阿默普萊斯金融 (AMP) 2020 Q1 法說會逐字稿

Welcome to the First Quarter 2020 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, Sylvia, 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, 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 references to various non-GAAP financial measures, which we believe provide insight into the company's operations. Due to unprecedented external events in the first quarter, we believe GAAP results are not comparable to the prior period. And 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 2020 earnings release and our 2019 Annual Report to Shareholders, and these may be supplemented in our first quarter 2020 10-Q 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 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.

Good morning, and thank you for joining us. I hope you and your loved ones are staying safe and healthy. Clearly, this has been an extraordinary and challenging period globally. I'm proud of how well Ameriprise has responded to this pandemic.

From the start, our priority has been serving our clients as well as the health and safety of the Ameriprise team. We've benefited from our substantial business continuity planning and investments and quickly shifted approximately 95% of our employees, advisors and field staff to working from home in mid-March.

We've been able to maintain very strong client and advisor engagement with very little disruption. Our technology capabilities have been outstanding. Our teams are working seamlessly and collaboratively in this virtual work environment. We're helping clients stay focused on their long-term goals and navigate tough markets. The strength of our advice value proposition and the solutions we offer are ideally suited for this environment, and we're operating with an excellent financial foundation. We maintain a large excess capital position, substantial liquidity and a high-quality investment portfolio.

We're generating strong cash flow, and we're always very disciplined in terms of risk management and ongoing expense management. During this crisis, Ameriprise is operating well, and I believe we are in a strong position.

In terms of the markets and economic backdrop, clearly, there are headwinds. The first 2 months were quite strong. But with the declines in March, equity markets ended the quarter down 22% sequentially and 12% year-over-year. The Fed has been aggressive, including cutting short-term interest rates by 150 basis points to near 0. We saw some improvement in the equity markets in April on optimism around reopening. However, we're seeing the economic impacts of the shutdown and stay-at-home orders, and we expect the environment to remain challenging with elevated volatility.

Let's discuss the first quarter. We started the quarter on a record pace. And even with the market headwinds, we delivered good results. On an adjusted operating basis, ex Auto & Home and including the tax benefit we highlighted, we delivered net revenue growth of 4%. Earnings grew 34% with EPS up 46%, and ROE, ex AOCI, was 39.7%, up from 36.5% a year ago. Our assets under management and administration ended the quarter at $839 billion, down 6%, reflecting the significant point-to-point decline in equity markets. However, this was partially offset by strong client flows. And if you look at our total margin, it is in line with last year at 22.1%, and that's even after the impact of lower equity markets and the interest rate cut in March.

I want to turn to Wealth Management and what I believe will continue to differentiate us as we move through an economic recovery. With the very real challenges clients are facing, this is when our advisors and our business really stand out. We're helping keep clients on track and focused on their long-term goals. The investments we've made over the last few years and those we accelerated in 2019 are paying good dividends in this environment.

Our digital and cloud capabilities, which include our CRM platform, ongoing gold tracking, websites and mobile apps are all helping our advisors maintain their strong relationships with clients and stay productive. Very clearly, we delivered a good quarter in Advice & Wealth Management despite the significant dislocation in March. We had strong revenue growth of 9%, good earnings growth and meaningful growth in net inflows into fee-based accounts and strong activity levels.

On a relative basis, we maintained very good margins. In fact, AWM margin remained above 22%. Like others, short-term interest rates will impact our profitability. However, continued strong client activity and engagement, the strength of our advisor productivity and our banking operations, which are beginning to ramp up nicely, are positives for continuing to generate good margins.

As you can see in the quarter, we're managing expenses back to more normal levels at about a 2% growth rate ex the bank. This compares favorably to our 9% revenue growth in AWM. And we will continue to tightly manage expenses and remain aligned with the revenue environment.

