阿默普萊斯金融 (AMP) 2018 Q1 法說會逐字稿

Welcome to the first quarter 2018 earnings call.

My name is Sylvia, 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.

Alicia, you may begin.

Thank you, operator, and good morning.

Welcome to Ameriprise Financial's first quarter earnings call.

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

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

Turning to our earnings presentation materials that are available on our website, on Slide 2, 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 operation.

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

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

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

A sample list of factors and risks that could cause actual results to be materially different from forward-looking statements can be found in our first quarter 2018 earnings release, our 2017 annual report to shareholders and our 2017 10-K report.

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

On Slide 3, you see our GAAP financial results at the top of the page for the first quarter.

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

I would like to point out that effective January 1, 2018, the company changed the naming convention for its non-GAAP financial measures from operating to adjusted operating, to more clearly differentiate between GAAP and non-GAAP financial measures.

The definition of these measures remains unchanged.

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

Additionally, in the first quarter, Ameriprise adopted a new accounting standard, Revenue from Contracts with Customers on a retrospective basis.

The adoption resulted in changes to certain adviser revenues that are now recognized on a gross rather than a net basis.

All information discussed today reflects this restatement.

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

Good morning.

Thanks for joining us for our first quarter earnings call.

I'll provide my perspective on the business and then Walter will follow with our detailed financials.

Let's begin.

I'm pleased to share that Ameriprise reported strong first quarter results.

We're generating good earnings growth in both Advice & Wealth Management and Asset Management.

So far in 2018, the overall operating environment has remained positive but fluid.

After a strong January, market volatility increased the markets ended down to the quarter.

In March, the fed increased short-term rates and longer-term rates have begun to rise, though they remain at low levels.

And the regulatory environment is clearer, so we're encouraged by that.

In the first quarter, we had good growth in client assets and activity.

In terms of financials, assets under management administration were $887 billion, up 9%.

And on an adjusted operating basis, net revenues grew nicely, excluding the impact of 12b-1 were up 9%.

We delivered significant growth in earnings up 30%.

Earnings per diluted share grew a meaningful 37%, and our return on equity is consistently among the best in the industry at 29.3%.

Maintaining a strong financial foundation is core to how we operate and gives us flexibility to take advantage of opportunities.

We returned 91% of adjusted earnings in the first quarter, consistent with our return over the last several years.

And yesterday, we announced another increase in our regular quarterly dividend up 8% to $0.90 per share.

This continues our record for consistent dividend growth over the years and marks our 13th increase over the last 13 years, and since 2012, we doubled our dividend.

Let's move to our business results.

In Advice & Wealth Management, our advice value proposition and premium client experience are important differentiators.

We work diligently to earn excellent client satisfaction, probably Ameriprise is also recognized in the investment industry for our trust, customer service, consumer forgiveness and likelihood to recommend.

And in the first quarter, Ameriprise was ranked as a Hearts & Wallets Top Performer in 4 important areas: understands me and shares my values; explains things in understandable terms, has defined the repeatable processes for producing results; and has knowledgeable, timely and tactical investment ideas.

This terrific recognition builds on our existing credentials and reinforces that what we do for our clients and how we do it continues to differentiate Ameriprise in the industry.

In an improved operating environment, Ameriprise client assets grew 12% from a year ago, as clients put more money to work.

Activity was strong and we had an excellent quarter for net inflows and to fee-based investment advisory accounts of $5.7 billion, an increase of 44% over last year.

Our investment advisory platform is one of the largest in the industry at more than $250 billion, growing 18% from a year ago.

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

We'll continue to high awareness levels.

We're spending significant time on delivering our highly effective advice value proposition more consistently.

Many advisers are taking advantage of our extensive leadership coaching programs on advice and generating client referrals.

We're serving more clients with comprehensive advice and financial planning as well as a more million dollar-plus clients.

In addition, we're investing our digital capability, so that clients can work either more collaboratively with their advisers.

We'll also continue to invest in our servicing capabilities as well as data and analytics to better understand client preferences and help advisers deepen relationships.

And our field team is strong and successful.

Ameriprise advisor production was up 16%, excluding net 12b-1 fee change.

Our advisers have consistently increased productivity at a higher rate than most of our competitors and we had continued strong productivity growth in the first quarter.

In addition, another 79 experienced advisers joined Ameriprise in the first quarter from wirehouses, regionals and independent firms and we have the largest number of Ameriprise advisors ever named to several top adviser industry rankings.

