阿默普萊斯金融 (AMP) 2019 Q2 法說會逐字稿

Welcome to second quarter 2019 earnings call.

My name is Sylvia, 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.

Alicia, you may begin.

Thank you, operator, and good morning.

Welcome to Ameriprise Financial's second quarter earnings call.

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

Following their remarks, we will be 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 references 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 our second quarter 2019 earnings release, our 2018 Annual Report to Shareholders and our 2018 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 second 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 operations and facilitates a more meaningful trend analysis.

Many of the comments that management makes on the call today will focus on adjusted operating results.

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

Thank you, Alicia, and good morning, everyone.

Thanks for joining us.

As you saw in our earnings release, Ameriprise continues to perform well.

We've delivered another strong quarter, completing a good first half of the year.

Today, I'll discuss a few important themes.

First, our wealth management business is leading the way.

It's the front-end of Ameriprise and our growth engine.

Second, our high-quality Asset Management insurance and annuity businesses complement our leadership in the growing wealth management space.

They delivered both competitive profitability and strong free cash flow.

And third, we have an excellent financial foundation, which provides important capital generation and flexibility.

We continue to take steps to free up capital and invest to accelerate our growth and generate shareholder value while returning significant amounts of capital to shareholders.

Turning to the operating environment.

The economy continues to improve.

Equity markets have recovered nicely from the pullback in the fourth quarter.

Long-term interest rates have come down in the first half, and it also looks as though the Fed may cut short-term rates in the near term.

During the quarter, we achieved some new milestones.

Assets under management and administration reached an all-time high of $916 billion, and Advice & Wealth Management retail client assets grew 7% to more than $600 billion, also a new record.

Additionally, we delivered double-digit EPS growth of 14%, building on our track record.

We've long maintained industry-leading ROA and have taken it even higher to 37%, an increase of 670 basis points over last year.

Let's start with wealth management, which is driving our growth.

Our comprehensive advice-based approach is highly relevant, effective and uniquely Ameriprise.

Our approach is supported by a broad suite of solutions and anchored in strong personal relationships to meet clients' evolving needs.

Importantly, assets remain in Ameriprise through clients' life stages as their needs evolve from asset growth to preservation, income generation and estate planning.

In fact, a recent report by research firm, Hearts & Wallets, found that Ameriprise is a top performer in terms of average share of wallet across customer of all ages.

This is an important distinction at a time when many investors are choosing to work with multiple financial service providers.

We not only serve our clients' full range of needs.

We also derive consistent revenues for the business across market cycles.

This recognition reinforces how we operate and serve clients.

It complements our Temkin credentials were across the investment industry, Ameriprise is #1 in trust, #1 in customer service and #1 in consumer forgiveness, and we're #1 for customer loyalty.

Our advisers are also standing out in the industry.

So far this year, 335 Ameriprise advisers have earned prominent industry recognition, including top rankings in Barron's, The Financial Times and Forbes.

I'm proud to see our advisers recognized in the marketplace for their excellent client service and practice success.

In terms of financials, we're delivering meaningful revenue and earnings growth while we invest for the future.

In fact, AWM generates nearly 80% of firm-wide revenue when you include contributions from our complementary businesses.

Our AWM margin remains strong at nearly 23%, which is among the best in wealth management.

One of our key growth drivers is fee-based advisory.

Assets were up 13% to nearly $300 billion.

In fact, we had $4.8 billion of net new inflows in advisory, our ninth consecutive quarter of more than $4 billion.

Another important metric is adviser productivity, where we delivered a new record high.

Strong client flows coupled with the extensive support Ameriprise provides helped drive a 6% increase.

We've delivered excellent productivity growth quarter after quarter.

Regarding adviser recruiting, we welcome 72 experienced advisers.

As a group, they are 19% more productive than advisers we brought in this time last year.

This continues our track record of bringing in larger producers who appreciate the Ameriprise brand and our advice value proposition.

I feel good about our results and the ability to grow.

We see a significant opportunity to serve more clients with advisers, especially those with $500,000 to $5 million in investable assets, who value an advice relationship, backed by strong capabilities and a trusted firm.

We're also investing significantly in our client experience.

These investments include enhancing our advice experience with new digital capabilities.

In early spring, we began rolling them out along with extensive training.

Advisers are sharing success stories with me about the difference that it makes in their clients' lives and for their practices.

We're also in the early stages of adviser uptake and looking forward to building on this initial success.

Another key investment we discussed with you is our new customer relationship management platform that we're rolling out through the fall.

This integrated system helps advisers to find and manage contacts, consolidate client data and track client progress.

This will make it even easier for advisers to engage clients through personalized contact.

We're also taking steps to fully integrate our investment advisory platform.