We had very good growth in client and advisor metrics in AWM. It was one of our best quarters for total client net inflows, and more than $6 billion went into investment advisory accounts in the quarter, a record. We saw good pickup in transactional activity as more clients engage with us in financial planning and advisor relationships. Advisor productivity increased 8%, as advisors leveraged our capabilities. Client brokerage cash balance increased close to 30% to more than $32 billion as clients built up cash given market volatility. Growth in cash slowed in April, and we would expect these assets to be put back to work in the future.

Even with the market pullback, client activity inflows in March were solid, and that continued in April. Our advisors are working closely with clients to keep them focused, help them adjust and look for opportunities.

On the recruiting front, we attracted 80 experienced, highly productive advisors from across the industry in the quarter, and the pipeline looks very good. Regarding the recruiting climate, the COVID-19 crisis has created challenges but also opportunities. We moved to virtual recruiting and have been able to recruit and onboard advisors successfully. We're pleased by the very high engagement from advisors who are interested in Ameriprise.

As in previous challenging environments, our financial strength and comprehensive advisor value proposition makes us an attractive destination for experienced advisors. There may certainly be a slowdown in recruiting in the near term. But longer term, we see an opportunity as some advisors consider making a change and seek a high-quality firm with a track record of helping advisors grow and thrive.

Again, we've been able to operate very well during this period with all of the capabilities and support we put in place. Our advisors as well as new recruits have been impressed with how quickly and effectively Ameriprise mobilized when the crisis broke and how well we have supported them and their clients. We also continue to build and grow our bank.

In the quarter, we brought more than $2 billion of cash sweep balances on the balance sheet, bringing the total to over $6 billion. We began to grow our card portfolio, focusing on the Ameriprise client base. The test for our mortgage program went well, and we are beginning to roll that out more broadly in the second quarter. And we're planning for pledge loans to be implemented in the latter part of the year.

In regard to our Insurance & Annuity solutions, we've been very proactive ensuring we have the right focus in this climate. We're making the appropriate pricing and underwriting adjustments, and we're maintaining our strong risk management across these books. The businesses are delivering solid earnings in line with our expectations for this low interest rate environment, and they're generating strong free cash flow.

In terms of Annuities, variable annuity cash sales were up 24% from a year ago with a mix shift towards products without living benefit guarantees. We launched a new structured solution annuity in January, and we're getting good uptake and will accelerate the shift even further.

In Protection, life sales continue to grow in our VUL product. As with variable annuities, we have made pricing and benefit changes. We've also made cap rate reductions and adjustments to our underwriting as appropriate. So overall, the takeaway is that we're being proactive and will continue to do so consistent with our risk management discipline.

Moving to Asset Management, we had a good quarter. After a record start in January and February that built off of the progress we've made last year, we were able to move -- to operate remotely on a global basis in a seamless way. We've been very engaged with investors, intermediary partners and institutional consultants, reinforcing the strength of our key strategies and providing an informed perspective. We benefited from the investments we've been making to ensure our teams can communicate with the right advisors and support our distribution partners.

In terms of the quarter, we delivered a 50% increase in retail gross sales globally compared to a year ago, which is very strong. The strong sales momentum in retail led to being $2 billion positive for the firm in January and February. However, flows turned negative in March due to a pickup in retail redemptions as clients derisk their portfolios. Institutional clients invested through the market dislocation, and we saw nice additions to existing client mandates, and we had some wins that funded leading to net inflows in the quarter.

So overall, we had a net outflow of $2.5 billion in the quarter, and that included a $1.3 billion very low fee institutional mandate that we are expecting and a bit over $800 million in former parent outflows. This is a significant improvement from our results a year ago, which compares very favorably to the 17 active peers we benchmark against. In fact, we were #5 in terms of flow rate, driven by our strong showing in equities and improved fixed income flows.

As we look at April results, gross sales remained strong and redemptions have slowed as equity markets have improved. With regard to investment performance, our equity performance has remained strong through this volatile period, especially in key strategies like income-oriented equities. And while we did have some short-term underperformance in fixed income in the quarter, within some of our multi-sector strategies, we're seeing improvement in April. Long-term numbers across equities, fixed income and asset allocation remained strong.