Our insurance and annuities solutions are an important part of the largest solution set that we offer.

Sales at variable annuities have picked up by about 20% from a year ago and variable annuity account balances grew 3% driven by equity market gains.

In insurance, we're seeing continued good sales in VUL and UL, which were driven by IUL lump-sum sales in the quarter.

For both our insurance and annuity businesses, we're simplifying and streamlining of sales processes to help deepen adviser and client engagement and meet clients’ needs for retirement income and protection.

In all to one home, we had underlying improvement in profitability and the changes we've implemented are having a positive impact.

We've improved claims management pricing and underwriting and the changes are working their way through the book.

Unfortunately, like the industry, cat losses dove down from prior quarters were a bit above our expectations given the storms in the Northeast to Midwest.

In Asset Management, we continue to deliver good financial results and competitive investment performance for our investors.

Our first quarter financials were strong, pretax adjusted operating and earnings increased 30% from a year ago, and assets under management were up 4% or $485 billion.

Regarding investment performance, it remains very good.

At the end of the quarter, about 70% of our funds, equities, fixed income and asset allocation were above Lipper medians or benchmarks for 1-, 3- and 5-year time frames.

And results were particularly strong in the U.S. across domestic and international equities as well as taxable and tax-exempt fixed income.

Clients are benefiting from our efforts to establish a global investment operation, which is resulting in increased collaboration and insight sharing across a range of investment portfolios.

Net outflows were elevated in the quarter, the main driver was an institutional, where we're impacted by client's tactical asset allocation decisions, a large sovereign wealth client, who redeemed for liquidity purposes and delayed fundings given the market environment.

It was not performance related.

We expect improved sales in the second quarter, as more of our wins are expected to be funded.

In global retail, the increase in outflows were driven by higher redemptions in EMEA given volatility.

We do anticipate its bounce back in the second quarter, given expected platform fundings.

In U.S. retail, we remain in outflows as we're still experiencing pressure from redemptions and equities like the industry, though sales at major intermediary clients have improved from last year.

In each quarter, we expect the level of outflows from our closed block of low fee former parent assets and the flow rate in the quarter was in line with our expectations and improved a bit from a year ago.

With regard to what we're doing about our flow situation, in institutional, we're working to have more strategies approved with consultants and deepen relationships with current clients where we continue to further expand internationally.

In regard to retail, in February, we added a new head of North America, which aligns our original leadership similarly to EMEA and Asia Pacific.

We're working hard to get more strategies on platforms, enhancing our segmentation strategies and ensuring our wholesalers are engaging their clients about their particular needs.

In EMEA, we're investing more resources to expand the distribution reach and key markets in Europe to complement our U.K. strength.

We're also investing to strengthen our Columbia Threadneedle brand awareness across our regions, including in key markets in Europe as well as in the U.S, where we're seeing a good lift from our television ads and digital strategy.

In the quarter, we completed a significant portion of the planned integration of our front, middle and back-office operation platforms that will increase our flexibility and ability to offer customized solutions, and we continue to prepare for Brexit and that work is going well.

In Asset Management, we have more work to do and that's where we're focused.

Overall, Ameriprise is in a strong position.

We have a great foundation upon which we can build.

Very few financial services companies are generating this level of consistent performance returning to shareholders like Ameriprise's, while continuing to deliver good earnings.

We have an excellent financial foundation and balance sheet that we managed very well.

Our diversified business provides important flexibility and our wealth management business is one of the best in the industry and has significant growth potential and is responsible for driving approximately 75% of the company's overall revenue.

We're confident on the investments we're making as we focus on serving more clients and growing the business.

And therefore, we believe Ameriprise is undervalued and represents a compelling opportunity both today and for the future.

Now Walter will review our financials and I'll be back at the end for questions.

Thank you, Jim.

Ameriprise delivered strong results in the quarter.

We continue to make significant progress and delivering our long-term shareholder objectives, with strong growth in revenue, EPS and return on equity.

Let me take you through the details beginning on Slide 6. Ameriprise reported adjusted operating EPS of $3.70, fueled by our strong growth businesses.

AWM and Asset Management earnings were up over 25% in the quarter.

Overall, revenue growth was strong, up 9% in the quarter.

Strong growth in client assets, particularly in wrap accounts and market appreciation drove substantial 16% top line growth in AWM.

Asset Management revenue was up 7% from markets and a vendor credit relating to completion of our front, middle and back-office integration.

