阿默普萊斯金融 (AMP) 2017 Q1 法說會逐字稿

Welcome to the Q1 2017 earnings call.

My name is Paulette, and I will 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.

Thank you, and good morning.

Welcome to Ameriprise Financial's first quarter earnings call.

On the call with me today are Jim Cracchiolo, Chairman and CEO; and Walter Berman, our Chief Financial Officer.

Following their remarks, we'll be happy to take your questions.

On Slide 2 of the earnings presentation materials that are available on our website, you will see a discussion of forward-looking statements.

Specifically, during the call, you will hear reference to various non-GAAP financial measures, which we believe provide insight into the company's operations.

Reconciliations of non-GAAP numbers to their respective GAAP numbers can be found in today's materials.

Some statements that we make on this call may be forward-looking, reflecting management's expectations about future events and overall operating plans and performance.

These forward-looking statements speak only as of today's date and involve a number of risks and uncertainties.

A sample list of factors and risks that could cause actual results to be materially different from forward-looking statements can be found in today's earnings release, our 2016 annual report to shareholders, and our 2016 10-K report.

We make no obligation to update publicly or revise these forward-looking statements.

Turning to Slide 3. You see our GAAP financial results at the top of the page for the first quarter.

Below you see our operating results, which management believes enhances the understanding of our business by reflecting the underlying performance of our core operations and facilitates a more meaningful trend analysis.

The comments that management makes on our call today will focus on operating financial results.

I'd also like to point out that we've added some disclosure this quarter in our Protection segment.

Now you can see the P&L drivers of our Life and Health business and for our Auto and Home business.

In addition, we moved the closed block of long-term care business from the Protection segment to the corporate and other segment.

And with that, I'll turn it over to Jim.

Good morning, and thank you for joining today's earnings call.

I'll provide my perspective on the business, Walter will discuss the numbers in more detail, and then we'll take your questions.

Let's get started.

Ameriprise had a good first quarter.

I'm pleased with our start to the year.

The operating and market environment has been more stable.

Equity markets have settled down after the post-election spike, and investment sentiment has improved.

However, markets are still in a wait-and-see mode for further policy decisions and clarification.

And the U.S. Federal Reserve has started to increase short-term rates from near record lows.

That said, the regulatory and geopolitical environment remains quite fluid.

Across the firm, we remain sharply focused on serving our clients and advisers as we execute our strategy for growth and long-term value creation.

We posted new records for assets under management and administration at $818 billion and Ameriprise retail client assets at almost $500 billion.

Our growth in assets and increased client activity were reflected in our first quarter financial results.

We delivered significant growth in operating EPS of 24%, and an operating return on equity that's consistently among the best in the industry at nearly 24% and over 26% before unlocking.

In fact, it was one of the strongest quarters in Wealth Management, the primary growth engine of Ameriprise, which represents over 70% of the company's activities.

There is a significant need for financial advice.

The opportunity has never been greater.

Ameriprise is well situated as the leader in financial advice.

Key to our strategy is growing our retail client base and serving more mass affluent and affluent investors.

We're particularly focused on attracting those investors with $500,000 to $5 million in investable assets.

Ameriprise retail client assets were up 11%, as we focus on serving them in advice relationship, supported with a full suite of products and our confident retirement approach.

We continue to invest significantly in our brand, technology, tools and training to help our advisers grow their productivity and to further strengthen awareness of Ameriprise and our value proposition.

We're building on our successful "Be Brilliant" national advertising campaign and launched new broadcast and online advertising during the quarter.

Ameriprise brand awareness is near an all-time high.

And we're investing in new digital advice capabilities and further enhancing tools to help clients work even more collaboratively with our advisers and to help our advisers deepen their relationships even further.

And we're providing extensive leadership support and coaching for our advisers to help them serve existing clients more fully through advice relationships, earn more referrals and increase their practice value.

Over the past year, the regulatory developments absorbed significant management resources and adviser retention as we worked with our advisers to understand potential changes for the industry and Ameriprise related to the DOL fiduciary rule.

In addition, we began implementing certain changes that are aligned with where the industry is headed.

For example, our transition to advisory shares without 12b-1 fees.

And things are going well.

We continue to manage this period of change, and we're starting to turn our focus to more growth.

In fact, we're experiencing strong growth in our fee-based businesses that reflects industry trends to fee-based relationships.

Our investment advisory platform is one of the largest in the industry and growing as a larger part of the business, as we see continued shift to fee-based.

In fact, net inflows in wrap more than doubled to nearly $4 billion.

While transactional activity maintained up 4% in the quarter as our advisers served our clients more fully, and we had strong growth in client cash balances, money that can be put to work going forward.

With the investments we've made in technology, tools and support, advisers are growing their productivity up about 13% from the first quarter a year ago, adjusted for 12b-1s.

Advisers across the industry are recognizing the value we offer them and their clients.

I'm proud that Ameriprise has become a top destination for advisers who're looking to grow and adapt in a dynamic environment.

In the quarter, nearly a 100 experienced productive advisers moved their practices to Ameriprise.

And the productivity of our more recent hires is about 20% higher than advisers recruited a year ago, and our pipeline looks good.

As part of our focus on bringing in more advisers, yesterday, we announced an agreement to acquire a broker-dealer with about 200 advisers that specialize in serving clients of financial institutions, including banks and credit unions.

It complements our growth strategy, and we expect to finalize the acquisition later this year.