Looking at our financial results. Clearly, revenues will be impacted in this environment given the asset decline. But we're seeing good results and higher fee flows, and markets coming back a bit will help. We're also doing a good job managing expenses as margins remain quite good. We are managing controllable expenses while making sure that critical projects that align to our growth goals remain in place. So to wrap up Asset Management, I'd close by saying the teams are executing well, and we're focused on continuing our progress.

Now let's turn to the strength of the company, our balance sheet fundamentals and risk management. I'll start with our balance sheet. It's exceptionally strong. We have approximately $9 billion of liquidity. We have $1.7 billion of excess capital, and we have a high-quality, diversified investment portfolio with an average rating of AA- and limited exposure to industries that are under pressure. Our strong risk management prepares us for these type of volatile economic conditions. Our hedging program is excellent at 99% effectiveness in a volatile period. The business continues to generate good free cash flow that we invest for future growth and return to shareholders.

In the first quarter, we continued to return capital well, although we did pause our buyback given the uncertainty in the market. With the strength of our business and capital position, we will resume our buyback at an appropriate level as we move forward. And as you saw, we announced a 7% increase in our quarterly dividend that we feel good about, our 16th increase since we became a public company 15 years ago.

In closing, I feel good about our position and ability to navigate this environment. We're prepared for this environment to remain volatile. With the underlying strength of our business, the investments we've made, the cash flow our diversified business generates and our capital management, we have a very strong hand to play.

Ameriprise is working through this crisis extremely well. We're able to weather these markets and economic headwinds and focus on long-term strategic priorities. We will continue to focus on our clients, our priorities and moving forward in the right way.

Now I'll turn it over to Walter, and then we'll take your questions.

Thank you, Jim. Ameriprise delivered another strong quarter of financial results and business metrics, with adjusted operating EPS up 46% to $5.41. This was driven by strong underlying trends I will describe today as well as a tax benefit in the quarter due to anticipated net operating losses for the year. While the NOL is extremely beneficial from an earnings and cash flow standpoint, using our expected tax rate in the 16.5% range, our earnings per diluted share would still have been up 15%.

A critical factor for Ameriprise, or candidly, any other company during this period, is our high-quality balance sheet and risk management fundamentals that underpin the business, including liquidity, capital, hedge effectiveness, free cash flow generation and business continuity performance. These foundational elements allow us to navigate the current environment well and have positioned us to continue delivering excellent results as we move through market cycles.

In the quarter, GAAP reported EPS was $15.88, reflecting the positive impact of our credit spread, hedge valuation and other market-driven impacts.

Let's turn to Page 6. Adjusted operating net revenue was up 4% to $3 billion after excluding Auto & Home from the prior year period. Revenue growth was driven by Advice & Wealth Management, where we had an increase in wrap net flows of 41% and improved transactional activity driving up 9% increase in revenue.

EPS for the quarter was $5.41. As I indicated, this reflects a tax benefit. Let me explain. The use of net operating loss carrybacks was eliminated in the Tax Cuts and Job Act at the end of 2017. This ability was brought back on a temporary basis as part of a new legislation. As a result, Ameriprise will receive a substantial GAAP and operating tax reduction associated with our ability to carry back our estimated 2020 NOLs to prior higher tax periods.

Using our latest forecast, the 2020 tax benefit is estimated at $220 million. 65% or $144 million of the estimated full year benefit was taken in the first quarter, based upon first quarter GAAP earnings with respect to the full year forecast. The benefit will be adjusted quarterly for the balance of the year based upon changes in markets and our forecast. Our numbers will be finalized on December 31, 2020. The benefit allows us to continue to execute our current business strategy and operations and partially offset impacts of COVID-19. As I previously stated, using our expected tax rate, our EPS would have increased 15% versus last year. Our adjusted operating return on equity in the quarter was nearly 40%.