Annuities and Protection stable revenue was in line with expectations.

Expenses continued to be well managed across the firm with G&A up only 1%.

I'll go into the details on expenses in each segment of the subsequent pages.

We returned more than $500 million to shareholders through buyback and dividends.

Given the lower share price in February and March, we increased the amount of share repurchase to the highest level over the past 5 quarters.

Let's turn to AWM on Slide 7. Advice & Wealth Management delivered another outstanding quarter across all dimensions.

Revenue was up 16%, driven by strong wrap net inflows and improved transactional activity levels as well as higher equity markets and interest rates.

Expense growth was primarily driven by higher distribution related expenses, G&A increased 6%, which included higher volume related impacts due to strong growth, increased investment for business growth and the addition of IPI.

AWM had substantial 27% earnings growth and 230 basis points of margin expansion in the quarter.

The adoption in the new accounting standard impacted margins in both periods by approximately 40 basis points.

I'd like to take a moment to review the quarterly drivers of earnings.

First, there are only 90 fee days in the first quarter, 91 in Q2 and 92 in Q3 and Q4.

Given the growth we've seen over the past years in our wrap business, the impact of each fee day has increased to approximately $14 million of revenue and $6 million of PTI.

Second, there was one fewer E&O day which negatively impacts revenue by $3 million.

Lastly, we have some seasonality in our expenses that we have discussed in the past.

As it relates to the first quarter, we had higher payroll tax expense of $7 million.

Let's turn to Asset Management on page 8. Asset Management financial performance remained very strong.

Revenues were up 7% from strong market appreciation, the acquisition of Lionstone as well as the vendor credit I mentioned earlier.

In addition, the fee rate was consistent with our expectations in the 52 to 53 basis points range.

Expenses continue to be prudently managed.

Excluding the acquisition of Lionstone, G&A increased 3% and included elevated research and regulatory cost in the U.K. and Europe.

We delivered a particularly strong margin of 40% in the quarter.

We continue to expect the margin to be in the 35% to 39% range in the near term.

Let's turn to annuities on Slide 9. Variable annuities were flat at $116 million.

Equity market appreciation increased account that was year-over-year, but earnings were flat due to lower mean reversion done a year ago.

Variable annuities continued to be in outflows.

Though at a slower pace than last year in both our internally distributed block and the closed block that was distributed by third parties.

We've also seen a 20% increase in sales of our variable annuity product.

Fixed annuities pretax operating earnings declined $7 million, as lapses in interest rates continued to impact results as expected.

Turning to protection on Slide 10.

Life and Health pretax operating earnings declined 4% from the pressure of continued low interest rates.

Total claims are in line with expectations, though we did see a slight uptick in mortality in the first quarter that was offset by an improvement in the disability income.

We had good sales momentum as we started the year, particularly for our index universal life product, which is up 9%.

In the Auto and Home business, pretax operating results in the quarter were impacted by elevated net cat losses of $14 million that were concentrated in the Northeast.

We continue to reduce home exposure in Colorado and Texas from the cancellation of one of our affinity partnerships.

This has resulted in our home policies in force declining 6% year-over-year and 3% within the quarter.

Let's turn to Slide 11.

We're continuing to grow our Advice & Wealth Management and Asset Management businesses at a faster pace than insurance and annuities.

Advice & Wealth Management made up nearly 45% of the earnings in the quarter.

Combined with Asset Management, the fee-based businesses made up 72% of our earnings for the quarter.

This mix shift supports our strong free cash flow generation.

Next, I'd like to spend a few minutes on our risk management framework and influences that have been drawn about the reserve adequacy of our long-term care businesses.

As you're aware, we have developed sophisticated ERM program that utilize analysis and stress testing to inform our risk appetite and understand our capital return capability across a range of potential scenarios.

And it is this framework that supports the recommendation made quarterly to board regarding the level of our share repurchase as well as the amount of our annual dividend increases.

Long-term care obviously is part of our ERM framework and we remain very comfortable with our exposure.

There are 3 primary levers to manage the long-term care business: first, premium rate increases.

We have taken a balance, but active approach to steadily increase rates since early 2005.

The average approved accumulative rate increase is 138% on our nursing home-only indemnity business and 63% on our comprehensive reimbursement business.

This has mitigated some of the need to build reserves.

Second, investment income.

Here we have prudently managed our investment portfolio.

Third, our reserve processes, which I will go into in a bit more detail.

We have a rigorous process of diligently reviewing our long-term care reserves on an annual basis.