Later this year, we're introducing our customer advisory relationship program, moving from multiple different programs to one cohesive program where our various strategies can work better together, freeing up time and effort for advisers to serve clients.

And we launched the bank in the second quarter.

And in June, bought more than $2 billion of money market cash sweep balances on our balance sheet.

Later this year and in 2020, we'll add new deposit-based products, credit cards, mortgages as well as price lending.

Ameriprise is a well-established advice leader with an excellent reputation.

I'm energized about what we have today and what we're doing to further strengthen our position as a leading wealth manager.

Now I'll turn to Asset Management, where we continue to deliver competitive profitability and focus on targeted growth opportunities.

Overall, we have a high-performing lineup across equities, fixed income and asset allocation strategies.

And where we had pockets of underperformance, we've seen good improvement this year, which bodes well.

Our overall investment track records remain competitive and strong.

In terms of flows, we've seen an improvement in the level of outflows that we experienced from the last 2 quarters.

Our market share in North America improved.

That's several of our top intermediary firms with good flows into strategies where we're placing more emphasis, such as our dividend income, strategic income, mortgage opportunities and municipal income.

In fact, we saw a meaningful reduction in our outflows each month of the quarter.

We think we can gain even more traction in fixed income, both in the strategies that I've mentioned and a number of others where we have good investment performance.

We're beginning to position these strategies even more prominently.

The risk-off trade in Europe and the ongoing uncertainty of Brexit impacted our flows.

That said, outflows have stabilized with improvement in the U.K, Benelux, Italy and Spain.

You may have also seen that we won a $2 billion U.K. equities mandate with the majority of the funding occurring in the third quarter.

In institutional, we were in net outflows, reflecting the market environment where investors were a bit more cautious.

That said, we're making progress in our global investment solutions business that we've invested in.

We're building a good pipeline, and we won some mandates in the quarter.

We're also working to grow our SMA model delivery business where the fee levels are in line with institutional mandates.

We now have more than $10 billion in assets under advisement.

In addition, we won a new $800 million mandate in the quarter.

And as you know, these mandates are not included in our flows.

These are a few areas where we're seeing good progress.

And as you know, industry headwinds for active managers continue.

Despite these pressures, earnings overall for Columbia Threadneedle remain strong, and we ended the quarter with $468 billion in assets under management.

Our net adjusted operating margin in this business of 37.1% remains very competitive and within our targeted range.

We're investing where we see long-term growth opportunities and benefiting from our reengineering to help offset higher Brexit and regulatory expenses that we and others are experiencing in the U.K. and Europe.

Keep in mind, we run this business as part of Ameriprise with a long-term perspective.

With regard to insurance and annuities, these are well-managed books.

These businesses provide earnings diversification and stability.

They are seasoned books of businesses that replenish with client flows, generating strong free cash flows for our companies.

With regard to the quarter, our variable annuity flows were down from last year.

And while VUL/UL sales were down year-over-year, we saw improvement from the first quarter driven by a pickup in VUL.

Given the environment, these results are what we would expect.

We built the business to serve Ameriprise clients and, therefore, have differentiated risk characteristics.

We effectively hedge variable annuity guarantees.

In fact, our net amount at risk as a percent of account value is one of the lowest among major variable annuity writers.

With regard to our long-term care business, we continue to be proactive in managing our book.

In fact, this current year, we sought greater rate increases and benefit adjustments than we did in past years.

The Auto and Home business continues to show improved results, and we're on track to close the transaction in the fourth quarter.

That brings me to our capital strength and flexibility.

Both are clear differentiators.

We're generating substantial free cash flow that we reinvest for growth and return to shareholders.

You can expect us to continue to build on our track record of strong capital management.

As we've grown, we've consistently returned about 100% of our adjusted operating earnings to shareholders through steadily increasing dividends and buybacks annually.

In this last quarter, based on freeing up additional capital, we began to take up our buyback, consistent with what we shared with you.

We are in an excellent position to continue to generate shareholder value.

Our priorities on the capital front are clear: continue investing in the business, evaluating inorganic opportunities and maintaining a return on capital to shareholders at attractive levels.

Lastly, I'm pleased to share that in June, Ameriprise reached our 125th anniversary.

Very few public companies in the U.S. has reached this milestone.

We're proud to have been in business for more than a century, and I believe it's because we've always put clients' needs first and have constantly evolved involved.

As we look to the future, we're energized about the growth opportunity ahead, the strength of our business and our financial foundation.

Now Walter will take you through the numbers.

Thank you, Jim.

Ameriprise achieved another solid quarter of financial results with earnings per diluted share up 14%, even with marginal equity market appreciation compared to a year ago.

This was led by strong performance in Advice & Wealth Management and continued stable results in our other businesses.