Let's turn to Page 7. There are 4 main balance sheet and risk attributes that are critical to continually meet client, shareholder and regulatory requirement: liquidity, capital, managing the level and volatility of earnings and effective operational risk management. On all fronts, we met this challenge, and we are well-positioned to meet our client and business needs going forward, just as we have in prior market cycles. At the end of the first quarter, we had substantial liquidity at both the parent and subsidiaries totaling approximately $9 billion with about $2 billion at the holding company. Our excess capital ended the quarter at $1.7 billion, which reflects the impact of challenging interest rate and equity markets, reduction in debt as well as the adoption of VM-21.

An important component of our capital strength is our investment portfolio. It is defensively positioned and diversified with AA- average credit quality. I want to highlight that within our investment-grade corporate portfolio we are concentrated in defensively positioned sectors that operate well with the current stay-at-home restrictions, specifically U.S. electric utilities, food and beverage, health care and U.S.-based midstream pipeline companies. We have no exposure to airlines or specialty retailers and less than $10 million of exposure to banking or autos. And our high-yield exposure is only 3% of the portfolio and diversified by industry and issuer.

We closed the quarter in a net unrealized gain position of $600 million, but that improved to a net unrealized gain position of approximately $1.4 billion by the end of April. We have a robust hedging program, which is an important component of managing earnings volatility. It was 99% effective in the quarter, exceeding its 95% target, and we expect that to continue. The benefit of these hedge programs are evidenced in the strong GAAP numbers we reported that included a large gain from our hedges on a GAAP basis. Our proactive risk management program is extensive, and our swift transition to the vast majority of our staff working from home highlights planning and capabilities we have established.

Our business has performed well. And as Jim indicated, we are seeing good business growth metrics continue and grow.

Advice & Wealth Management delivered very strong results in the quarter, particularly in light of the market dislocation we experienced in March, as you can see on Slide 8. Advice & Wealth Management adjusted operating net revenues grew 9%. Results through February were very strong. Revenue was up 14% with $4.5 billion of wrap net inflows and transactional activity up 14%. As the environment changed, we continue to see solid engagement with advisors and clients. We had an additional $1.6 billion of wrap net inflows in March. We saw our cash levels increase substantially to nearly $33 billion, up from $25 billion at year-end, and transactional levels remained strong. Client activity was strong in April.

Pretax adjusted operating earnings grew 8% or $28 million in the face of a $54 million headwind related to the Fed rate cuts. A strong increase in revenue allowed us to continue to drive profitable growth despite short-term interest rates.

G&A increased 2%, excluding the bank. We are continuing to make investments for growth where we feel there is an appropriate payback in this environment. While there is a potential for continued market volatility and short-term interest rate pressure, we believe that the strong activity trends and financial performance will continue. During this changed environment, our advisors remain totally engaged with their clients. We have strong interest with our remote recruiting strategy, and we have increased our net investment income by investing at higher spreads within the bank.

In the quarter, we had 80 new advisors with strong productivity levels joining Ameriprise and a strong and growing pipeline. Asset Management continues to generate substantial revenue and pretax adjusted operating earnings for Ameriprise, which you can see on Page 9. Similar to the trends we saw in Advice & Wealth Management, Asset Management delivered improved business metrics.

Pretax adjusted operating revenue was up 9% through February, reflecting good markets and higher fee net inflows. But the trend was impacted in March from both market depreciation, elevated redemptions and a performance fee adjustment. Excluding the performance fee adjustment, operating net revenues were up 2% for the full quarter. In addition, expense discipline remained strong, driving earnings to $172 million, excluding the performance fee adjustment. The adjusted margin in the quarter was nearly 38%. Going forward, we feel good about our product offering, investment performance and distribution capabilities that support continued gross sales improvement in higher fee assets going forward. The fee rate was consistent at approximately 52 basis points in the quarter, and we remain committed to expense management in light of the revenue environment.