Our reserve levels reflect the policy features and risk characteristics of our book of business as well as ever-increasing credible claims data, so policies with richer benefits have higher reserves.

We have complete reviews with our orders and no concerns have been raised about our reserve adequacy.

Also we periodically engage an independent actuarial consulting firm to validate our conclusions.

We have been setting our reserves using over 20 years of actuarial data.

In the third quarter of each year, we add another year of experience and incorporate any deviation from our assumptions into the reserve calculation.

The annual adjustments have been very small percentage changes of the total reserve.

Material changes and reserves are not consistent with our approach or the process that I just described.

We have not experienced, nor do we expect to experience sizeable reserve increases on this business.

Let me be very clear.

I can confidently say that long-term care will not impact our ability to return capital to shareholders consistently.

Turning to Slide 13.

Ameriprise balance sheet quality, cash flow generation and capital return capability remain very strong.

Ameriprise's capital position remained strong with $1.4 billion of excess capital and an RBC ratio of over 500%.

In the quarter, we returned over $500 million of capital to shareholders, which was over 90% of our operating earnings.

Also, we announced an increase in our quarterly dividend of 8% to $0.90 per diluted share, reflecting our ongoing commitment to capital return and confidence in our future cash flow capacity.

With that, we'll take your questions.

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

First question was on buyback.

Walter, you mentioned that you stepped it up from the last few quarter run rate.

Is this something that you think can be sustained going forward?

Or did you view this as more of an opportunistic increase in the quarter?

It can be sustained.

Again, we will evaluate each quarter, look at it opportunistically and certainly we have the capacity on that basis to continue to buyback at the levels that you saw.

Again, we will evaluate it each quarter.

Okay.

And then one on G&A expenses and Advice & Wealth Management that the 6% increase.

How much of that was driven by IPI?

And I guess, what would be your general expectation for G&A expense growth going forward?

IPI is a small part of it.

It's probably on the expense side because it's new and added -- it's about $4 million, and going forward, I think as we talked about, it's in the 3% and 5% range.

You do know we're investing for growth but certainly we feel that is a reasonable range that you should anticipate.

Our next question comes from John Nadel from UBS.

First of question on the SEC's announcement recently regarding the fiduciary standards.

Jim, any sort of early thoughts there?

Your reaction or the firm's reaction to what's happening now?

Yes.

So first of all, we're going through the really -- the details of this over 1000 pages.

On the surface, it looks very good in a sense that it is a bit more principle-based, it's a more appropriate against what would be supportable regulation that's out there in case that's out there.

That is appropriate for us to and the industry to conduct business, but still serving people in their best interest which we fully support.

So we're very encouraged by it.

There's always to get a -- meet the details of it and figure out how that looks in reality, but we think it is appropriate for the SEC to take the broader role and have it consistent across all our activities.

So we're very favorable to that and as you also saw there was a major court ruling there.

So unless the DOL appeals it then that rule will be out.

Yes, understood.

And then on the wrap flows, Jim, I mean, exceptional results.

I guess, the question sort of using Ryan's term, can we talk about sustainability there?

What you think is really driving that increase in wrap flows?

I mean, I know productivity has improved.

Experienced financial adviser recruiting all these things, but at the core of it, do you feel like this level of flows is really a sustainable level?

Yes, I would say, we feel very good about the productivity of the system and the advisers.

I think that they're focused, they're back to work, they're not worried about the next regulatory overhang that really has convert.

Remember, last year we had to convert huge amount of their business, eliminate 12b-1s.

We had to put them on the best interest stand consistent with the DOL.

So there was a lot of work and a lot of activity and training and now the advisers are much more focused.

Now what we're doing throughout this point is, we're investing real strongly back into the core of the business.

Our advice value proposition, our digital capabilities, we're enhancing our ability for our advisers to really seek out and serve more clients and clients that have more wealth, and so we're feeling really good about that.

Client inflows are really good.

Our productivity of the adviser base is strong and growing.

So that's really what we're continuing to be focused on.

Our transaction activity also picked up in the quarter.

So it wasn't just flows into wrap, we saw a good flow situation coming in from clients and even with the volatility, people have been very disciplined about how they're working and engaging their clients.

And then if I can sneak one more in just going back to Slide 12, I really appreciate the color on the long-term care business.

I think that's clearly been topical of late.

The last bullet on the slide talks about significant protections in place to effectively mitigate counterparty risk.