With regard to our annuities and insurance capabilities, we continue to execute a managed strategy within our Wealth Management framework to provide our clients with good solutions, while we focus on appropriate risk management and shareholder returns.

Our Annuity and Life and Health businesses are performing in line with our expectations.

Annuity sales decreased year-over-year in the quarter, reflecting the slowdown in the industry, reflecting the regulatory environment.

In regard to our Life and Health insurance business, we continue to ensure advisers can offer insurance options as part of our confident retirement approach and we had a good pickup in installment sales in the quarter.

In Auto and Home, we continue to see improvement in the business across the areas we're focused on and have discussed with you.

For example, our loss ratio in auto improved to 75% from nearly 88%.

We continue to take rate across the franchise as well as enhance our claims management, pricing and underwriting.

However, first quarter was one of the worst catastrophic quarters for the industry in decades and resulted in losses above what we had expected.

Without this, we would've shown nice improvement.

We continue to be very focused on further executing against our plan to get back to good returns.

In Asset Management, we continue to generate good profitability while adjusting to a period of change in the industry.

We're focusing on delivering value for our clients and distribution partners, while continuing to invest in areas that will provide future growth opportunities and greater efficiencies.

Columbia Threadneedle has established strong 3, 5 and 10-year investment track records.

We had a good start to the year in terms of performance, which strengthened our U.S. equity franchises, coming back from a weaker fourth quarter.

We've benefited from our quality growth bias in equities this year as markets have settled down after the U.S. election.

With regard to fixed income, our track records are strong and have even improved further over the last year.

We have 111 Morningstar 4- and 5-star funds.

In addition, we were recently recognized with 5 more Lipper Fund Awards in the U.S. and 20 awards in the U.K. and Europe.

In regard to distribution, we put in place a strategy to compete successfully both here in the U.S. and internationally.

In U.S. intermediary, we're focusing our sales efforts in direct alignment with helping advisers build appropriate portfolios and grow their practices as they help clients address their goals, whether that's growing their assets, generating income, navigating the rate environment, tax efficiency, while managing volatility.

While we're in outflows similar to other active players, gross sales year-over-year has risen over 9% in many of our anchor funds and strategic fund categories, and market share increased in many of our key intermediary relationships.

In U.K. and European wholesale, we've seen improvement in sales as we move back into net inflows in the quarter.

As an example, we started to see good sales in U.K., Germany and Spain in March.

And hopefully, as the uncertainty with the European elections dissipates, we'll continue to have a good opportunity for growth.

And finally, in third-party institutional, we saw a pickup in fundings in the quarter, primarily in our fixed income area.

Unfortunately, even though our performance was good, we were impacted by an continued reduction in assets from a sovereign wealth fund in the Middle East, a continuing industry-wide event due to sovereign fund liquidity needs.

As with retail, we're complementing our traditional institutional business with continued progress, expanding our solutions business, especially in multi-asset and adaptive risk products.

In addition to making good progress on our strategy, we're investing to expand our product lines in areas that will provide future growth opportunities.

This includes our solutions business.

As an example, the Columbia Adaptive Risk Allocation Fund has a strong 3-year track record and it was second last year in terms of net flows in its Morningstar category.

In addition, we're starting to see some initial traction in other new products like the Threadneedle Dynamic Real Return Fund and Absolute Return Funds in EMEA, which we're building upon.

In addition, we continue to put focus on expanding our responsible investment product line, building on our strength in the U.K. And we're further building our strategic beta business in the U.S. through our recent acquisition and the sustainable income funds we've launched last year.

We plan to build out our offerings across asset classes and styles.

With regard to other strategic investments, we've launched a new global advertising campaign highlighting the benefits of our consistent and collaborative approach to investing.

We're focused on key markets in North America, Europe and Asia Pacific and based on our initial launch, it's being favorably received.

In addition, while we're making these targeted growth investments, we're continuing to manage expenses well and benefiting from our reengineering strength.

We're making adjustments to our product lines and our organization to better leverage our global capabilities, including moving our front, middle and back-office capabilities from regional to a global platform.

We began this last year and expect to be completed mid-2018, which will provide greater efficiencies and will allow us to better serve our clients.

Our margins remain competitive.

Overall, for Asset Management, we've built a competitive global business and we continue to focus on key actions to strengthen our position in a changing marketplace.

Though we will continue to experience a level of outflows, including in our closed books that reflect our acquisitions, we're adapting to the industry change and are confident that we can maintain competitive margins while investing in areas of growth.

So overall, for Ameriprise, I'd like to highlight 2 key components of our story.

We continue to grow nicely and we're generating more of our earnings from our less capital demanding business.

In first quarter, Advice & Wealth Management and Asset Management drove 66% of our pretax operating earnings, excluding corporate.

And the strategies and actions we've described to you today will continue to drive this progression further.

Second, maintaining our excellent financial foundation is core to how we operate the company.

Our capital position and shareholder return are key differentiators of Ameriprise.

Our business generates significant free cash flow, and the actions we've taken to evolve our business mix are key elements of our differentiated level of capital return.

In fact, yesterday, we announced 2 additional actions that reflect the strength of our financial foundation and consistent capital management approach.

We increased our regular quarterly dividend another 11%, the 10th increase in over the past 8 years.

And we announced another $2.5 billion share repurchase program as we're nearing the end of our current authorization.

In closing, I feel very good about our position and our ability to continue to build for the future.

There is an immense need for advice products and services as wealth develops around the world.

Our business generates good earnings and strong free cash flow that we reinvest in the business and return to shareholders.

Our return on equity is consistently among the strongest in financial services.