Turning to Page 10. Results in Annuities and Protection are in line with the expectation in this market and rate environment. Variable annuities earnings declined to $93 million in the quarter, impacted by many of the same trends I've already discussed. Revenues increased 2% as market appreciation is largely offset by continued net outflows. Expenses increased 9% from last year, primarily related to 2 items. First, SOP reserves continue to increase, as expected, and this was further exacerbated by market volatility. Second, we had lower DAC amortization a year ago, impacting the year-over-year comparison. We anticipate that variable annuities earnings will return to more normalized levels going forward.

Fixed annuity earnings declined to $2 million. This decline is largely driven by spread compression and lower account sizes. Protection delivers a very stable stream of earnings, contributing $72 million in the quarter, with overall claims in line with expectation. We expect these trends to continue.

We continue to feel good about our Annuities and Protection business. We are seeing a shift in VA sales to our new structured variable annuity product, and we are seeing a shift from IUL products to VUL. Additionally, we have made appropriate changes to our product features, underwriting, and pricing, given the changes in the operating environment. These enhancements position us well going forward.

Now let's move to the balance sheet on Slide 11. I've already highlighted many of the elements of our balance sheet fundamentals that give me comfort in our positioning going forward: our strong liquidity position, substantial excess capital, effective hedging and a defensively positioned investment portfolio. We returned a substantial level of capital to shareholders in the first quarter even after pausing our share repurchase in mid-March out of an abundance of caution with the environment. We intend to resume buyback in short order. And we announced an increase in our quarterly dividend of 7% to $1.04 per share. These actions demonstrated our commitment and ability to continue our longstanding track record of capital return.

Let's turn to Page 12. This is a slide I used at our last Investor Day. The statement remains on track. Our balance sheet and enterprise risk management capabilities were tested again, and we have shown excellent results. Our underlying business drivers remain strong and will generate strong free cash flow in this low interest rate and volatile equity market environment. We remain totally committed to strong, sustainable, profitable growth.

With that, we will take your questions.

(Operator Instructions) And our first question comes from Suneet Kamath from Citi.

My first question is on Advice & Wealth Management. In the quarter, you talked about $54 million headwind from the low short-term rates in equity markets. Can you just help us frame what that looks like in terms of a headwind as we go into the second quarter?

Yes. Suneet, it's Walter. That will be approximately, in total, about $120 million. The $54 million will move to $120 million for the interest rate in AWM on the short term.

Okay. And at that point, you'll fully have the interest rate impact embedded into baseline?

Yes. We believe that, yes. Assuming no other changes. Yes.

Yes. Okay. And then my other question is on the fixed annuity business. Earlier in the year, I think you still were optimistic about potentially doing a reinsurance transaction. Obviously, since then, rates have fallen pretty dramatically but spreads have also widened out. So just trying to get an update in terms of how you're thinking about the ability to execute a reinsurance deal on that block in 2020.

Yes. Execution will be difficult in this environment. So we're at pause. Our -- certainly our desire to do that is there, and we would just wait until the environment allows us to do that.

Okay. And then the last one is just on the capital return. You chose your words very carefully, I think, in terms of returning capital at an appropriate level. Can you just help us think through what that means? I mean in the past, you've talked about returning 100% of your earnings. Can you just give us an update in terms of where you're thinking today is?

Yes. Suneet, I think what we would say is we think we could still sort of track to what the ongoing earnings formula will look like and be in range of what we've done in the past in that regard. So I think -- again, it's hard to predict just based on the environment. But I would say we feel very comfortable with both the excess capital position, the cash flow generation and the earnings stream that we have coming about. So I think you could calibrate from there, probably still in the range of the 90% to 100%.

Our next question comes from Alex Blostein from Goldman Sachs.