I guess, specific to that, in the event that your counterparty suffered significant downgrade of its credit or claims paying ability, is there protection in placed against the incremental capital that RiverSource life would potentially need to hold against a lower-rated reinsurance recoverable?

Basically, the issue is, it would have to be a tremendous movement in it, and we feel with the protections that we have that we keep on talking about that the impact to us would be minimal.

S&P?

Yes.

Because we're dealing with, again, what we feel the protections are and then what the net exposure would then be.

And listen, it's a complex process but as we indicated, we feel very comfortable for those protections and the net amount of that exposure we think will be certainly very manageable.

Our next question comes from Kenneth Lee from RBC Capital Markets.

Just had one on the Asset Management side.

In terms of the institutional outflows, wondering if you could give us a sense of the recent trend of the unfunded institutional mandate?

And where they stand right now?

Yes, so we actually, again, you can't necessarily, with certainty always, say exactly when, but we do have a nice number of wins that are waiting to be funded.

We do believe that some of the investors held off in the first quarter and some of the disciplines that we had that were approved, and so we feel the institutional business should be a much more positive than what we've seen in the first quarter, with a bounce back and some of those wins in fundings.

We do have a good number of products that have been approved on a consultant side and more that are in the hopper, and we're having good discussions with our clients, including on some of the multi-asset solutions that we have.

So we're hoping that, that will continue to trend in a more positive direction as we move through the year.

Got you.

And just one more follow-up.

Anyway that you could breakout by asset class, just the total outflow, whether there was any particular concentration in specific asset classes?

Yes.

We'll look to see if we can do that for you.

Our next question comes from Adam Klauber from William Blair.

Your revenue growth, the change in revenue growth is pretty impressive.

In '16, it was roughly negative 2%, '17 moved up to 4%, this quarter jumped up to 8% or 9%.

Is a revenue growth level in the high single digit, is that sustainable?

Or is this quarter just better than we should expect going forward?

No.

Again, if you look at the business drivers that are there, it was certainly with the markets and with our growth.

I can't say there's going at the same levels, but certainly it was also the changing interest profile.

Certainly, it will be in -- certainly it be higher than we've experienced at the ones you've talked about and we're quite confident of that.

We always have been in the situation from that standpoint with the insurance which grows and annuities which grow at a slow pace.

But the Asset Management and the Advice & Wealth Management businesses are in a good trajectories.

So I can't give you -- it's going to be at that 9% level, but certainly it's going to be higher than we've seen.

Okay.

And then the last year, so you've done like 2 more bolt-on acquisition/deals.

How's the pipeline?

And could we see 1 or 2 more deals in the next 12, 18 months?

Yes, I think, listen, I think the activity in the industry has picked up a bit and we very much have the capability and the ability to continue to bolt-on.

We've seen a nice fit with Lionstone that we acquired, and we think there are some additional capabilities that we would like to add on to our Asset Management capabilities.

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

Just a housekeeping question.

In Asset Management, when we have flows on an ex-former parent company basis, been this bad?

So you meaning other than the ex-parent?

Yes.

Right.

So I would say there -- that probably, if we go back, it really depends on the cycle and unfortunately, in the first quarter, we were sort of hit with fundings being held and at the same time, people relocate out of some of the disciplines like high-yield and other things like that because of the market pullback and change in the fixed income area.

Equity is the same way with the volatility that picked up.

So Europe moved into nice inflows last year, and again, the first quarter was a little bit of holding and so you got the redemptions coming without necessarily the sales.

But the sales right now was starting to pick back up again and the redemptions are calming again.

So we did face a level of volatility in the first quarter and you also in the first quarter, always have people that review their portfolios and make some reallocations which we did have.

So we think that we'll bounce back.

We didn't expect it to be that high.

Having said that, I do believe we are making good focus and good progress in certain areas, but it's not something we're happy about.

But we're diligently trying to work to improve that situation.

And then related to the Protection segment, the pricing environment for Auto and Home is improved, underwriting margins in Protection are trending in the right direction.

Your ex-cat combined ratio is averaged a couple points below 100 for the last 7 quarter, how much further improvement do you think is needed before the company would consider exploring strategic alternatives for that business?

Because there's obviously a clear push towards more Asset Management like businesses at the company.

So again, I think we're well on our way to showing good progress in the business.

I think the unfortunate point over the last number of quarters have been the level of cat activity and we've actually did some good work to minimize that.

We've actually adjusted some of our affinity relationship so that we can reduce the extra exposure there.