And the financial foundation we've built allows us to remain opportunistic.

And I feel good about our ability to navigate an evolving industry and consistently generate shareholder value.

Walter?

Thank you, Jim.

Ameriprise continues to execute on the strategy Jim outlined to transform our business mix.

We continue to generate strong free cash flow and return capital to shareholders, while delivering growth in EPS and high returns on equity.

Advice & Wealth Management continues to be our primary growth driver, now representing 45% of total revenue.

We continue to manage expenses tightly across the firm, while making target investments that will support future growth.

Finally, our balance sheet remains strong.

In the quarter, we returned 111% of operating earnings to shareholders, which included the repurchase of 2.9 million shares.

We also announced yesterday an 11% increase to our quarterly dividend to $0.83 per share, as well as an additional share repurchase authorization of $2.5 billion through June 30, 2019, which is similar to our prior authorization established in December of 2015.

Turning to Slide 6. Ameriprise delivered very strong operating earnings per share of $2.70, which included the tax benefit from a share-based compensation accounting change of $0.17 per share.

We delivered good top line performance at Ameriprise, with Advice & Wealth Management revenue up 8% on an operating basis.

In addition, we demonstrated strong expense discipline.

G&A increased 3%, reflecting elevated corporate segment expenses relating to DOL and a few unusual items.

We returned a substantial amount to shareholders through dividends and share repurchase with $478 million returned in the quarter, which represents 111% of operating earnings.

Let's turn to Slide 7. The Advice & Wealth Management business continues to perform very well, delivering strong business metrics and financial results.

Operating net revenue was $1.3 billion, up $97 million in the quarter from solid wrap net inflows, increased fee-based revenue and higher earnings on brokerage cash.

Adjusting for 1 fewer fee day, and the impact from changes to 12b-1 fees, revenue grew 12%.

We successfully completed the previously announced move to share classes that do not have 12b-1 fees for advisory accounts, which reduced revenue by $34 million in the quarter.

This was about half of the revenue impact that we expected going forward.

From a PTI and margin perspective, the impact of this change is very small, and we expect it to be neutralized by other actions we are taking.

Overall expenses were up 5%, reflecting higher distribution expenses, which included the investments made in experienced adviser recruits.

However, we are tightly managing G&A expenses, up 3% from last year, as we make targeted investments for growth.

Revenue growth and expense discipline drove operating earnings up 21% to $248 million and an excellent operating margin at 19.2%.

Moving to Slide 8. Overall, client asset levels reached a new high at $0.5 trillion.

Assets continued to move into fee-based accounts with wrap net inflows of $3.9 billion.

At the same time, we saw increased transactional activity, specifically within retail brokerage and financial planning.

This demonstrates that our broad product offering and financial planning focus are valued by clients.

Brokerage cash assets remained near an all-time high at $26 billion, even with the growth in wrap accounts and higher transactional volumes.

Earnings on cash balances increased this quarter reflecting the December rate movement, while we only saw a portion of the impact from the March rate increase.

So we expect additional interest revenue growth in the second quarter.

We previously indicated that as the Fed raises rates, we'd expect to keep approximately 80% of the first 100 basis point increase.

Like others in the industry, we've kept the majority of the rate increases to-date.

With any subsequent rate increases, we will evaluate the appropriate level to share with the client based on the operating competitive environment at that time.

Asset Management continues to generate good profitability as you can see on Slide 9. Operating net revenue was flat year-over-year at $726 million.

Market appreciation was offset by net outflows, 1 less fee day, foreign exchange and lower performance fees than a year ago.

We continue to maintain industry competitive margins by tightly managing expenses and making targeted growth investments.

As you can see, G&A decreased 3%.

Pretax operating earnings were $150 million, unchanged compared to a year ago, and margins remained at 35%.

Assets under management were $467 billion, up 1%.

Net outflows were $5.6 billion in the quarter, which includes $2.4 billion related to the normal level of low fee former parent outflows.

Global retail net outflows were $3 billion, as industry flows out of active strategies in the United States and geopolitical uncertainty in the U.K. and Europe impacted results.

In global third-party institutional, outflows were $200 million with good inflows from the funding of several mandates.

This was offset by a $1.1 billion outflow from an institutional client with a specific liquidity need.

Overall, performance remains good with sequential improvement in 1-year performance for domestic equities relative to benchmarks and peer groups.

A few of our newer products like CARA now have strong 3-year track records, which makes them more appealing to retail and institutional clients.

On Slide 10, you can see that Ameriprise continues to make progress in shifting its business mix to less capital intense businesses.

Advice & Wealth Management and Asset Management make up 66% of Ameriprise pretax operating earnings, excluding corporate and other segment.

We anticipate that this shift will continue and reach 75% over the near term.

Let's turn to Annuities and Protection on Slide 11.

Annuities pretax operating earnings was up 12% to $139 million.

This increase reflects positive impacts of equity market appreciation, partially offset by ongoing favorable impacts from unlocking.

Variable annuity net outflows increased in the quarter, reflecting a decline in VA sales in line with recent industry trends as well as higher lapses.

Another trend we're seeing emerge is among clients outside the surrender period shifting to fee-based advisory accounts.

Life and Health earnings declined $13 million to $68 million in the quarter, driven by 2 favorable items in 2016.

Specifically, a $6 million benefit from recapturing a block of life reinsurance and disability insurance claims that were extremely favorable.

Overall, claims in the quarter are within expected ranges.

Auto and Home results improved by $8 million from last year.

