest rates. We also have the benefit of the long-term care reserve release. However, this was offset by higher weather-related impacts in Auto & Home, which Walter will address.

Revenue growth in the quarter reflected a more volatile market environment. But we remain very much focused on executing our growth plans and managing expenses as we continue to invest in the business and return capital to shareholders. We're consistently generating good free cash flow, growing earnings and returning to shareholders at a significant level, while maintaining our excellent capital position.

For the quarter, operating earnings per share increased 12% compared to last year. Excluding certain items, EPS increased 15%. In terms of return on equity, an important measure for us, we continue to deliver at a differentiated level. ROE increased to 23.5%. This is up 180 basis points from last year and marks another record high. Assets under management and administration were up slightly to $811 billion, as asset growth was offset by the unfavorable foreign exchange translation of $12 billion. Overall, we are growing our fee-based earnings driving the ongoing shift in our business mix.

Let's move to the business segments. In Advice & Wealth Management, we're continuing to generate good earnings with strong margin. Client flows were very strong, and assets levels hit a record high at more than $450 billion, up over $18 billion over last year. We're generating good inflows into fee-based investment advisory accounts, with inflows of over $3 billion, up 9% in the quarter. Our investment advisory platform is one of the largest in the industry and a consistent growth driver for Ameriprise. We continue to get good uptake from our adviser capabilities we're investing in, such as our e-file delivery and our money movement system. The capabilities help advisers share information more easily and process business faster. It's freeing up their time to focus on serving their existing clients more comprehensively.

This was our best quarters for recruiting. We're bringing in more productive advisers in a very competitive marketplace, with 93 new experienced advisers joining the Firm in the second quarter. With strong average productivity per recruiter across both channels.

And our ongoing pipeline also looks strong. As we shared previously, we continue to seek to serve more of the mass affluent and affluent markets, and we see opportunity in two areas: people who are accumulating assets, as well as those who are transitioning to retirement. Our Confident Retirement approach generates higher satisfaction, deeper relationships, more assets and higher referral rates. In fact, for the affluent, satisfaction rates we're earning with clients served true Confident Retirement are some of the highest I've seen. Based on the results we have seen, there's more we can achieve, as more of our advisers begin to adopt a simplified and engaging approach.

Now we're expanding Confident Retirement for wealth builders -- people who are in the accumulation phase. This expanded approach has proven effective in our initial consumer research, as well as with our adviser pilot we tested in the quarter, leading to nice lifts in both productivity and flows. We plan to roll it out nationally to our entire field force beginning in the fall and through next year.

Also in the fall, we're kicking off our new brand and advertising platform. We're shooting the ads for it this week, and we'll be working closely with advisers to take advantage of the campaign in their local markets. I feel good about its potential to engage our advisers, clients and prospects, and continuing to tell our story, as well as demonstrate the benefits of working with Ameriprise.

We're also enhancing our digital presence in the Ameriprise website, incorporating responsive design to make it easier for consumers to access their information from multiple types of devices. As a result of these and other efforts, our advisers continue to grow productivity, which increased 9% year over year to a new record of $512,000 over a 12-month basis. Overall, we're delivering nice growth and profitability across the business, with strong opportunity for further growth.

In regard to Annuities and Protection, year-over-year operating earnings were down in these business. But there are a number of items from both the current and previous quarter that Walter will discuss. In terms of annuities, variable annuity account balances were relatively flat, but that was largely due to outflows in our closed book. Within Ameriprise, we had good sales growth, up nearly 10% from a year ago. And we're seeing nice traction from the introduction of two new living benefit riders in the quarter.

We also continue to see strong adoption of variable annuities without living benefits, reflecting good wholesaling activity and a positive reaction to helping clients and advisers understand the advantages these products can provide. This has contributed to a good and moderate shift in the mix of variable sales of products without guarantees. Sales of VAs without living benefits represented about a third of total VA sales in the quarter. There's essentially no change in fixed annuities, given the current rate environment.

In Protection, we continued to work with our advisers on the benefits of insurance for our clients. Life and health cash sales were up 10% from a year ago, with continued strength in index UL. And our overall client retention in these solutions remain high. This helps enhance the long-term nature of the Ameriprise client-adviser relationship. We're simplifying marketing and sales materials, processing new business more efficiently and enhancing our digital capabilities. We also refreshed our disability income insurance product line in the quarter, as this remains an important feature of a comprehensive financial plan. These enhancements should begin to show in the third quarter.

In Auto & Home this quarter, we were particularly impacted by the storms that were more severe than usual in the central part of the country. In regard to the overall business, Auto & Home has a good client base, with good distribution that garners a high client satisfaction and retention. As we discussed with you, we have a number of actions on the way to address some increased developments we have experienced. This includes adjusting pricing, tightening underwriting, as well as improving claims management in certain areas across the book. The steps we're taking should get us back on track to the level of performance and return we previously delivered. It will take time as our initiatives work through the book. We expect to see good benefits in 2016 and beyond.

Now let's move to Asset Management, where we have a strong foundation of assets and are generating solid earnings and competitive margin. Assets under management were down slightly from a year ago, but that was largely driven by the foreign exchange translation. We're executing our strategy, while investing in the business and being diligent about expenses. We're generating strong investment performance versus benchmarks and peers.