We delivered an industry-leading return on equity of 37%, which reflects a 670-basis-point improvement.

We are generating substantial free cash flow and maintaining excellent balance sheet fundamentals to underpin our businesses, with excess capital of $1.9 billion to the end of the quarter.

I will take you through the details beginning on Slide 6. First, I'd like to note that our weighted equity index was up only 3% versus last year, much lower than the growth seen in the S&P 500 year-over-year.

Typically, our WEI trends similarly to the S&P 500 and the disconnect of 4% this quarter is much larger than usual, primarily due to underperformance of European indices.

Ameriprise's adjusted operating net revenue was up 3% to $3.2 billion, driven by revenue growth in Advice & Wealth management.

The impact from marginal market appreciation was offset by strong growth in wrap assets and improved transactional activity.

Asset Management revenue was on target, given the cumulative impact of net outflows as well as lower market appreciation than we've seen in recent quarters.

And Annuities and Protection are stable businesses with limited revenue growth.

So we continue to manage expenses well across the firm with total expenses up only 2%.

And we returned to over 100% of adjusted operating earnings to shareholders through increased share repurchase and dividends.

This results in very strong EPS growth of 14%, and ROE of 37%, as I mentioned.

Turning to Slide 7. You can see that our business mix continues to evolve with Advice & Wealth Management generating over half of the company's earnings, up from 36% just 3 years ago.

We've seen a consistent trend over the past few years, and it should continue as we focus substantial growth investments on areas where we've seen opportunity within the wealth management business.

Additionally, wealth management sources the majority of the company's revenue, 80% over the past 12 months.

Let's turn to Advice & Wealth management, beginning on Slide 8. AWM continue to perform well across all dimensions.

Advice & Wealth management's adjusted operating net revenue and pretax adjusted operating earnings grew 7%.

This growth rate was impacted by the marginal growth in the WEI from last year.

That said, the quarter benefited from underlying organic growth that was quite strong with wrap assets up 13%, with net inflows up $4.8 billion in the quarter and 6% improvement in transactional activity sequentially.

Higher interest earnings on brokerage sweep balances and expenses were well controlled.

In addition, we launched a bank in the quarter and continued strong adviser recruiting, both of which benefited revenue and earnings going forward.

Expenses remain well managed when you factor in the following: we had higher volume-related expenses due to the increased transactional activity I mentioned.

We continue to make substantial investments for growth, including the bank.

There was a mark-to-market impact on our adviser deferred compensation program, and there was an additional payroll day on a sequential basis.

We anticipate expenses will remain in this range for the remainder of the year.

Finally, our margin remained very strong at 22.7%.

As I indicated, we have strong organic growth trends in Advice & Wealth Management that you can see on Slide 9. Total client assets were up 7% to $608 billion with wrap assets up 13%, both of which have benefited from the solid trend of continued wrap net inflows over many quarters.

Adviser productivity continues to trend upward, reaching $638,000 per adviser and on a trailing 12-month basis.

A strong experienced adviser recruiting, new digital tools and capabilities and serving more of our target client market are key drivers of this strength.

Lastly, brokerage cash balances came down $1 billion sequentially to $24 billion.

We earned 210 basis points, up 157 basis points from a year ago, but down a couple of basis points sequentially.

As other firms have mentioned, we too are monitoring potential Fed announcements and intend to pay us a longer portion of the Fed rate cut to our clients while remaining competitive.

Let's turn to Asset Management on Page 10.

Revenue and pretax adjusted operating earnings performed well.

Similar to AWM, we had a marginal benefit from equity market appreciation.

In addition, the year-over-year growth rate was impacted by cumulative outflows and unfavorable foreign exchange translation, which was offset by the timing of performance fees.

Additionally, Jim mentioned several recent mandates won and the benefits from those will be seen in future quarters.

We remain focused on tightly managed expenses while making targeted investments in appropriate areas for future growth and managing required regulatory changes.

Margin in the quarter increased to 37%, returning to our target range of between 35% to 39%.

Turning to Page 11.

Results in Annuities and Protection are solid.

Annuities earnings were up 6% to $129 million, primarily from lower sales and higher living-benefit writer fees.

While sales remain down year-over-year, we saw a 19% increase in variable annuity sales sequentially, which supported the improved transactional activity I described in Advice & Wealth Management.

Protection earnings were up 3% to $65 million.

Claims continue to be within our expected ranges and the underlying business is performing well.

Clearly, interest rates remain a headwind for these businesses.

We are currently completing our unlock and review and will discuss the outcome of the review in the third quarter.

It is likely that interest rate will have a negative impact on our unlocking.

However, there are numerous factors that contribute to our unlocking.