Despite higher cat losses from a few storms in March, we are pleased with the improvement in our underlying loss performance for this business from the steps we have taken to improve results.

Our loss ratio was 88%, down from 92% last year and included 9 points from cat losses.

We remain focused on managing our cat exposure.

In the quarter, we entered several new reinsurance arrangements to reduce this risk.

We anticipate benefits in upcoming quarters from those arrangements, as well as numerous changes to products, pricing, claims and underwriting that we have implemented.

We continue to monitor underlying reserve levels and are seeing continued improved development.

However, we are waiting for additional experience to emerge before adjusting reserves to reflect these trends.

You'll see on Slide 12 that our balance sheet fundamentals remain strong.

Our excess capital is nearly $2 billion, with an estimated RBC ratio consistent at approximately 500%.

Our hedge program has been quite effective, and we remain focused on mitigating exposures.

The investment portfolio remains strong and diversified with a net unrealized gain position of $1.3 billion.

We returned almost $500 million of capital to shareholders through dividends and the repurchase of 2.9 million shares in the quarter, which was 111% of operating earnings.

We continue to target to return 90% to 100% of operating earnings to shareholders as a baseline, but as we did this quarter, we will adjust as we assess market conditions and our evaluation.

And with that, we'll take your questions.

(Operator Instructions) And our first question comes from Ryan Krueger from KBW.

G&A costs have been flat to down in Advice & Wealth Management for several years now.

Is the 3.5% increase that we saw this quarter more typical of what we should expect going forward?

Or do you view it as somewhat elevated in the quarter?

It's Walter.

I view it as somewhat elevated, I think.

The expenses will be managed as we've managed in previous years.

Obviously, it's situational, but we certainly anticipate to have a marginal increase in expense.

Okay.

And then, on the move to be to a more global from a regional platform, does it mean that you expect to send your current Asset Management margins in the 35% range?

Or should we expect it to provide upside?

Well, we're moving to new global platforms for the front, middle and backlog for this.

And when we complete that in mid-'18, we feel that it will give us some efficiencies and reduce some of our operating costs there.

But it will also give us better servicing capabilities and better abilities to leverage our capabilities globally.

That will also give us some leverage.

So we think that it will give us some efficiencies from a cost perspective as well as some opportunity for us to grow the revenue side even more fully.

Our next question comes from Yaron Kinar from Deutsche Bank.

I actually have Brian Bedell on the line with me as well.

Before I turn it over to him, just had a question more on the balance sheet side.

Can you maybe talk about your retail exposure in the CML portfolio and CMBS portfolio, and how you manage it?

How do you think about it, just given the stress that we see in that space?

Well, our exposure is actually -- is quite manageable.

We -- as we look at it both from the standpoint of direct investment in real estates and other aspects of that, we have been managing that portfolio down.

Our loan-to-book ratios are quite good and quite strong, and our concentration levels are quite low.

So we feel very confident in the portfolio.

Can you talk maybe about your exposure to Class B and C malls?

How do you think about that?

Okay.

We do not have any large exposure to large box situations and our mall exposure, again, it is small from the standpoint and it is -- that's where we concentrate keeping the loan-to-book value quite aligned at an appropriate level.

So we feel really good about it.

It's been -- it's an older book that's been working its way down.

Okay.

I'll turn it over to Brian.

Great.

I just have a couple of questions, if I may.

I appreciate you taking my questions.

One, maybe on the -- you mentioned, obviously, the 12b-1 changes across the complex.

Can you talk a little bit more about the advisory shares?

What type of fee arrangements in general that they have?

And then what type of impact that may have caused the advisers to switch, if at all, into different fund families, either between active and passive or to ones that had different fee structures?

So what we did is we eliminated the 12b-1 on the portfolios that the advisers are already managing.

And to the extent that some of those fund share classes did not have a [ one ] without the 12b-1, we're rebating it back to the client in those instances.

In that regard, the advisers are still able to maintain the portfolios as constructed with no change there.

The advisers themselves, based on the charges that they make to the client, first of all, are very competitive against the industry.

We look at that, we benchmark that and in fact, based on our asset levels, they're actually below wire house levels of charges as well as independents in most all categories.

So what advisers then look at is the services they render.

They'll see if there is any adjustments that they want there or other planning services that they'll render on their behalf.

But in most cases, the portfolios are as constructed, have stayed the way they are.

Advisers always adjust their portfolios.

They have ETFs and passives as part of those portfolios as well.

And they will continue to monitor those activities and rebalance them as appropriate based on market conditions.

So that has gone very smoothly.

As Walter said, half of the revenue was reduced in the first quarter.

All of that has now changed and so as the second quarter, the rest of that will be removed from the P&Ls, but also from the advisers.

Okay.

Great.

That's helpful.

And then just maybe a longer term, broader industry question.

Maybe if you could just talk about your appetite within Asset Management for doing more acquisitions in the active -- in the active space and then, just also if you can talk about the Columbia and Threadneedle integration, what's going well, the time line of that?

And maybe, just some challenges that you -- that -- that if you're having any challenges there, things that didn't -- are perceived to be a little bit more difficult than you thought originally.

So -- from an M&A, listen, we continue to scout but we're looking for things that might fit in neatly that would add and complement their activities for some of the product sets that we're trying to build and grow.

And so if things come about, we're interested.

On the other side, we're not running out to do acquisitions at this point in time.

If something can be good for us that's of appropriate value, that we can get synergistic opportunities.

But as I said, we're very much focused on improving our core organic business, making investments when necessary.