In the US, we continue to generate strong equity performance in short-, as well as longer-term timeframes, particularly in large cap core growth and quantitative products. In addition, our small and mid-cap growth products continue to improve in the short-term. Taxable fixed income performance has performed in line with our risk profile. Tax exempt performance remains strong. While the Acorn Fund is still underperforming over the medium-term, its performance has improved versus both against benchmark and peers in the short-term.

In EMEA, we continue to generate good short- and longer-term track records, especially in equities. While UK performance has been somewhat mixed recently, longer-term performance remains strong. Both US and European equity performance has continued to improve, and longer-term track records are quite strong. In Asia, all our locally managed funds now have a one-year track records, and in each case, are beating their benchmarks and peers.

Let me highlight some other things we're focused on, starring with retail. In the US, retail gross sales were up almost 10% from last year. We're adding to our leadership talent in distribution, marketing and product, and will soon announce our new national sales manager that will complement the leadership changes that we have made over the last few quarters. Wholesaling focus is improving. We're strengthening our product training, and better aligned our sales strategy. And we're investing in our marketing and advertising to reflect new Columbia Threadneedle Investments' go-to-market strategy. Our plan is to be in the market later this year with New Creative.

While these actions are beginning to take hold, there's still more work to do. In the quarter, retail outflows were elevated in the Acorn Fund, which lost a large DCIO client. However, we're very focused on improving Acorn's performance. We're managing the planned leadership transition and increased concentration of our top holdings, returning the investment process to its roots and strong legacy.

In the UK and Europe, we're generating good retail growth sales, and had net inflows of about $800 million in the quarter. We also have a very good UK property business, with assets of about $13 billion, that provide a meaningful contribution. In addition, at US Trust, we're experiencing a level of outflows consistent with prior quarters. We renewed our relationship with US Trust, which remains strong. Over the next quarter or two, we expect outflows in some low-margin fixed income portfolios that US Trust will take in-house.

In institutional, other former parent-related outflows included a larger-than-usual outflow in low-fee Zurich assets, due to the stale of an annuity block. The underlying run rate of outflows have returned to normal levels as we service this closed block. That said, we're driving growth in our higher-fee, third-party business, including more than $900 million of net inflows in the quarter, as nearly all the mandate winds we expected to see in the first quarter funded in the second. Client service, consultant relations and sales are managed globally now, which has enhanced our support and ensures that sales teams offer our full portfolio of strategies.

Our institutional sales pipeline is healthy, and we have a good pool of high-potential sales. We expect that over time, third-party institutional will become an even larger component of the business. This includes the solution space, where we're continuing to build out our capabilities and investing in our infrastructure and sales efforts to support longer-term growth.

More work remains to be done in Asset Management. But we're making progress on a number of fronts, and believe we can continue to gain traction in key areas. We will still experience one-off impacts and legacy flow dynamics. And like the industry, we continue to deal with current market and geopolitical conditions. Our focus remains on improving our overall flows as we continue to deliver competitive financials and look to earn share across key markets.

Now let me turn to an issue that we're all focused on: the Department of Labor's fiduciary proposal. We support the DOL's objective ensuring that investors, particularly those saving for retirement, receive advice that's in their best interest. The industry has supported a uniform fiduciary standard for years. Ameriprise has long-served clients and served them well under a fiduciary standard. We believe that our track record and the high client satisfaction rates we consistently earn demonstrate that we have a beneficial business model for the delivery of advice.

We take the DOL seriously when they say that they intend to preserve beneficial business models for the delivery of advice. However, we think the DOL's proposal, as currently drafted, could have some significant unintended negative consequences. We have submitted our recommendations, and are supportive of the comments from the major trade associations, other member firms, and FINRA. These provide vital perspectives on the broad range of issues that must be addressed, and are responsive to the DOL's request to help them get it right.

Importantly, just in the last few days, the DOL has said that they will make significant changes to the proposal. We hope that that means that the concerns raised by many stakeholders and comment letters are being heard and will be addressed. Given they intend to make changes, all stakeholders should wait to see how the comments to the DOL are addressed before making definitive conclusions. We've dealt with regulatory changes before, and we'll work with our trade associations and other stakeholders throughout this process to advocate for our clients, with a goal of most appropriately satisfying the DOL's objectives. We continue to believe that Ameriprise is situated well and has the ability to respond to appropriate requirements to satisfy the DOL's objectives.

In closing, as I look at the Company overall, we have been able to consistently generate good growth in EPS and strong ROA. We have a good combination of businesses and people to continue to execute the strategy we have in place. I feel good about our ability to continue to generate strong free cash flow with our mix of businesses, as well as to navigate the market and consistently return to shareholders as we have. Our capital management remains a real strength. We recently increased our quarterly dividend, and also increased our buyback in the quarter as we saw more dislocation in the stock.

With that, I would like to hand things over to Walter for a detailed review of the numbers.

Thank you, Jim.