Let's move to the balance sheet on Slide 12.

We continue to generate substantial free cash flow, and our balance sheet fundamentals are excellent.

Our excess capital reached $1.9 billion, and we expect this to grow further when we close the sale of our Auto and Home business later this year.

Our investment portfolio is well positioned, diversified and high quality.

Our hedging program remained extremely effective.

These factors combined with strong financial performance across our businesses support our differentiated return of capital to shareholders.

In the quarter, we returned $570 million to shareholders through buyback and dividends, which was 102% of operating earnings.

We expect to have nearly $2.5 billion of excess capital at year-end 2019 while targeting to return 110% of operating earnings to shareholders for the full year.

With that, we'll take your questions.

(Operator Instructions) And our first question come from Erik Bass with Autonomous Research.

Can you talk about the outlook for Advice & Wealth margins, especially if short-term interest rates do move to being a headwind?

And related, how much were expenses elevated this quarter due to the investment you're making in higher comp?

Can you talk about how you see the investments flowing through the bottom line over time?

Sure.

This is Walter.

From a margin standpoint, again assuming the Fed does cut, from that standpoint, will affect them, but we still believe that the margins will stay in the approximate range.

But again, we have good revenue growth and good profitability coming through, so it's difficult to take it for less -- exact estimate.

But certainly, we believe that the margins will remain in this range.

As it relates to the investment, the investment spending is a large portion of the expense increase.

And as we indicated, we continue to expect that will factor through for the remainder of the year.

And they are generating good returns.

I don't have the quantification of that, but they certainly are giving us the paybacks as we see strong revenue growth.

Got it.

I think you had mentioned a couple of higher comp expense items though as well.

Are those things that could recur?

Or are those more one-off expenses in the quarter?

The comp there -- if you're talking about in AWM?

Yes.

In AWM, that was really on deferred comp and is related to basically -- we hedged portions and some portions we can't hedge, and that was the differential that impacted us.

So it's really subject to markets.

But -- and we are certainly mitigating some of them.

Got it.

And then finally, can you provide an update on your target for the bank and the time line for bringing on the credit card portfolio and other product you've talked about?

The credit card portfolio will come on the balance the latter half of this year, and the rest of their products will start coming through in, beginning in 2020 going through the year.

But the credit card will come on in probably the third or beginning of fourth quarter.

Got it.

Is there any way we should think about the earnings kind of building from here?

I think it's probably neutral to a slight drag this quarter, and you've talked about being profitable by the end of the year.

But with those products coming on, how should we think about the buildout?

Okay.

Well, what you're going to see for -- the bank came on in -- basically in June, and so very little of the sweep balance that was moved over was an impact to the profitability.

You'll see that, obviously, impact the third and fourth quarter.

And we're targeting with -- certainly, a changing interest rate.

We'll probably be a small positive for the year.

As it relates us, we're building out the bank.

And the credit card portfolio will really be a slower build on that from -- in 2019 to start building in '20.

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

Walter, just to follow-up on the cash sweep.

How should we think about the difference in terms of economics between sweeping to a third party versus keeping them on your balance sheet?

Sure.

Okay, as it related to the initial funds that we moved over, that was basically -- that full benefit, it was being realized by us because it came out of, basically, money markets, on that basis.

So that is a full benefit to us picking up majority of that from the investment of less the amount that we're crediting to the client.

As we go into the transferring additional sweep balances, obviously, from that standpoint, the differential becomes much less because it's the investment trade-off of a sweep account versus what we then gap onto the balance sheet.

But there will be a positive element of incremental earnings relating to monies that are moved over.

This environment, we just have to gauge the impact of it, obviously, the interest rates where they are.

Okay.

Got it.

And then you talked about both the Fed cut or a potential rate cut, you will be looking to pass along some of the impacts to clients.

How fast can you pass along that?

Or is there kind of like anything that is preventing you to move the impact directly to the client?

So this is Jim.

If it's one rate cut, let's say, 25 basis points, we'll be able to pass along a piece of that just like we took a piece and gave it to the client as the rate came in.

As that rate -- if the Fed cuts more than that rate, we'll again, adjust.

But the bulk of that will just be absorbed by the firm, similar to what we did on the uptake.

So what I would say is, the first cut, part absorbed by the client, part absorbed by the firm, and we're able to handle that as we continue to make our adjustments to shift with the bank, et cetera.

But it depends on the number of rate cuts.

Just like we increased our margin because of the rate cuts, we -- the margin will be adjusted down to some extent based on the short term.

Now outside from the margin increase on our margin -- from interest rates, we've got nice margin improvements from the core business.

So we still expect us to continue on that path.

But remember, when we moved from the high teens into the 20s, part of that was due to the increases in the Fed rate and, therefore, some of it will come back down in a similar fashion.