And as I said, if something comes along that complements that, we'll look for it.

From a perspective of the globalization, organizationally now that has been bedded down well.

The teams are working together.

In fact, we're getting some very good opportunities between the international investment side and the U.S. Research is now done and shared globally.

There are certain of our product portfolios that are done in a complementary fashion.

We're leveraging some of the learnings as well as -- as I said, even operationally, how we go -- putting the front to middle back-office together.

So that has to come along nicely.

It always takes a little longer than you want at the beginning, but then the synergies and the starts of the conversations actually grow nicely.

And so we feel very comfortable, and that should proceed nicely as we move forward.

You see that as improving your ability to do future acquisitions in terms of getting through this integration with (inaudible)?

Yes.

Because once we move to global platforms, again, if we were to add some -- some other asset managers, either internationally, domestically, we'll have a consistent platform to put them on rather than 2 separate ones.

And the platforms that we're putting in place will be up to the greatest of what's out there, in the level of capabilities that are currently in the marketplace.

Our next question comes from Alex Blostein from Goldman Sachs.

Jim, first question, just around the strategy for you guys.

So given, obviously, a better rate backdrop and potentially a lighter regulation, what are your latest thoughts on potentially reentering the banking landscape?

You obviously had to drop the bank charter because of very different regulatory backdrop a couple of years ago.

So just wondering as you're thinking about monetizing the cash balances, does that at all change with the current kind of administrative setup?

Well, yes, as you said, we did once have a bank that was mainly servicing against our adviser base, not as a separate institution.

So we're continuing to look at opportunities to add other services back to our adviser network.

And based on a regulatory regime and some other things that may occur, we might look at opportunities that would be complementary or partnerships that we would grab.

So it's one of the things we constantly review.

But things haven't necessarily changed dramatically yet.

So we'll stay tuned and see what would make sense down the road.

Got you.

And then just a separate question around the VA business.

So obviously, sales have come down, but also withdrawals picked up quite significantly.

Sounds like a good chunk of the book maybe entered the surrender period.

So maybe that's -- it just makes it easier for clients to move the cash.

So any sense you could give us on how much of the book is through the surrender charge period?

What could that kind of percentage look like by the end of the year?

And ultimately, how much of your wrap account flows was effectively funded by withdrawals from the VA business?

Just -- I would just say, we saw as a bit slowdown in our sales a bit like around 11% or so.

I think the industry is still running a bit more than that, almost double.

I would also say that, yes, there was a little bit of where things were out of surrender that people and advisers probably moved more to the wrap business right now based on the regulatory of what was still unclear with the DOL as we moved through the first quarter.

So we'll see how that unfolds, but that's still not a negative for us.

It goes into the wrap business versus into a new annuity.

So we're very comfortable with that, but Walter, I don't...

Brian -- Alex, I think, to your question, about 50% was in surrender.

And really while it's elevated, I wouldn't -- it's again -- it's within ranges from our actuarial standpoint.

So we're just observing, and I think we are in line with the industry on this.

Got it.

And then just a last cleanup question on AWM, guys, for you.

The 12b-1 fees, the $34 million this quarter, any way to break it down?

How much of that is coming out of the franchisee channel versus the employee channel?

And on the remaining piece, should we think about the mix being, obviously, the same as what we saw in the first quarter?

Yes, so I would say you're probably talking about 3/4 -- 2/3 to 3/4 coming out of the franchisee versus the employee.

From a margin perspective, in the first quarter, about 3/4, it just sort of worked out of the margin came out in the first quarter that hit the company, and there's about a 1/4 or 1/3 left, something like that, from a PTI margin impact that will come out in the second quarter, just based on the way things would build and the accruals, et cetera.

So we feel very comfortable in managing that.

All that was converted already.

So it started in February and moved through March.

And so -- and some things are billed at the beginning and end of the quarter.

So we think that is already done perspective and the rest will translate through the P&L.

So there will be a bit more -- about an equal revenue impact in the second quarter, but actually, a bit less from a margin perspective because we took most of that in the first quarter.

Our next question comes from John Nadel from Crédit Suisse.

I have a question about the acquired financial adviser firm.

Just wondering if you could give us some metrics.

I know you don't want to talk about terms of the transaction, but maybe, average productivity per adviser or average client assets or something along those lines, maybe a few metrics that would help us understand what its -- what its impact is going to be on the Advice & Wealth Management segment once you bring it in?

Okay.

So it was approximately 200 advisers, about $8 billion of assets.

I don't know whether we disclosed anything -- I would probably say the average productivity is in the 300 range or thereabouts.

And they really focus really on the financial institutional channel, which is banks, credit unions, et cetera.

It's something that we never really -- I mean, some of our advisers do that, but not as a concerted effort in a coordinated way.

And so we saw the opportunity that would -- some of our value proposition, some of our capabilities, some of our solutions that, that will help them ramp up.

That's what they saw as an opportunity that Ameriprise would be very complementary to help them scale further and make the investments necessary for that to be a very strong channel for us down the road.

So we look at it as another opportunity to branch out or to further expand.

It adds a nice firm that developed over the last 2 decades or so.

And so we think it will be a complementary acquisition for us.

Is it big enough, Jim, that -- it sounds like the margin there is maybe a little bit lighter.

I'm guessing at that though.

But is it big enough to actually move the needle on your overall margin?

No, no, it isn't.

And as you said, yes, it would be a little less since the way it's managed is more on the independent, but we think that that's something that we could add value to with what we're doing and why we're doing it.