As Jim indicated, Ameriprise delivered another solid quarter of financial results in the face of a fairly volatile market. Operating net revenues were $3 billion, up 2% from last year. Revenue growth was muted by the impact of a CLO liquidation in the prior year, as well as an unfavorable foreign exchange translation. Without these items, underlying revenue growth was 4%.

Operating EPS was $2.33, up 12% from last year. However, it was impacted by several one-time items that we announced last week: specifically, elevated cat losses in Auto & Home, a reserve release in long-term care, and an unfavorable mean reversion. Excluding these one-time items, operating EPS was $2.38, up 15%. Operating return on equity reached a new record level of 23.5%, which is above our targeted range of 19% to 23%.

Turning to slide 4, you will see that our business mix shift continues to evolve. Advice & Wealth Management, and Asset Management, represented 65% of pretax operating earnings this quarter, fueled by strong growth in AWM. As we grow, we expect the mix shift will continue towards an intermediate 70%-plus target.

Turning to segment performance, starting with AWM on slide 5, the Advice & Wealth Management business is performing well across key growth and activity metrics, and delivered solid financial results, particularly given the market volatility. Revenue is up 6% to $1.3 billion, largely driven by an $18 billion increase in assets. Our total expenses increased 5% year over year. It was driven by higher distribution expense. We kept G&A expenses flat year over year, while still investing in key business growth initiatives, including more productive, experienced advisory recruits, advisory platform product expansion, and investments to improve the ease of doing business for advisers and clients. This resulted in earnings of $220 million, up 13%. And a record margin of 17.3%, up 110 basis points from last year.

Let's look a bit more closely at the drivers of AWM's profitability improvement on slide 6. We continue to generate good growth in adviser productivity, which reached a record level of $512,000, up 9% compared to last year. Productivity improved nicely in the franchise channel, which reached $532,000, up 8%. And we saw a more substantial growth in the employee channel, where productivity increased to $433,000, up 12% from last year.

Improved adviser productivity, along with strong experienced adviser recruiting and expense discipline, continues to support the strong margin expansion. Margins have groan 350 basis points since 2013, when we established our 20%-plus margin opportunity. Looking at it by channel, margins in the more established franchise channel are now 18%. Margins in the employee channel were almost 12% this quarter, and continue to expand nicely. Over time, we intend to drive employee channel margin expansion, and they should approach the level of the franchise channel. We remain focused on driving improved profitability through continued productivity improvements, as well as recruiting and retaining advisers.

In addition, we see the opportunity for margin expansion when short rates rise. We have approximately $20 billion in client cash sweep accounts earning about 22 basis points. Since we have not benefited from short rates yet, we would expect a substantial margin lift when the fed funds rate increases. Together, these growth dynamics demonstrate the strength of our model, success of strategies to growth this business, and the opportunity we have to drive profitability even higher.

Our strong performance on the absolute basis is matched by our strong relative performance, as you will see on slide 7. Our AWM segment revenues are almost $1.3 billion, which is a 9% CAGR over the past two years. Over that same time period, our margins have expanded 340 basis points, substantially surpassing the margin expansion of peers. We believe our growth has been quite competitive on a relative basis, including relative to other large wire houses and online brokers that benefited from banking and market-making activities.

Asset Management continues to provide a solid contribution to Ameriprise's revenue and earnings, as you will see on slide 8. Operating net revenues declined 1% to $832 million. However, the year-over-year comparison is distorted by the timing of a CLO liquidation of $23 million in the prior year, and an unfavorable $17 million impact from foreign exchange translation in the current quarter. Adjusting for these items, underlying revenue growth was about 3%.

Pretax operating earnings were down 1% to $197 million. Again, adjusting for the timing of a $17 million CLO liquidation in the prior year and an unfavorable $6 million impact for foreign exchange translation, underlying earnings were up approximately 12%. Expenses continued to be tightly managed and we were essentially flat, adjusting for the items I just described. We remain focused on maintaining profitability and margins at the current level, while investing in growth initiatives to improve flows.

Turning to Annuities on slide 9, Annuities' pretax operating earnings were $150 million, down 12% from last year. However, the prior-year results included several items distorting the year-over-year comparison. Adjusting for these items, earnings increased 6%. Underlying variable annuity pretax earnings grew 7% from a year ago to $123 million, when we adjust for the year-over-year impact of clients moving to manage volatility funds and mean reversion. While the move of clients to manage volatility funds drove a significant initial earnings benefit last year, it also improved the risk profile of the block. Underlying earnings growth was driven by higher account values of variable annuities sold through our own adviser channel, and the runoff of the closed block distributed through third parties.

Fixed annuity pretax operating earning was flat at $30 million, as the benefit of repricing the block was offset by elevated lapses. Lapse rates are in line with our expectations. Given the current interest environment, there are limited new sales, and as a result, this book is expected to gradually run off, and earnings will slowly decline.

Turning to the Protection segment on the next two slides, Protection pretax operating earnings were $72 million in the quarter, impacted by $48 million of cat losses in Auto & Home and an $18 million reserve release related to our long-term care disabled life reserve. Both of which were previously disclosed. Let's focus on the life and health business first. Underlying life and health pretax operating earnings were impacted by higher claims activity and a lower interest environment. On the claims side, life claims were elevated in the quarter and slightly higher than expected, while disability claims were still quite good in the quarter, they were higher than a very favorable experience in the prior year.