Yes.

It's Walter.

Let me just amplify on one thing as your question on frequency.

It's fairly quick because the majority of money is invested in the Fed funds, and so the crediting rates are adjusted as so are earning rates.

Our following question come from John Nadel with UBS.

I have a couple of questions.

But Walter, I wanted to come back to a statement, I think, it was one of your final slides thinking about the capital returns.

I think you mentioned that you're targeting 110% of operating income for the full year, not just for the second half of the year.

So if I'm calculating it correct, I think, you're running it just south of 100% in the first half of the year.

It seems -- I think what you're indicating to us is that the pace from the back half of the year is going to be substantially above the 110% to get to a full year 110%.

I just wanted to make sure I have that right.

You do have it correct.

Obviously, it's -- it will be [fact-driven], but that's our intention right now that we will certainly have to increase there substantially to get to that 110% for the full year, approximately.

Got it.

Okay, that's helpful.

And maybe one for Jim.

I'm just -- I'm thinking about the fixed annuity book, and your commentary about accelerating the free up of capital from various portions of in-force block.

After the transaction with Global Atlantic on the first 20% of the block, I think the message was very clear that you're looking to accelerate that free up.

How much has the drop in long-term rates since then impacted the potential of moving forward with additional capital [received] from the remaining fixed annuity block or other pieces of the portfolio?

So I'll let Walter cover a little more of the detail.

But the way we think about it is, as you would see, we have a good amount of flexibility.

So it's not as though in this rate environment that the rates continue to go down that we need to execute a transaction.

What was really good about what we did so far in Walter and team is, it set up that capability for us, and then we will work appropriately based on appropriate arrangements and the time frames that we're interested in and with the rate environment to execute those transactions.

And so I think that gives us some more flexibility if we wanted or needed.

And at the same time, we don't necessarily have to do it just based on what circumstances dictate today.

So it's Walter, John.

Certainly, with our excess position, we don't have to do it now, but -- and the interest rate will impact it.

We'll evaluate that.

But as Jim said, we have the capability in place and certainly are evaluating that.

And it is our intention in the right set of circumstances, we will then commence the remainder of it.

Okay.

That's helpful.

And then if I can sneak one last one in on Advice & Wealth management.

If I look at the first half of the year, G&A growth was around 8%, but revenue growth, a little over 5%.

That's the first time in a long time that I can recall that there's been that kind of a differentiation or disparity between G&A growing faster than your revenues.

If G&A is going to stay around the same level as the 2Q for the remainder of this year, if we set aside the Fed and its actions, should we expect the operating margins going to decline from here?

So just let me start and then Walter can continue.

As you heard in my opening remarks, we are taking the opportunity, first of all, I've mentioned to you about recruiting as an example.

We're bringing in much larger books of businesses.

There's a cost in doing that, just the transition cost of people coming on board and [a cats] and all that stuff.

Our transaction revenue has gone up.

We've had some mark-to-markets on our deferred comp that's also in those numbers.

So part of the 8% is having to do with some of that.

In addition, I've mentioned some of the investments we're making.

So I'll give you an example.

Putting in a new CRM platform, you've got all the implementation costs.

You're actually paying for 2 systems overlap for the year.

So there are a number of things like that.

But we feel that in this time frame, where we see the growth opportunity, the strong margins we have in AWM as well as our potential for growth, this was a time for us to increase those expenses.

You remember in the last year, I had to cut back a little bit of them because of all the DOL expense and the regulatory.

So we wanted to shift that back to growth investments.

We think those investments will pay us good dividends moving forward.

But that's part of the reason why the G&A.

So if you're asking me for the future outside of those investments and some of the things I've mentioned to you, would that continue?

The answer would be no because we will firmly control our expenses, particularly in a more difficult environment.

But we feel right now making those investments, even though G&A is up a bit, remember, we've been able to hold the line pretty well with a strong growth business.

My margins are significantly above some of the other people that you guys look at and track, and my returns are significantly higher.

And that's fully loaded.

That doesn't -- that's not EBITDA, that's PTI.

So what I would just look at is the expenses will be higher for this year, but it's based on the things I've mentioned.

If for whatever reason the market slows down and other things, we'll clamp back on their expenses.

But -- well, some of that's due to the investments we're making in the overlap, in the growth and some of the things that we covered in the activity levels.

So John, it's Walter.

The only thing I'll add to that is, listen, obviously, we have good revenue trajectory, but one thing is in the second quarter.

We only had 2 weeks of the earnings coming from the bank as related to the transfer.

You'll have the full impact of that starting in the third and fourth quarter.

Yes.

That's kind of where I was going was -- so the bank will be a partial offset.