We would like that to continue to work through the book, because at the end of the day, we built this book over a long period of time, it is one of the best we think affinity, direct players out there, and we really would like to get it back in a good situation for our partners and ones that can sustain and start to excite the growth there and then we'll continue -- we'll evaluate it.

I'm very clear on that, having said that, I think we just want to continue to make some good progress there that shows through, through the earnings.

Our following question comes from Erik Bass from Autonomous.

Can you provide some additional detail on what drove the increase in your RBC ratio this quarter?

And guess, what were the discretionary reserves you were least related to?

And what's change near thinking about the need for them?

Well, actually since last year, I think we discussed that we had discretionary reserves as we looked at the -- both the tax situation and others, and those reserves clearly were discretionary and they have been reversed, and obviously, we also declared the dividend.

So we feel comfortable at the current NAIC levels that the RBC ratios are in the level that we think are appropriate.

Okay.

And then on the last call, you alluded to potential interest in getting back into the banking business.

Can you just provide any update there on your thinking and discuss what you see, I guess is the potential incremental benefits to your interest margin from owning a bank?

And also, I guess with having a bank change, your capital requirements or have any material impact on excess capital?

Okay.

Yes, we are certainly continuing with our interest and as we evaluate that and we feel that it is -- will be a beneficial situation to expanding the scope of our product capabilities and will add a reasonable amount of margin, as it does with certainly some of our peers, and as it relates with capital, we feel based on initial valuation, it should have a minimal impact on the consolidated excess capital position other than the capital that goes into the institution.

Got it.

So it'd be both an expansion of kind of product capabilities as well as an increase in the interest margin, as you would be able to keep more of the economics, I guess, particularly as rates, if they continue to move higher?

Absolutely.

It's fixed.

Our following question comes from Suneet Kamath from Citi.

I wanted to start with long-term care.

Just given your confidence in the level of reserves and frankly the lack of reserve bills on an absolute basis and relative to peers, is there any hope that maybe at some point you could sell this business or exited?

Are there any sort of structural limitations in terms of your ability to do it?

Or is it just boiled down to price?

I think there is no structural limitations for us to do that, obviously, interest rates play an important part of it.

But also, yes, so the answer if an opportunity came up, we certainly explored them in economic sense.

We understand the book and like I said, this book is something that we feel like a lot of our products has been managed in a very effective way.

So that's why we feel as confident.

So yes, if the opportunity came up for the right situation and interest rates certainly would help going up, we would certainly listen.

And we've been reading a little bit about interest from third parties in these types of blocks, is there any -- is it sort of crickets out there in terms of conversations?

Or are you actually getting some feedback in terms of interest without naming specific (inaudible).

I think we've seen more interest slightly and certainly in that block in the -- so yes, I can say we've seen more interest.

Suneet, one of the things I would say is, as there is a lot of activity out there for books that may not have been of the quality of ours, so I think what has to occur a little more is, people understanding really the differentiation.

And I think you'll find whether it's in our protection or in our annuities books.

These are asset accumulation, good strong clientele built over decades, very good returns, very low risk, very good hedging, very good -- the way we reserve et cetera.

So I actually believe this is a very quality -- high-quality portfolio and as people start to evaluate that, there'll be a differentiation.

And I know you Walter, you mentioned interest rate need to be higher, is there a rough sense of how much higher they need to go before such a transaction makes sense?

It's interesting question.

Certainly if you look at -- if you get into the 5% to 6% range or 4.5% to 5.5% range, certainly, it gets to the point where you can make an intelligent evaluation about.

And that's sound 10-year or is that something longer?

It's more in a 10-year, yes.

Okay, and then just one last one for Jim.

In the past you'd given us sort of periodic updates on the margin in the employee channel versus the franchisee channel within A&WM, can you give us a sense of where those 2 channels are today?

Yes, so we continue to create a margin and build it in the employee channel, it's up in the mid-to upper teens, I think, roughly around this point.

And it's tracking very good.

It's also off a larger base, meaning that the size has grown.

So we feel very good about that and the continued progress that it makes, and we'll continue to build utilization in that system with the recruits that we brought on board.

So it's tracking very well.

Suneet, it's Walter, that's something to make sure, I'm talking about not 10-year treasury, I'm talking about 10-year corporates, okay.

10-year corporates, okay.

Our next question comes from Alex Blostein from Goldman Sachs.

Question for you guys is just a follow-up around the bank strategy.