I would like to take a few minutes to discuss the long-term care disabled life reserve review that we conducted in the quarter. As you are aware, we announced $32 million reserve increase in the first quarter, following a review of our claims reserve, based upon information we received from Genworth. After reviewing the documents we received from Genworth, we decided to engage a third-party consultant to validate their analysis. This additional review identified that actual claims and termination experience for our block was more favorable than the information generally initially indicated. As such, we released $18 million of claims reserved that had been booked in the first quarter.

We are working with Genworth to improve the accuracy of the data provided and enhance the processes associated with setting the claims reserves. The reserve review conducted over the past couple of quarters is related to claims reserves only, since we used data from Genworth to set that reserve. The adequacy of the active life reserve is determined using our own data, and is reviewed regularly. As part of our annual unlocking process, we will evaluate all of the non-equity market assumption across our life, LTC and annuity products in the third quarter.

Let's turn to Auto & Home on slide 11. The Auto & Home business had an operating loss in the quarter, which was clearly impacted by the significant level of cat losses. We planned for $23 million of cat losses, but actual cat losses came in at $48 million. This was driven by higher exposure to the central part of the country that experienced an elevated level of severe weather in the quarter.

Underlying Auto & Home results reflect the current-year loss ratio provision. As you recall, we are booking reserves for the 2015 accident year at a level consistent with the 2014 accident year loss ratio assumption we changed in the fourth quarter. As we discussed last quarter, we are continuing to phase in changes to our pricing-to-risk models, enhance claims and underwriting processes, and improve operations. We are seeing clear indications that the changes we are making are working. There has been a slowdown in new policy sales across product lines, with the most material decline in auto. We're on target to achieve marginal profitability for Auto & Home, excluding excess cat losses in 2015, with a more meaningful improvement to earnings in 2016.

Let's turn to the balance sheet on slide 12. Our balance sheet fundamentals are strong. We have approximately $2.5 billion of excess capital. Our risk-based capital ratio is estimated to be approximately 560%. Our hedge program is effective, and our investment portfolio is well-diversified. Our business mix shift has continued to generate strong free cash flow, allowing us to return a substantial amount to shareholders.

Given the share price in the quarter and our current valuation, we accelerated the level of share repurchase. We returned $549 million to shareholders through share repurchase and dividends, which is our highest quarterly level. This equates to over 125% of operating earnings. As always, we'll continue to monitor both the macro environment and our relative valuation, and look to bring down our excess capital over time.

In summary, Ameriprise delivered another good quarter of financial results. Our growth engine remains the AWM business, where strong fundamentals will continue to drive margin expansion. In Asset Management, we are maintaining competitive profitability, and our business initiatives are focused on improving flows. The Annuities business is delivering sound growth for an improved risk profile. Life and health earnings remain solid, and we are taking the necessary steps to improve the financial performance of the Auto & Home business going forward.

Our business mix transition to higher-growth, higher-[PE] businesses is ongoing and generates strong free cash flow. And all of this rests on a solid balance sheet and enterprise risk management framework, and is clearly driving shareholder value.

With that, I'll open it up to questions.

Thank you. We'll now begin the question-and-answer session.

(Operator Instructions)

Our first question comes from John Nadel from Piper Jaffray. Please go ahead.

Good morning. Thanks for taking the question.

My first one is around Advice & Wealth Management. You saw net revenues continue to grow pretty nicely, roughly in line with the growth in productivity. I'm curious, Jim, whether you saw any significant change in the underlying mix of the sales by product. I know, for example, last quarter you saw a fairly light contribution from annuity sales. I'm assuming that picked up this quarter, with the overall VA sales growth.

Yes, that's correct. What we have seen is, again, strong take-up again in our fee-based RAP businesses. We have seen an increase in our sales on the guaranteed, on the annuity side. Things like various transactional business and brokerage such as REITs, are very low. It represents about less than 1%, around 1% of our sales activity. It's really against the core products and services that we have offered. We have seen a good flow improvement and good activity across our network.

Okay. And then, anything in the quarter that you would characterize as a noticeable early impact from advisers maybe shifting some business in response to the DOL proposal, recognizing it's only a proposal?

Not at all. In fact, our advisers feel very good about what they do for the consumer, whether in qualified or non-qualified. And we have had a pretty consistent mix. We get unbelievable satisfaction levels from our clients. And they are really very comfortable and happy with achieving their retirement goals, if it's against their retirement needs.

In fact, we think we're well-situated, based on the business that we do. Again, the products that we sell-in are needs-based. So at the end of day, I think we're doing what we need to do appropriately, consistent with both the regulatory, but more importantly, from a client need and disclosure perspective.

Thank you. And then I just have two real quick ones in Asset Management. G&A seemed a bit higher than I would have expected. It's not that significant; maybe it's about $5 million or so. Just curious whether we should think about the $345 million of G&A in the quarter as a run rate, or if there was anything unusual there in the second quarter?