And so over time, I think, it will add to our margins and will improve what it has there.

But actually, help them grow even more, which would even expand the revenue and the asset base.

So we think it will be nice over time, but it's not going to be in the near term, something that will move the needle in any way.

Got it.

And then, just 2 more quick ones.

One, about $10 million in DOL-related transition costs this quarter.

How do we think about that for the remainder of the year?

Okay.

It's Walter.

It will be decreasing.

Again, we see it decreasing slightly in the second quarter and then trailing off.

Again, it's dependent on as the situation evolves with the government and with the DOL, where it's going to go.

But certainly, a lot of -- we're winding down certain aspects and other aspects -- so we feel that we brought it to a logical point and then just going to wait and see.

And then lastly -- lastly, on the Auto and Home business.

I'm just curious, particularly, in light of the commentary about a new catastrophe reinsurance program.

I'm wondering if you could give us a sense or characterize maybe what you think is a normal level of catastrophe losses for the business either over a full year, something along those lines, whether in dollars or in points on the combined ratio?

Some way for us to get a sense for what you guys consider in your pricing formula to be a normal level of cats?

So obviously, John, it's going to tough for me to forecast something that's not forecastable.

But I don't...

No, I'm not asking (inaudible).

I'm asking what's in the model.

Let me answer the question the way I think is where you try to get too.

Listen, we thought in the first quarter the cat were going to be lower and obviously, when we spread our plan for that, it was the same level as last year, which was much -- those 2 years now elevated.

So we're seeing hopefully, that it will drop as it goes into the third quarter.

It was a timing issue.

The thing that we've done that we do control, is really the ability to mitigate it.

And that's what we've done with these 2 reinsurance, additional reinsurance arrangements, which will allow us to at least try and reduce the expense implications as it moves forward as it relates to progressive element, as relates to the accumulated aspects of this.

So we're feeling comfortable that we have an ability to mitigate it, but obviously, we can't forecast exactly where the levels are going to be.

The only other thing I would add to what Walter said at the very beginning, and again, you can look at -- in the industry, is our actually cats were running nicely below in the first quarter until the very end of March.

And you saw there was a number of storms that picked up around the U.S., particularly in the central states.

And so -- listen, so far, April has been a little quieter.

But you never know, knock wood, but it could have been some of that move from the normal period of the second quarter at the very end of the first.

But again, we don't know, but what we've done is put these other agreements in place that if it does come in heavier, we'll take some of the load off, and we think that was the appropriate thing to do.

And to your point, we'll get a better sense after we go through a few more quarters of what that may look like, but we've made adjustments in our business, some policy adjustments, some reinsurance adjustments, even where we are writing business or not writing business, and some of the curtailment that we made in some of the partners that we were working with that should reduce cat losses over time.

So very much, we have our eye on and we think that this could be an improving situation for us.

Yes.

I appreciate all that.

I don't think it's that big an area of focus.

I was just more curious, not in terms of forecasting the weather, but just what you think would be a more normal kind of the year.

That's all.

Listen, I wish I knew at this point.

But your question is very valid.

Having said that, we were a little -- it was running nicely consistent back to whole periods.

But listen, it reared its little head, so hopefully, it will be a little better as we go forward.

But thank you for the question.

John, I usually get that question from Jim.

So that's why I (inaudible)

I asked that question to Walter too.

Our next question comes from Humphrey Lee from Dowling & Partners.

Just looking at Asset Management's adjusted pretax operating margin.

So the 35% is definitely resilient, given you have 1 less fee date and given some of the outflow challenges.

But it's still kind of at the lower -- still at the lower end of your target.

So I guess, my question is, what will need to happen in order to -- for you to hit the upper end of your 35% to 39% target for the segment?

The key thing we control there is managing the expenses, obviously, and then we're doing -- and as we get higher revenue weighted inflows, that will improve and then certainly, the markets.

But this quarter, you're correct.

There was a lower fee day, certainly impacted the revenue.

And certainly, we had lower performance fees.

So as we look at it, it's a range.

And we believe with the markets where they are and the way we're managing the business and looking at the flows that we will stay in that range.

I can't really predict that we're going to be moving up or down the range because it is dependent on the markets, and it's dependent on, again, the elements of what -- the flows that are coming in, when they're coming in.

But we feel that we're in a good range and we are -- the 35% to 40% was, again, different circumstances, different situations, but the business is operating, I think, at a pretty effective level at this stage.

Okay.

And then, looking at the $1.1 billion of institutional redemptions from the sovereign wealth fund.

Can you maybe remind us what percentage of your institutional AUM right now is from sovereign wealth fund clients?

I believe, right now and it's somewhere in the $3 million to $4 billion range or something in that range.

Well, it's only the -- that one.

That one sovereign fund.

It's exactly -- it might be a little less than that right now.

But again, I think, listen, I think, the situation there is one that could change over time, as they're making adjustments in what they need.

Having said that, I think, it's something we feel very comfortable what we're managing for them and the performance of it, but those are decisions that they make periodically, as we know and I think other providers are having that same dialogue.

Okay.

And then, just on the broader terms for the institutional side, so adjusting for that $1.1 billion redemption, and the former parent stuff, it looks like third-party institutional net flows were a positive $800 million.

Is that a good representation of your current pipeline for the institutional business?

Yes.

So the third-party institutional as the pipeline still remains pretty good.

And as we said, there's always -- it's lumpy when you get the fundings, et cetera, but the pipeline still looks good.