Then if I can paraphrase for you, Jim, it sounds like what you're articulating is, as we turn the page to 2020, you'd expect us to be seeing revenue growth exceeding G&A growth.

Absolute -- I mean that's what we're focused on what we've been able to deliver.

But I just wanted to say to you, I mean, even with the incremental, it's not as significant based on what we've been able to do, but we think this will pay some good dividends for growth in the future.

And the expenses will come back in line along those means.

Our following question comes from Andrew Kligerman from Crédit Suisse.

I want to follow up quickly on John's question about the 110%.

That would imply buybacks of close to $600 million per quarter for the next 2 quarters.

But I think about the capital position where Ameriprise sits, $1.9 billion excess capital, another $700-million-plus incremental by the end of the year from Auto and Home, and then you talk about these annuity blocks.

So would it be fair to consider that perhaps you could ramp up the buyback considerably more even than $600 million a quarter?

Or would you be thinking more about acquisitions?

So what we would say is, we feel very good about, to your point, the ability to return.

We'll be ramping up our buyback and opportunistically continuing to look at that depending on market conditions.

But it also gives us a lot of flexibility moving into 2020, both from a -- whether it's a return of capital or it could be based on some incremental acquisitions depending on the market and the climate and the valuations and the type of business opportunities we see.

So what I would say is, it's a good sort of a hand to sort of play.

But as Walter said, we'll be stepping up a bit towards the end of the year depending on market circumstances, if the opportunity arises, maybe more.

On the other side of it, it gives us a lot of flexibility moving into 2020, which I think would be a positive in your thought process.

Great.

And I mean, historically, as I've seen Ameriprise, you've acquired when market conditions were weak when others didn't have the capital.

I mean is that still the mentality?

Or do you see a lot of opportunities out there that you'd like to take advantage of with this capital?

So there may be some opportunities come along.

They're opportunistic depending on strategic and what we think.

But having said that, I do favorably believe in the Warren Buffet mentality, and we have a lot of flexibility to do that.

As you know, we are actually quite strong in a down market as well.

Okay.

Two quick questions.

I thought I heard, Walter, you mentioned a variable annuity unlocking.

Could you provide a little more color around that?

Is there something coming that would be material?

Okay.

So Andrew, right now we're going through the process.

We have not completed it.

And so we'll do that at the end of the third quarter.

We were just making a statement that the interest rate will have a negative impact.

And right now, as we look at behavioral, the other aspect we're working through, but we don't see anything that's surprising us yet.

Got it.

So nothing overly material is that from...

No.

Nothing we're seeing, no.

And then lastly, just...

Not complete.

But nothing we're seeing.

So far.

Okay.

Rate increases in long-term care, you mentioned that you're getting better than what you had anticipated.

Could you give any sense of the magnitude there?

No.

Right now, it's on 2 fronts.

Obviously, we have instituted appropriate, but increased rate increases, but we're also making benefit shifts that we're seeing good percentage take-ups that are higher than we've seen previously.

So we have not yet quantified because that's part of the unlocking also.

But we're certainly seeing positive aspects, both on the rate increase side and the benefit shift proposals that we've made.

There's more acceptance.

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

Given the risk transfer that was completed for the annuity segment, can you talk about a possible reduction in stranded cost going forward for that business?

You're talking about the fixed annuities?

Yes.

Basically, it's been profit-neutral.

So technically, there's no stranded cost in implications to us from that standpoint because it is not large in its space anyway from that standpoint.

Okay.

And then now that we're kind of 1 quarter into the bank launch, can you talk about maybe lessons learned that you can position the business for growth in the next year or so?

I know when you're planning for a launch, you think things are going to a certain way, and then it happens, and you learn some lessons from it.

Okay.

It's interesting because this is our second launch, so we've had experience in doing it.

And I can say that it's actually been quite smooth from that standpoint.

And certainly, the -- bringing back the credit card portfolio is moving quite well.

And from the transfer of the sweep accounts and bringing up the infrastructure, we've actually not had a lot of surprises.

And like I said, we've done this before.

So I think it's moving well.

Good.

And then my final question.

It sounds like there was a nice client win in the quarter for the Asset Management business.

Can you talk about maybe where you're seeing opportunities in the market?

And how you're positioning the company in a fee-pressure environment?

Yes.

So the win was really in the U.K. in our equities area.

As you saw, there's been some transition, some fund managers, et cetera, and were well thought about.

We also see some opportunities.

And again, I think all of us are a little surprised, et cetera, with the Brexit delay, and that has caused a little more people holding back and risk-off in Europe and the U.K. for Brexit as well as some of the signs in the European economy.

But we're starting to see that stabilize, and we actually think that some of our activity will begin to pick up in Europe and the U.K. as well as we move forward, and we're starting to see some more interest come back.