No. I think the only thing unusual is, as Jim mentioned, I think, we launched our brand. And certainly we had the expense in there, but we believe the expenses will just be at its normal run rate.

Yes, and we did the relocation of the Threadneedle premises in London. So we had some additional expense there.

And then on the fee rate, it looks like you are starting to really see some upward momentum there. I'm curious, based on what you are seeing in the underlying mix shift. I know you said some of the legacy outflows were elevated this quarter, and maybe that had some impact. But how much further do you think that fee rate can go, let's say, over the next couple of years, based on an underlying mix shift there, Jim?

Well, I think we had a little uptick in some of the fees from the performance fees in the quarter, which doesn't happen on an equal basis every quarter. But I think there's a little more in the performance fee basis there. I do believe, as you said, some of the legacy lower fee coming out. And over time, I think, as we build a bit more in the institutional through third party, some of the solutions will be higher.

Unfortunately, the Acorn was a little higher fee that we lost on the retail side. So if we can stem that and continue to get some growth in the sales, as we saw in the other retail channels like international and even domestic, I think we can offset that and start to add. But I would just say the bit of increase you saw was just a little lumpy from some of the performance fees.

That's helpful. Thanks a lot, Jim.

Thank you. Our next question is from Yaron Kinar from Deutsche Bank.

Good morning, everybody. Thanks for taking my questions. I want to start with the capital deployment. Can you explain a little more the rationale behind the elevated buybacks this quarter, compared to, I think, a very consistent $350 million quarterly run rate the last three years? And can we extrapolate from that or think of an elevated new run rate going forward?

It's Walter. Again, as we have always indicated, that we have the capacity and we'll evaluate both the environment and our valuation. And we felt in this quarter that it was warranted -- we did take it up to $75 million. We will continue to evaluate that. We certainly have the capacity to do that. And I think at this stage, we're going to be opportunistic as we look into the remainder of the year.

Okay. And then in Advice & Wealth Management, the recruiting efforts clearly were quite strong. And then you say the pipeline remains strong as well. Do you see any impact from the DOL proposal there? Do you see that impacting your recruiting capabilities?

No. I think one of the things -- again, the DOL will -- once we exactly know what finally they come out with, we'll understand some of the implications. But we're probably situated very well in the type of business that we do, how we work with clients. We operate under a fiduciary standard across our network today. We have very strong compliance structures, and it's one of the benefits of people coming to us.

They like how we handle our centralized compliance, our disclosures, et cetera. We have a very strong client value proposition. And so we have seen a very strong, good pipeline of highly productive people, both in our employee and franchisee channel. The pipeline remains strong.

So no, we feel pretty good about it. Again, I think we're in good shape relative to the industry in general. I don't see any differences between us or the industry, when you look at it from a DOL. In fact, I think we're very well-prepared, because we have a strong advisory relationship around our financial planning activities today, and our retirement value proposition.

So again, we don't know exactly where the final regulation will come out. But I think you can see very strong responses out there from the industry, from the associations, even the regulators, like FINRA. I saw a note going out from the SEC governor. So there are a lot of responses out there that hopefully the DOL would understand what they need to accomplish. We're very supportive of that objective. We think we can satisfy that objective very well. But again, it's the way they go about doing it, I think, is where the rub is.

Got it; that's helpful. And a quick final question, if I could, off the AWM segment. I think you mentioned in the script that you are expanding into clients in the accumulation phase. Would that mean that we should expect some offsetting productivity pressure coming on the revenue per head, because you are now targeting individuals that are probably not quite at the same level of networks that the existing base is?

No, not at all. In fact, I think it actually would be a great complement. What we are doing, we're rolling out to our advisers right now. We've done a lot of work in research, both the combination of our brand, our value proposition, our Confident Retirement accumulation approach. Our heritage is based on accumulation for retirement.

So I actually believe that we can serve the higher end of the mass affluent and the affluent quite well, and those really accumulating for retirement, the Generation X coming up, et cetera. So it's really getting our advisers a little more focused on going back to that opportunity and combination. And it's really against the upper market here. I actually think it will be a good opportunity for us in complement to what we do, and longer-term, to build long-term relationships, as we've had in the past.

Great. Thank you very much for taking my questions again.

Thank you. Our next question comes from Alex Blostein from Goldman Sachs. Please go ahead.

Great, good morning. Thank you.

A question for you again on margins and AWM. Clearly a really nice trajectory, nice expansion so far. As we look out, and thinking of the current environment space, what it's been for the last six months, maybe a little bit more of a range above market. How quickly do you think you will be able to get that 17% margin that you have, maybe 17.3%, slightly higher, which you are targeting, closer to 18%, assuming no higher interest rates?

Alex, I think as we said, we have moved the needle pretty well and pretty fast over the last number of years, going first to our 12% target, then to 15%. Now we're into17%-and-change rate here. So I think if we continue to just continue to execute, help our advisers just continue to drive their productivity and get our asset flow. As we continue to focus our business even more on moving our center to a bit more on the affluent space, uptaking some of the tools and capabilities we're putting in place.

We're coming in with a new branding approach at the end of the year. We have a new wealth builder approach for accumulators. So we're recruiting pretty well. The people we're bringing in are higher-productivity. We're attracting a good number of people in the higher end.