Jim, first, a question for you just around dynamics in the recruiting environment today within Advice & Wealth. In the past, we've obviously seen some moderation in FA recruiting activity in times of heightened volatility. And presumably, the dynamics of social distancing makes recruiting more challenging right now. But curious to get your thoughts on kind of how the net new asset flows within AW is expected to trend over the next couple of quarters given this dynamic.

So I think, as you saw, we were able to put a good group of recruits on board, 80 in the first quarter. Our pipeline looks good. I mean as you went through the moving to work from home and what everyone had to do in the industry, including competitive frame, it sort of disrupted that a little bit. But we were able, very quickly, to move to virtual. We are operating 100% really from that perspective in that regard, including from a recruiting environment. We have good engagement with potential recruits. And so that's working well.

Having said that, you're still taking people and then moving in this environment. And so with the volatility, as you said, things slowed down a little bit. But the pipeline looks good, and it's more of that where the people feel comfortable making a transition. But longer term, we found after these environments, people do look to come to a strong firm. They do look at a firm in how they've operated through an environment like this. And we feel very good about the value proposition as well as the interest. So we feel like that could pick up as things settle down, as we've been active in the marketplace.

Regarding our flows, we've had very strong client flows in the first quarter, including through March. And that -- those flows continue in April. Of course, they were always a little bit higher in January and February, but they maintained at a very good level through March and into April. So we still feel good about the flow picture.

Great. And just maybe a little bit more around the pipeline commentary you just mentioned. Can you give us a sense the composition between the kind of independent franchisee channel and the employee channel? Which one of these is likely to fare better in the current environment from FAs moving over versus where you might actually see a little bit of a slowdown because of the environment?

So we see strong some interest in both. We still see it in the employee channel because of the type of arrangements that we have here, the support they get, all of the enhanced benefits that they're very used to both in our employee model and our franchisee model. And we're actually seeing independence as well as some RIAs come back because of the really enhanced value proposition that we provide even into our franchisees. And so they get all the benefits that they would have gotten if they were an employee in a certain respect of the type of support, the branding, the technology, even the onboarding, which is done in a very comprehensive fashion based on how we support them and set them up.

So I would just say that our value proposition is playing quite well right now as people are realizing they need more than just to associate with an independent channel or just that they could buy services out there from an independent channel. So we're finding from both ends that the interest is quite strong, and these are the people that we are attracting.

Great. And then just a quick follow-up for Walter, just a couple of numbers around the bank. Could you help us with what the net interest income and the net interest margin was at the bank in the second quarter just given the fact that it's becoming a larger contributor to the overall? And then maybe give us a sense for expectations or future cash moving out of the off-balance sheet cash sweep into the bank and the sort of the new money NIM that could -- that you guys could earn on that today.

Alex, it's Walter. Yes, obviously, the bank is still in a margin -- a marginal situation as it's beginning to take hold. Certainly, I can tell you that from the activities that we saw, we started to invest substantially from the bank at -- taking advantages of the spread income. So we anticipate that the bank will be making a more significant contribution going forward but still in a measured basis. So right now, it's just early to say as we move through it, but the margin is quite strong. Obviously, interest margin is quite strong. But we did take advantage of this situation to improve that by making some investments with some pretty large spreads as we move through. And we are certainly focusing more on the bank as we move through the year and go beyond that.

Our next question comes from Tom Gallagher from Evercore.

This is David Motemaden on for Tom. I guess I just had a question on the 5% U.S. treasury ultimate interest rate assumption. I guess just wondering how you're feeling about that heading into the third quarter review given the drop in rates and maybe remind us what the impact would be of lowering that maybe 100 basis points. And maybe just talk about what sort of ongoing impact that may have.

Yes. So this is Walter. So as I previously indicated, certainly, we are evaluating. We do believe still, as we look at it, it is still aberrational from that standpoint. We'll certainly take a deep review in the third quarter. One of the things, it is a couple of hundred million dollars, as I indicated. But I just want to make sure we all understand. Yes, that is a couple of hundred million dollars, but that has no impact on our excess capital as we evaluate that. And so we will be taking a look again and evaluating it. But again, no impact to our excess capital.