And the other thing we're seeing is in our solutions business institutionally.

We're starting to get some mandates.

We just got 1 out of Asia and 1 or 2 out of Europe, and the pipeline is building.

And it takes time for you to really get in front of people with some of your capabilities, but I think that's starting to take hold.

The other thing we see is, in the U.S., I mentioned, but from sort of a good capability, strong performance and income-oriented strategies, both from an equity perspective as well as the fixed income, we're seeing a pickup in sales.

I actually would say, if you looked at the second quarter, from an active equity, we're probably doing pretty well relative to the industry.

We're not getting as strong an inflow as we should in the fixed income, and that's where we're putting more emphasis.

We've always been known more of an equity shop, and equities have been a little more in the active under pressure.

But we have really good strategies in fixed income.

The sales group and distribution in North America is starting to shift some of their emphasis to include the fixed income more prominently and having more conversations around it.

I think we could pick up some greater share there that would help the flow picture in North America in the active space.

So we're feeling good about some of those things.

Having said that, the headwinds are still there.

We're continuing to shift where our investments are going into things like data and analytics to better enable.

We're putting emphasis around some of our research capabilities, investing in some of our new solutions in infrastructure and real estate.

We're getting some wins starting in the real estate from the firm we bought.

So there are some good things in the horizon.

Having said that, as you know, the space has been a little more difficult, but we're starting to gain some traction that hopefully will reduce our outflows.

Our next question comes from Ryan Krueger from KBW.

I just had one follow-up on the bank.

Can you give us a sense of the spread that you're earning on the $2.2 billion of -- that was moved into bank?

250 basis points.

And that's AWM's earning, okay?

Look at it from that way because we're not getting into the transfer pricing discussion.

But 250 basis point from AWM standpoint.

Okay.

250 basis points.

And then just how big are the credit card portfolios that you expect to move over the next couple of quarters?

It's about -- I think it's $200 million, $220 million, something in that range.

Our next question comes from Alex Blostein from Goldman Sachs.

Just from this last point, and I had a couple of other questions on the bank, but 250 basis points is a pretty widespread given where rates are today.

Can you tell us where you're investing that if you look at agency spreads available out there?

It seems a little stretchy.

Well, we're basically investing right now in basically in mortgage floaters and high-quality paper.

And what -- we're seeing the spread because, [candidly], it's coming off of the money market, so therefore, that's where the bulk of difference is.

There's little more earning rate that we will -- okay?

It's not so much we're stretching the investments.

The investments are all in high-quality floaters.

Got you.

And then the yield on the credit card portfolio, the $200 million you guys are going to transfer in Q4, what is that?

And I guess, what is that going to do to net interest margin at the bank in the near term?

And then I guess bigger picture point, as you kind of lookout a couple of years, I know you guys talked about, I believe, pretax income within 5 year is getting closer to something about $200 million.

How is that going to evolve?

So maybe talk about the size of the bank within 5 years kind of aspirationally, where you're hoping not to be?

What are sort of the composition of the book would look like?

And within the $200 million target, what are you assuming for credit cost because did you think, well, actually that's going to be consumer loan portfolio.

That's a lot of questions.

Let me -- I can't really give you on the [margin] because that book is now coming over from a third party where we only get a small portion to feed.

Now we're going to start getting it.

So I -- Alex, I truly don't have the exact amount on the credit card margin.

So that one we can get back to you on.

The issue as it relates to building the bank is really going to be in the basis -- the bank is going to transfer over, as we said, substantial amounts of sweep accounts as we go through the period and, certainly, picking up the spread on that as we look at investing differently.

So that is really going to be the lion's share of the benefit that we are going to derive on that basis.

And getting into the probably the range of $5 billion, $6 billion, $7 billion in total, and then the rest is going to come from [health] on certainly a higher profitability on the credit card as we have that profitability since we're in the underwriting with one of our partners.

And then building up, as Jim said, the pledged loans, the deposit base and mortgage base as we go through.

But the real contribution is going to come from being able to use the balance sheet more effectively from -- and garner more earnings versus the sweep.

Got it.

Okay.

I'm sure, we'll circle back on some of those other ones.

Shifting gears a little bit, just thinking about the rate sensitivity within AWM broadly.

I think the brokerage cash sweep revenues are running at around $130 million this quarter.

Obviously, it's a pretty clean way to think about the flow down from lower Fed rate cuts, so that's pretty straightforward.

I was hoping to get a sense on how the other piece of kind of the rate sensitivity in the model so like that net interest investment income and the net expense against that, I think it's about $65 million a quarter for you guys.

How is that going to evolve?

I think it basically your certificates business with lower rates.