So I think we're doing the things. What that means quarter to quarter, I can't tell you. And I can't dictate the market dynamics of just -- but I think that, in combination -- we know at hopefully one point this year, the fed is going to start to raise.

Remember, we don't have contracts that are rolling off of some others, where that locked in. We're actually at a low point. So any benefit there goes right to the bottom line for us as well.

So I think we're situated well, and I think we're going to continue to work against that. We don't necessarily just focus on a margin improvement. We focus on a strength in growth in the entire channel that leads to that margin.

Alex, it's Walter. I'll just add, if I could, as we talked about it, the employee channel certainly has been one that has demonstrated an improvement in its margin. And again, as we bring on years and certainly a higher productive years, and they start building up productivity, they're making a greater contribution to the fixed. And that will also continue to go. So I think there's a lot of things in play that will continue. Again, you can't just predict quarter to quarter, as Jim said.

Right, understood, thanks. And shifting gears a little bit on the ops management business, can you just give us a sense on the below-margin fixed income portfolio that you are saying US Trust has been sourcing? Just from a modeling perspective, help us understand how much it is and what's the fee rate on that business? And then Jim, you highlighted continued strength in the institutional pipeline. It would be helpful to get us a sense, at least directionally, where that stands relative to last quarter, as we think about the Columbia institutional flows ahead.

I don't know the exact number at US Trust, but we're probably $1.2, something like that. I'm not exactly positive. It's more of some separate accounts, their lower fee. For us, it's not, though, they're a higher-margin business at all. But again, it's something that makes sense for US Trust, is what they are doing. It's not a major to us. But I just figured -- I noted it because we sometimes look at the flow number, rather than necessarily the revenue.

From a perspective of institutional, it's quite strong. The pipeline is quite strong. The fee rate is quite good. We're getting mandates both domestically, as well as internationally. Europe is picking up. We think there is good opportunity for us as we continue to look out.

Again, we don't know exactly when those things go and when they eventually, even if you win them, fund them. Because people are looking at the market situation, the geopolitical, the interest rates. But having said that, I think we've got a wide range of good pipeline there that we're competing with. And hopefully, that will continue to show some strength.

Understood. Thanks for taking the questions.

Thank you. And our next question comes from Tom Gallagher from Credit Suisse. Please go ahead.

Good morning. The first question on DOL. You've had three months or so since that proposal has come out. And I recognize it's still fluid and there might be changes. But just curious if you have done an internal analysis to assess the range of potential impacts that you think this might have on your business? That's my first question. I realize you haven't disclosed publicly. But have you done something internally, yet in a fairly comprehensive way, to assess potential impact? That's my first question.

We, as a business, look at it as many have. You don't have clarity yet of what the regulation is. There's an exemption that people say: yes, you can definitely sell an annuity, et cetera. And then some would say: well, maybe you can't. So at the end of the day, it really depends on how you interpret that. It's not as clear.

What I could say to you is this -- and this is one maybe that would be helpful in you analyzing it. We are a business that serves our clients for all of their life needs, including retirement. So roughly 50% of our assets then qualify similar to others in this industry. In that regard, we have a majority of what we do in the investment business in the qualified through advisory fees. We're one of the biggest and best-growing in the industry against that, and we have strong platform capability continuing to drive that, if that's where the world goes, appropriately.

But we do look at the needs of our client. We do put them in the product that's appropriate for them. And that's what we're asking the DOL, to make sure that they look at the best interest of the client. And best interest may not necessarily be what they think at the upset. You can see that from many firms in their comment letters, including whether it's FINRA, the SEC -- you can look at it from the associations. You can even look at it from even major brokerage and even investment firms, including those in ETFs, that have made the similar statements. So I think at the end of the day, that's what we're saying.

But from a mix perspective -- same thing with annuities -- most of our business is in guarantees, which the Treasury Department said is important. If you looked at what that would have done to the consumer, not having those products in the last downturn, it was significant. But we're no different than the entire insurance industry, annuity providers, selling annuities. And the percentage we have in qualified is similar. We're not an outlier in any of those things.

Now, how is that interpreted across the industry? I think all of us can come to a little different equation on that. But I don't think anybody knows for sure. So that's what we're saying. And if we just quantify things based on how we interpret versus how others interpret, I've looked at what some others said. Whether that is correct or not, I don't know. I think that's all we're saying, is: until we know more, until you know more, until we know after this comment period, after what the SEC comes out with. But once that happens, we'll be very clear of what that means and how we can respond to it.

I would just say that we have very strong capability here. We serve our clients well. We have an unbelievable level of disclosure and compliance today. We know how to serve people with the best interest across our entire network of advisers. And so we'll be able to respond. Hopefully, it will be against what the DOL truly wants as their objective, that would make it efficient and appropriate for us to do that so we can serve even the small consumer.

That's helpful, Jim.

And then just a follow-up on that. I hear what you are saying in terms of there is a fair amount of latitude and discretion you could probably use to interpret the context of the proposal at this point. So it would probably be pretty hard to quantify.