I guess, maybe just a little more color on a, what kind of ROE threshold you guys would need to see in the business when you're considering to kind of pull the trigger or not?

And I guess, was that -- what you guys have to acquire?

Or is that something you guys can just build internally and there does start a new bank charter?

Yes, so as you recollect, we had a bank charter before.

We still have a trust -- a bank trust charter, and so it's really building out our capabilities, getting the approval in the raw licenses in place et cetera.

So there's a level of work in activity that you have to do appropriately in that regard.

But it would really be around wealth management product.

We're not looking to do commercial lending like some other institutions have et cetera, et cetera.

We really want this to be more around supporting our client's activities and their individual asset loans et cetera, et cetera.

So we have the capability in the past to have done that.

We have the knowledge and so we need to put that back in place and go through the appropriate approval and set up the various systems and capabilities for it.

Yes, as it relates to the returns, certainly the book would have to build, but again, it's internally and with the product we're building in, but certainly we'd get into -- expect to get into the teams.

Yes, any sort of timeline that we should be thinking about, as you guys are considering this?

Probably as we look out to next year.

Yes.

Got you.

And then my second question just around the broker trends under cash.

So looks like the implied betas, deposit betas on the business remained quite low, something I think in the 30-ish percent.

I guess, as you progress through the rate cycle, and again, this is not just you guys are seen at across the industry, but as you progress through the rate cycle, what do you guys see these deposit beta is going?

Again, feels like they held up much better than expected and then ultimately, I guess, where they [peak] out?

Again, it's dependent on the competitive situation as we go, you're right.

Certainly the level before the increases that have taken place have been at a higher level because it's competitive and certainly it's been evaluated.

And actually a lot of that -- even though one in December has not worked this way totally through the quarter.

So the issue is, we see it, at some point, it will start being shared, but again it's a highly competitive in situation than we've seen in the last 2 that majority of it has been retained.

So it's tough to really estimate, but it's certainly at some point when you get to much higher levels, I assume it will stop being distributed in a more -- basically more to higher percentage clients than it is today.

Got you.

But where you stand today?

You're not seeing the material change versus what we're seeing over the last kind of 3 to 4 months?

And we scan this quite thoroughly.

No, we are certainly walk step of our competitors and certainly look at it and we feel it's a fair rate that we're offering.

Our next question comes from Tom Gallagher from Evercore.

Few questions on the long-term care, Walter.

The -- in terms of the reinsurance that you have in place, do you have protections over and above the assets that are currently in the reinsurance trust?

I guess, what I'm getting at is, if there was a short fall of assets in the trust and your reinsurance partner suffered for their financial difficulty, do you have extra protections to fill that asset need?

Okay.

The issue is, let me just get straight to it.

Our protections have geared towards what they estimate the reserves that are necessary for it, and we certainly work with them and understand it because we have been in partnership with it, and they certainly -- we feel -- we follow a protocol, they follow a protocol that those reserves are adequate.

I'm not going to speculate, if it's not but the -- it is something we are constantly monitoring and basically reviewing and certainly reviewing the strength of [glick] in the firms that support it.

So I feel comfortable at this stage that certainly we are well protected.

Got it.

And I guess, another issue that I've heard out there that, that's a concern related to that.

I just wanted to see if you could shed a little light on it, is that I think your counter party is viewed as using more aggressive reserving assumptions than everyone else in the market and from the disclosure we've been able to see, it looks like you guys are holding about the same amount of reserves for that business that's been reinsured.

To that company at around $2 billion.

Is that -- am I right on that or is there a difference between the reserves you're carrying for that book versus what your reinsurance partner is, if you're able to comment on that?

Well, I can comment on it.

We do our own calculations our reserves and certainly feel comfortable, but we're also aware what they are doing and currently, in discussions we are not concerned.

Okay.

And then my final question on this topic is your 10-K indicated that your analysis of long-term care reflects 2 -- 1 or 2 additional rate increase rounds over a 4-year period.

I just want to be clear, I understand that is that what's embedded in your GAAP and statutory reserves?

Or 1 or 2 additional rounds of rate increases over 4 years, or is that something different?

I just want to be clear on...

But just base on evaluation and that is what we felt is appropriate and based on what we feel that we would be able to garner.

And Walter, that's for both GAAP and stat?

No, that was for GAAP.

That's just GAAP, okay, all right.

Our next question comes from Doug Mewhirter from SunTrust.

First question on the MiFID.