I'm just not so clear on the sensitivity there to Fed cuts.

The Fed cuts, obviously, that one is spreading, and it will be impacted.

But again, we -- if I would -- it would be -- I can't give you an exact amount because that one is really, we manage through a very cautious program of protecting on the liquidity.

So the investment impact will be reduced.

I just can't give you the exact amount it's going to be reduced because that is invested out further with a bell bar (sic) [barbell] effect invested in certificates and different longer-term investment.

But it will be impacted less because the investment earnings are -- we have a large portion of that going out right now.

It shouldn't be significant.

Yes.

I tell them, a little more fixed, I think, on the asset side there.

And the last one, just to clean up on -- around some of the G&A discussion and just want to make sure that I'm getting the message here.

So clearly, the investment spend makes sense in 2019.

As we look out into 2020, G&A in AWM, is that essentially going to stabilize at kind of current run rate level, and then we should go back to more of a normalized growth, which I think historically has been kind of in mid-single-digit range for you guys?

So kind of take whatever you guys are running at for 2019, that's a new run rate and then maybe it just grows a little bit slower than it was in 2019.

I think that's a fair estimate, Alex.

That's definitely fair.

Our last question will be from Suneet Kamath from Citi.

I just wanted to come back to the AWM margin for a second again just to make sure I'm understanding what you're communicating.

So is the idea here that the margin may kind of stay in this 22%, 23% range, and kind of the rest of the year, you have the bank, but you have some other things going on in terms of rates.

And then it'll resume what has been kind of a steady climb higher as you move into 2020.

Is that the high-level commentary that you're giving us?

So what I would say, Suneet, would be, yes, along that lines, but again, there's some variables in there depending.

So the variables are very clearly how quick does the Fed cut, right?

And you can do those calculations to figure out what that would look like.

But let's say, hypothetically, the Fed only cuts once, then we feel comfortable with the margins we have and the expense growth that we have incremental over the business activities, adviser growth and stuff like that transaction.

We have that extra investments in '19 that should sort of come down thereafter.

From a relative level of getting business growth that the environment still is good, we'll start to grow back that revenue growth with the expenses being well maintained again.

The interest rate is the wildcard so to speak.

Some we can make up for it.

Some we can't.

Some will offset with, as Walter said, what we're able to do as we start to move more of our sweep activity into the bank and invest differently to offset some of that spread erosion from the Fed.

But I think it all depends on market and rates and instruments at the time, so it's hard for us to predict that.

But those are some of the things that would be an offset.

But if the Fed doesn't cut rates dramatically, then we'll be fine and continue to grow from there.

But if they do, we'll try to offset it with the blank activities and as expenses come down from the investments, but some of it will hit the margin as you would well know in the short term.

Okay.

All right, then.

And just 2 quick ones or 2 on Asset Management.

First, I think the former parent outflows have moderated pretty significantly of late.

So are we at a point where we're at this run rate kind of going forward?

And how big are the underlying assets in that category that you call former parent?

I don't have the numbers off -- we could get you back to that.

But the balance is there.

As we've always said to you, the fee revenue from our relationship with Zürich maintains pretty well.

The flows will always be somewhat negative based on just how that happens.

But the asset base pretty much has maintained roughly where it's been over the last number of years.

There's always some ins and outs if they close the pension or other things.

But market has been able to offset that.

The U.S. Trust business, which is the other larger mandate.

I think it's stabilized at a certain number; I don't have it in front of me.

Alicia can get back to you some of that information.

But yes, the outflows have slowed a bit.

And with market appreciation and dividend reinvestment, et cetera, they have maintained certain levels.

But Alicia can give you that.

Okay.

And then just my last one on Asset Management, and I appreciate the improvement in flows that you're seeing, but also, you've cited numerous pressures facing all companies in that industry.

So I guess how top of mind is doing something more significant there, be it a sizable acquisition or a joint venture?

So again, we feel very good about the Asset Management business that we have and what the team has been able to put together and some of the areas we feel like we are quite strong and able to continue to proceed well, even in this difficult environment.

Having said that, we do have capabilities for acquisition.

We've proven that.

We've been very successful in integrating.

So it has to be the right property.

We are open for a way that we would work with partners in thinking about that.

And if something did come along, or the market, in some way, felt a little stressful for others more so than us, we'll have the opportunity to work in some fashion.

But again, it's not something we're needing to like have to do, and we are really continuing to fine-tune our business, manage expenses, regear our activities to generate a good return in this environment.

But I think we've proven our capability.

We've proven our financial strength, and we've proven our ability to look at alternatives in the right way strategically, and that's what we'll try to do.

This concludes today's conference.

Thank you, ladies and gentlemen.

Thank you for participating.

You may now disconnect.