So let me ask it in a slightly different way. If you had to look at some of the areas or issues out there, do you legitimately see this being a bigger issue for, we'll say, revenue momentum in the Advice & Wealth business, fee pressure on the Asset Management business, or just the overall cost associated with the implementation of this? If you look at those three areas, what would --

I think it would be -- let me give you an example. Let's say one product becomes more difficult to sell. You're going to, over time, switch that to other products or services that make appropriate sense for the client, and do that orchestration. From a revenue, longer term, I'm not sure that's a -- there may be some period. Because you are trying to figure out what that is and how to actually do that, and put that in place.

But even there, it depends on the lead time that is provided in this. Again, that's another issue. I don't think, based on what they want done, that lead time is at all reasonable for many providers. And we're probably one of the best, that have the technology capability and the clients capability, et cetera, to do it as quick as anyone. So I would just say that's one aspect you've got to take into account.

The second aspect I think you take into account is the change in what's required in it. Again, based on what was originally sent, you are talking about extensive changes that would be required from a client, a disclosure, a change in what they are looking at a level of information down to account holder. So all that provided, it's a little mind boggling. You have seen some of the quotes across the -- some consultants in that development.

So again, it's hard to jump at any of that and say that's ultimately what will come out. I think the biggest issue more than anything that would be confusing to a player like us is this: how does that align with the regulations already in place? Will the SEC change what they are requiring and how to think about it?

There's a lot of case law behind this. There's a lot of regulations built over very informed information, over decades, that people follow in this industry. Not just for Ameriprise, but every broker dealer, every investment firm, every product company selling their products. So all of those things, or at the level of complexity that we say, what's the unintended consequence?

So again, that's why I'm not sitting here over-reacting to it. I think it has to be sorted out, it has to be rationale, it has to be ability to serve the client. Remember, there's a 100 million-plus US retail consumers saving for retirement. So, again, as I said, I think Ameriprise is well-situated. I think we have a great value proposition. Yes, any change, you always have to look at how you respond to it. But hopefully, this will get very rationale. Because we're probably one of the first firms to say we want to serve clients in the best interest. And we do that today. So I can't answer your question yet. I wish I could. I know it's what you all say and is one of the implications for us. But I would just say, if you look at the financial services industry, you look at a retail investment firm like us, and you look at product companies, we are situated as well as anyone.

No, that's good perspective. I appreciate it. Just one last question. Walter, you had mentioned you are preparing for your annual review of FAD 1697 products. And I guess you do that every third quarter. My specific question, long-term care, I know you did the claims review. Can you comment on act of life, whether that's a risk of reserve charge? I think you've been losing a little bit of money, or roughly break-even, a small loss every quarter, on an operating basis. Should we be looking at that as a potential risk here?

I think we're looking at -- you specifically want to go to long-term care. We're looking at the all of the products annuity and other products. And as we evaluate it, there are a lot of positive elements within it, as we look at different factors. Certainly one of them, as you are aware, is the interest rate, which will be part of the evaluation. We have made no judgments at this stage. Certainly where we thought the interest rates at this time last year is certainly lower. And we'll evaluate all those factors. But nothing pops out from the standpoint that we are concerned about, other than just looking at where the interest rates are at this stage. All behavioral aspects, certainly our price increases, other things, have -- we're very confident, and that's what the actuaries are doing right now.

Okay, thanks.

Thank you. And our next question is from Suneet Kamath from UBS. Please go ahead.

Thanks, good morning.

I just want to go to Auto & Home for a second. Just given the consolidation in the property casualty industry, as well as your comments about the turn-around taking some time, have you given any more thought to a more -- a sooner exit of that business?

Suneet, let me start with this. I do believe that what we are able to do with the business -- because the business is quite strong. We've had the business evaluated, its model. It has one of the best distribution-type platforms, it's one of the lowest cost providers in the industry, et cetera. It has one of the highest customer satisfaction -- in fact, it was rated second from the big rating company that usually you hear about, that you can't just necessarily talk about.

I would just say there are tremendous attributes we already have, so it's not a problem for us to grow what other people have. It's more of, we had to put in place, a bit, enhancements on some of the areas that have changed a little bit in the industry. We're tightening a little underwriting, adjusting pricing, a little more sophistication around that. Getting a little more what we would call expedited on some of our claims, adding resources there, rather than relying on third parties. So there's a number of things that we're doing that are well-known that the industry and what we can do. And we have the right resources that we have put in place to get that done.

So we actually feel very good about our ability, and that this will add to nice earnings next year, and the year after even more substantially. I think that will be a positive, as you think about it, and also carry for the business.

Having said that, we do recognize what's happening in the industry. We do recognize the level of consolidation. So we'll always think about how to evaluate that. But again, I don't feel like this is something that wouldn't add tremendous value to Ameriprise one way or the other, over time.

Suneet, it's Walter. The only thing I just want to clarify is, again, all the initiatives we're talking about are pretty much on track. Certainly, the heavier cat that we experienced, that will change the profitability. But the other initiatives and where we think this -- and how long it's going to take, is pretty much on track.

Your question is good, it's appropriate. We always do think about it and evaluate it. So again, we'll see as the world -- in the future.