And yes, it should be that.

It could be a bit more positive, depends on when things come in.

As I said, it would have been more positive in the first quarter without that negative redemption that we weren't expecting.

But having said that, yes, we should see some positives coming from third-party is what we're expecting.

Our next question comes from John Barnidge from Sandler O'Neill.

Just a couple of questions.

The expense ratio on Protection for Auto and Home was 20%.

Should we think of that as a run rate or a one-off level?

Okay.

It's Walter, again.

It's a bit high.

You should see that we're anticipating that will be in the mid to -- mid to 18% -- to maybe 18.7% or 18.8% range for the year.

Okay.

And then at what point do we start talking about the DOL rule uncertainty in some ways being more disruptive than the actual rule itself?

So listen, I think, there is the delay to June.

With that, they said they still want to move -- have a best interest level, but that the delay is to '18 now.

So I think there's the comment letters that went into the department, I think, as we know, there isn't a new head there yet.

Hopefully, that will be approved soon.

And so I would probably say we still are hoping that -- that goes through the type of review that the administration has asked for, and that, that would be done in a more comprehensive fashion.

And so I guess, we just have to stay tuned.

But we are preparing ourselves, and we'll continue to make adjustments where appropriate and necessary, but we'll wait to see.

And again, I think it's something that should be looked at.

I think you heard from the SEC yesterday that said, "Hey, this is something that we might want to take up as well." And I think having one consistent regulatory type of regime would be great.

And we go out to non qual and qual.

So we'll see.

We'll probably know more over the next number of weeks.

Our next question comes from Erik Bass from Autonomous Research.

Walter, I was hoping you could talk about the geography of your excess capital and how much resides in the life company versus the holding company or in Advice & Wealth and Asset Management at this point.

Okay.

The geography is basically, it is across the spectrum.

The majority of it is generated from the life company, but we generate very strong returns.

As you can see, it's -- we're over 500% -- we're about 500% our RBC and looking at our ratios, a regional portion -- I'd say about -- about 50% comes from the Life and then the balance comes from Asset Management and Advice & Wealth Management.

Got it.

That's helpful.

And on the life piece, the 500% RBC ratio is obviously still pretty strong.

It's come down a lot over the last year.

So should we think of that as -- that's where some of the sort of, I guess, decline in excess capital has come from?

Or are there other factors that have moved the RBC ratio around?

Well, there's other factors, but as we talked about, it was our intention to always keep the RBC ratio in the 500% range.

And obviously, there are other factors that take it up and we're constantly evaluating that.

So we feel comfortable with that range.

And of course, that is above the minimum standards from the rating agency.

Our next question comes from Tom Gallagher from Evercore ISI.

Walter, first, if I could just start on your comment on cash balances in terms of the margin that you should keep.

I think you mentioned, the 80% had been your prior guidance and it sounds like you're still sticking with that through the increase we've had so far.

What was the comment you made about going forward?

Was that from this point forward?

Or do you still expect to keep 80% for a while here before we get to the point where you're saying you're going to determine how much you need to pass back to clients based on competitive conditions?

Can you provide a little more clarity on that?

Sure.

So Tom, the 80% was basically a guideline as we talked about the first 100%.

And so far, there's been 75 basis points.

We've kept the majority of it.

I think, going forward, it is really going to be a situational element as we assess it.

We still believe that as we look at what's happening in the industry, a large portion of that should certainly be retained.

But we will, again, gauge it, what -- what competition and looking at the client elements of it.

So the 80% was strictly just to give you guideline on the first 100%.

And like I said, for the 75 basis points we have, we've kept the majority of it.

So going forward, I think, that we're just going to gauge it as we look at what's competitive.

Remember, the first 100 basis points is coming off of the bottom -- very bottom.

So it's very different than the past where you really had rates of 1% and 2% already.

So I think that's why the industry pretty much is keeping all of it, the banking institutions, et cetera, because you offer very low rates.

So I think, as you get into the second 100 basis points, is probably where the sharing will begin.

And if I -- just from your comments it sounds like you're still thinking to keep 50% or maybe a little more, but clearly not the 80%.

Is that a fair way to think about it?

I would probably say on the next 2 or something, we're probably closer to the very high keeping.

As you get more in between the 1% and the 2% that you range up your sharing as you go up.

So I think, again, for the next initial raise is it's still going to be probably keeping majority, and then, you start shifting it over time.

But again, I think we're all monitoring what's happening in general out there, but as I said, we're off a very, very low base is why it's a little different than in the past.

Got you.

And then just a question on the outsized flows in Advice & Wealth and the wrap accounts.

Is what we're seeing here really the shift more heavily into fee-based structures and away from commission-oriented sales?

I assume that we're seeing -- the DOL kind of knock-on effect is probably partly what's driving the outsized flows, but I just wanted to confirm if that's what you're thinking.

And then, a related question is, if that's what's happening, do you think -- are your -- we'll call it earnings contribution on those flows, a net positive over the lost revenues on commission type sales?

If you get my question, I'm just trying to understand where are we in that position.

So let me give you my -- our perspective.

So number one, I would say, is this.

There has been a continued shift to fee-based in the industry, whether DOL or not DOL.

I mean, as we look at our business, as you said, we're probably one of the highest fee-based already.

And that continuation continues to occur with advisers based on serving their clients in that fashion.

So I think, if anything, for some other parties, the DOL may have accelerated that, for others that they're making a firm commitment that that's the way they want to do business.

So in our case, yes, I think, it did contribute to some of the step-up in activity.