I know you've been working on the -- especially on the Threadneedle side, but also maybe also in your North American business, if you sort of zeroed in on what kind of expense impact that might have for the balance of the year?

Well, okay.

On the research fees relating to MiFID, as we indicate, it's around $2.5 million that we have in the quarter, so you can go out.

They were constantly looking at valuating but that is something that we experienced that basically we had in the first quarter.

We are doing some development, but again, that's in our development plan as relates to meetings and other requirements as we go forward.

But that should be, I would say $1 million or $2 million in that range as it relates to MiFID.

Okay.

And my second and final question, the -- with the long and -- middle and the longer to the interest rate curve finally inching up a little bit, have you seen increased interest in your annuity products.

I know it looks like you had an increase in sales, I didn't know if that was just a better marketing effort?

Or if there is -- or if it was more the -- more comfort with the regulatory environment?

Or if there is some sort of they're more attractive because of higher interest rates?

And do you think there is a level where you would actually hit an inflection point where you could actually turn the negative variable annuity flows into positive flows?

So we have seen in last 2 quarters a pickup in annuity sales, and again, I would probably say it's a combination of factors, I can't point to one; it could be where people are more comfortable now that they understand what is appropriate from a regulatory or best interest et cetera, as we said.

We haven't really changed, we've always had very comprehensive compliance practices.

Nothing in that regard has changed.

I think it's more of a comfort of where the annuity fits back in.

In that regard, I think there was a bit more of a focus of a little bit of a hesitation there.

Having said that, I also believe that the advisers are back to looking at where the annuity fits as part of a holistic solution and that I think is how we think about it.

Now we've always had annuity sales in the $4 billion to $5 billion range, unlike number of competitors that really turn on the force it and then turn it off, when as something happens there, we have been very consistent.

We have a good core product capability and benefits that our advisers understand.

We compliment that with other products from other providers on our shelf as well.

So we're not necessarily looking for a sales of the annuity to rise tremendously.

There is a level of redemption in our book or pay downs because of the client portfolios in draw down, but that's appropriate for us.

We look at this more holistically and as you can see, client -- we have good client flows.

We have good flows going into a combination of products, which include the wrap, includes annuity, protection et cetera, and that's really what we look at.

We don't necessarily look that the annuity business has to grow by leaps and bounds.

I think part of the sales coming off also has to do at the fixed side, where the interest rates aren't there at this point for us to get the spread that we're looking for.

But that could change longer term as well.

So we feel I'm very comfortable about that book and the sales that we do get and it does sort of go up and down within our good range.

So it's a good client persistent portfolio and that's really what we look for.

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

On Asset Management, in terms of the fee rates that you charge on your -- the assets that is coming in versus the assets that are going out, can you update us in terms of the differential between the fee rates?

The fee rate is higher for the -- certainly for the activity coming in versus going out.

I'm trying to remember.

It's around 4, 5 basis points, I think, we'll get back to on that, but that's what I think it is, it's certainly been higher.

Okay, yes, I think last quarter, you said it's, kind of, roughly 15% higher between, I mean, for the inflows versus the outflows, I'm just trying to see if there is still somewhat kind of in the ballpark?

That sounds a little hard to me, but let me check.

Yes, I think it was that way in the fourth quarter, but again, it varies based upon what the fundings are in the redemption, so it's not like a perfect science.

Okay, understood.

And then you've talked about some of the expected funding in the coming quarters given the wins that you have.

But in terms of the redemptions, do you anticipate any more kind of liquidity related redemptions or kind of rebalancing in the coming quarters?

Yes, again, you can't speak to what was going to happen in market conditions et cetera, but we did see a bit more of that sort of rebalancing and reallocation than we've seen in other quarters and I think you can see that with interest rates backing up with the markets particularly in February with how the volatility spiked.

So I would probably say, we don't expect it to be at that level going forward.

We see that sort of have calmed down tremendously, as we got through March and into April.

Okay.

Yes, I think the single client has a redemption for liquidity reason.

They took money out last quarter -- last first quarter and then some in the second quarter.

Would you anticipate something similar in terms of pattern?

That's hard to -- and we were very -- the client was very clear that it had nothing to do with the performance of the product et cetera.

So I think those are decisions that they have to make and we're informed like others.

So I don't think we're an isolated case on that type of liquidity from this type of client.

So I think that's more of what others have experienced as well.

Yes, so it's Walter.

Let me just, the fee in versus the fee out is about 6% higher.

We have no further questions at this time.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.