I appreciate those comments. But at the end of the day, it's not making any money. I'm spending a disproportionate amount of my time talking to investors about a business that, frankly, I just don't see why it adds value to your Company. It just seems like it doesn't fit. Like I said, there's consolidation P&C -- I still scratch my head and try to figure out why it merit the amount of attention that you are spending on it.

Suneet, I appreciate your perspective. And certainly as we look at -- this is not the return, not the way we want. But we do believe the basic underlying is quite strong, and we're fixing it. And then, as Jim said, it's not core. We'll evaluate it, but it's something that we put the resources in, dedicate it, and are turning it around and then have to evalute. This is not the way -- the sort of returns and characteristics that we would want from one of our businesses --

Had in this business.

That's right. This business is actually -- many years ago, actually had return. We certainly have seen it, and it has substantial potential. Your perspective is certainly valued.

Okay, thanks. And then I had just a couple of quick others. On the JHS Capital Advisors, I was just curious if -- can you give us some background in terms of how that deal came about? Is that something that you approached them, or did they come to you? Just want to get some sense in terms of how that deal came about.

Actually, we have the capability that we have been doing, looking at many different ways of evaluating in the environment. And certainly we have a group of people that look at and assess. And it was a combination, I think. And we assessed both their -- in fact, they had an employee base and a franchise base, and compensations evolved. It was really -- we do look, and we basically reached out to them.

Okay. And then just a follow-up on Yaron's question. I know we're not talking about DOL in specific terms, but would it be unreasonable to think that if the DOL proposal passes as it's currently drafted, that there could be further consolidation in Advice & Wealth Management?

Yes. Well, listen, one of the things that we're finding out there is, advisors even that have moved to a level of independence, et cetera, are recognizing that today's environment is a bit more difficult to do business in. And that they're looking for a firm that would give them the support for a range of things, including having good, strong compliance in place. We're attracting independents back into our franchisee channel for that reason and those reasons.

So it's not far to say if expenses and people don't have the right scale or appropriateness to respond to changes, that, that will cause some further level of consolidation. I would say, again, we have made a lot of investments in our Company in technology, in marketing, in compliance, in training, in development support. So again, I think we're well-situated if that continued to come about.

All right, thanks.

Thank you. Our last question comes from Erik Bass from Citigroup. Please go ahead.

Hi, thank you.

I just wanted to come back to capital management. I was hoping you could update us a little bit on how you are thinking about your excess capital, as it has now been around $2.5 billion for an extended period. Is there a level that you intend to keep as either a buffer or as dry powder for M&A? And if not, what are the factors, other than just your stock price, influencing how quickly you would return that capital to shareholders?

It's Walter. The level of capital has been at $2.5 billion, again, as we do. And certainly we generated a substantial amount of capital, and then we've been certainly using it to return to shareholders. We certainly don't lock and load at $2.5 billion, and it is opportunistic. As I indicated, we will certainly start returning more [to and re-evaluate it].

We have the ability and we're constantly assessing both the environment and the opportunities out there. And as we evaluate to basically inorganically or organically and return to shareholders. So I would say that we'll start now, as we talked about, and it's not our objective to keep $2.5 billion, that you should see us deploying that capital. But we do generate a lot. And we anticipate to continue to generate a lot, as the mix shift and other things take place in the way we manage the required capital.

Again, if you look over the last number of years, we've been returning more than 100% of our earnings. And that's because we've been able, as Walter said, through the mix shift, through freeing up capital in certain lines and better risk management and changing some of our investment portfolio, et cetera. So I think we've been generating more, even though we've been returning it. Which is a good thing.

Certainly a good problem to have. Is there a level of capital you want to keep for inorganic opportunities, if they do arise?

Yes, we always said that we would maintain a level of flexibility. Again, it depends. If there's a strong opportunistic reason that we should buy back a lot more because of the stock, we think the value is way low or something, that's one thing. But on the other side, we always said that we wanted to maintain some flexibility. But that does not have to be $2.5 billion for some additional acquisitions or things that come along that may fit in nicely, that we can easily duct in and get some good shareholder return. I think the nature of it was that over the last number of years, we've just been able to free up a lot of capital, even though we've been returning it. And that's why it's been roughly about $2.5 billion.

Got it, thanks. And then just one quick question, just on the tax rate. If you could talk about what drove the lower tax rate this quarter? And Walter, do you think of the 26% rate being sustainable beyond 2015? Or how should we think about taxes going forward?

It's strictly a 2015. And certainly as we go through the year, we evaluate the moving parts as it relates to the business mix, other factors that go in our tax planning. And the tax rate -- again, quarters, they always deviate a little. But the 26%, we're reasonably comfortable, is the achievable number for 2016. And then we will evaluate going forward. But that's about as far as I would look, at this stage.

Got it. But we should think of it gradually increasing over time, I would assume, as your mix shifts more towards businesses with a 35% tax rate?

Well, on the marginal tax rate, yes. And again, it isn't 35%, but certainly we do a lot of tax planning with the mix of business we have. So right now, the 26% is there. And then we just evaluate on the marginal as it changes, and then whatever tax planning we do.

Okay, thank you.

And thank you. This concludes our Q&A session. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.