I think that as I would say on commissions, we're still up 4% on commissions year-over-year.

It wasn't as though we dropped in commissions and we only did the fee-based.

So I think, it's still maintaining a level of commission-based business.

I think what's unclear now is because the DOL didn't get firmed up, that people are still -- okay, is commission something that we want to continue to think about and how.

So I think, as that gets firmed up in some way, you might see, again, a settling.

It doesn't mean that there will be a shift back from fee-based.

I think that shift was occurring anyway.

But I think at the same time, commission-based could maintain as a reasonable part of peoples' activities because it makes sense for a number of clients.

It's even more efficient for them.

And there are certain products that are sold that way that it is easier to be sold that way.

So for those reasons, that's the way I would think about it.

I don't know if I answered all your question, or did I miss a piece of it?

No I think -- so the fact of the matter is, you're still up 4% year-over-year on commission revenue.

So this would be -- this would be additive when I think about growth, the outsized flows in wrap accounts should be additive, not just replacing lost commission revenues.

Yes, I think, as I said, if it was where the DOL was firmly moving there, you'd probably see even -- that continued shift more dramatic probably.

Having said that, because it's not, or because it's unclear of what that is, then you'll still get a level of both as you go forward.

The difference between commission and wrap fee over time, as you get the fee over time versus you get more of it upfront.

So that impacts your time of period, not necessarily economically, it's worse off or better off.

I think it's more of time of period.

Got you.

And then just one final one.

The $60 million-or-so variable annuity net income, negative adjustment, that is market impact from guaranteed benefits?

Walter, can you explain what that -- what that was exactly?

I guess, it was $60.9 million negative.

That's from market -- specifically from market.

And the hedges?

That's the market.

And the impact on the hedges.

Okay.

So that was the difference between the hedge performance relative to the mark in the liability.

Is that the way to think about it?

And the -- statutory liability.

That's right.

And our last question comes from Suneet Kamath from Citi.

Just on Advice & Wealth Management.

I saw that the PTI was down sequentially despite the strong markets and the strong flows, et cetera.

So I just wanted to get a sense of -- is that 12b-1 impact, is that being fully offset in the quarter in terms of lower expenses?

Or is there a little bit of a mismatch there in terms of timing?

Well, it's not a perfect match.

So remember, the 12b-1 would impact on almost an equal margin basis based on our sharing versus the total that we pass on to the advisers.

So we got impacted in the quarter roughly about $9 million from a contribution margin.

And it was a little bit higher versus the total of it, as I said, to the total of the revenue and the 12b-1 just based on how the accruals and the billings and things went.

What I would say then is we were able to, based on some of the expense reductions we did going through the fourth quarter, and some of the fee adjustments we made to offset that and maintain our margin levels, et cetera, but I can't tell you whether it was a perfect timing [ one to one ] there.

But we feel very comfortable and the other 30 to come out will be about a $3 million margin hit to us in the second quarter, but again, based on some of the other adjustments, we should offset that.

So I think it's pretty much margin neutral from a 12b-1 perspective.

Remember, those are other reengineering and other activities that we've done separate and apart from that to try to offset it.

When you say margin neutral, I mean, is it -- should we also think about that as being PTI neutral because that was kind of the question that we're down sequentially in PTI, not the margin?

Yes, I would say sequentially, again, your fourth quarter was a little stronger.

You also had the 12b-1s in there.

So I think there is a number of different things.

You've got expenses and compensation up higher in the first quarter because of all your payroll stuff.

Even our accruals that you make in the first quarter.

So it's not an apples-to-apples quarter sequentially.

Walter probably can give you more information there, but we had a strong quarter, but you also have increase because the compensation and other things that all hit in the first quarter, and so you can't look at that sequentially.

I think that pattern on the sequential is actually consistent in the way to do it.

And you do get a different situation with the first quarter on VAs and a number of elements with that.

So I think, it is -- from our standpoint, it is tracking and where we -- sequentially and certainly, where we anticipated we would be, Suneet.

Yes, I would say, Suneet, we feel very good about how the quarter came out, the margins in the quarter, what that does on a consistent trend line for what we're looking for.

So we feel quite good about it.

I know it's hard to because you've got a lot of moving parts, but we feel good about what we did book there.

No, that's fair.

Just a quick follow-up on the performance fees in Asset Management.

I saw they were 0 in the quarter versus, I think, $6 million in the year ago.

Is that a timing -- timing element there or is your expectation that 2017 will be lighter than 2016 in terms of overall performance fees?

It's tough to estimate, Suneet, but it's certainly -- and really at this stage, it's -- we have -- it's something that is tough to estimate from that standpoint because you have property funds, different funds coming in and all that.

So it is -- we're just looking at quarter-to-quarter.

Okay.

And maybe just one last one.

Just on the 98 new advisers that you added in the quarter.

I mean, that seems to be a little bit higher than where you've been running in recent quarters.

So just want to get a sense of, is that coming from wire houses, independents?

Just any color on that would be helpful.

Yes, so we've actually brought in a very good class of advisers.

As I said, there's strong productivity.

We continue to attract them from wire houses, but we're also seeing some pickup from independents as well.

But I would probably say more so on the wire house front at this point in time.

And are those guys going into the employee channel?

It's been a mix, but the wire house, yes, a bit more into the employee from there and the franchisee, we attract a bit more from the independent space there, but there's a few that go from wire house to the franchisee as well.

But what I would say, the overall was a very strong quarter for us in that regard.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

And you may now disconnect.