Got it. Understood.

Walter, I think one -- he -- it wasn't -- that would be beyond the 100 basis points. That's not just for...

That would actually -- yes. That would be -- if you take a look at moving that both on the glide path and on the interest rate. So we'll be looking at both those items that have been raised and that we previously discussed.

Got it. And -- so you're saying a couple of hundred million doing both of those things but...

Yes.

But no other specifics around sort of what you guys are thinking about?

Well, right now, the actuary has evaluated that we certainly look, as you saw where the spread really increased, so that threw -- while the treasury went down, the spread went up. So you throw a multitude of factors going in. So those are all the things they are taking into consideration. And certainly, we will be taking a deeper dive look as we head into the third quarter to reassess that. But there's still a lot of aberration going through that. But...

Got it. Yes, that's fair. And then just following up on the bank. I understand you guys injected $100 million into the bank, which is one of the reasons why the excess capital went down. I guess what size does that -- in terms of on-balance sheet bank assets, does that contemplate versus the $6 billion at the end of the first quarter? And then you spoke about $120 million of a sequential drag from rates in AWM. Does that include considering shifting assets out of sweep and into the bank? And I guess I would think that, that would provide somewhat of an offset to that $120 million, but I'm not sure if that's in there or not.

Yes. That -- again, that is -- certainly, we will get an offset as we shift the assets onto the balance sheet and we start getting in the spread income as it relates to because right now in the sweep accounts, it is module -- profitability based on the Fed taking it down to 0. But certainly, we have some profitability there. But that is one of the advantage we will have with the bank as we move and we start getting the spread coming through diversified investment -- loan investment portfolio there. And we've already saw that some of that advantage starting to take hold as we invested in -- at the end of the first quarter investing into April. And the majority of that is on -- again, pretty much there is -- close on the $120 million. It's -- I would say that it has a factor within it. But it's -- we do anticipate benefits coming from the bank as we move through 2020 and forward.

Our next question comes from John Barnidge from Piper Sandler.

Could you talk about what percent of your commercial real estate portfolio is in rental for Barron's for April 1 and maybe what your expectations are for May 1?

That are in where? I'm sorry. Can you repeat that?

Rental for Barron's seeking rent release.

Okay. Right now, we're getting some coming in. It's actually been small. We're talking to -- maybe about less than 10% of the balances are asking for that. And -- but you got to remember, the portfolio is extremely strong using the fundamentals as it relates to loan-to-value at 46% and looking at a debt coverage, which is -- leverage coverage was 2.6. So this is a portfolio we've been with a long time. But we are seeing some. But again, strong fundamentals, and we are working with them, obviously. But we do not anticipate a significant cash flow issue at all at this stage.

Great. And then my follow-up question, a lot of people are working from home right now as -- in your organization and others. How do you view a return-to-work environment emerging? Do you see 100% going back? Or do you see there being a real estate and expense savings emerging?

So I think we and all of the businesses are really reviewing this now. And so our philosophy and our principles will be that we are guarding the health and safety of all our people. We've been able to work remotely with no disruptions and really support our client activity really well. Having said that, as you would imagine, some people want to get back to work. Some people would like to engage a little more face-to-face. And therefore, we are looking at sort of a phased approach for reentry, and that phased approach will be really triggered by every one of the states individually and locales individually of what they feel is appropriate and safe as far as people reentering the workforce. And then all of our facilities are being set up so that they can accommodate that on a gradual reentry basis.

So I can't sit here and tell you it will be 100%. What I could say is that things, as they improve in the locales where we do business, we will start reentry on a gradual basis, a phased approach. I think in the end, we're finding that there are some things that -- where people can work remotely quite well and may want to do that on a balanced equation, in which case, we can accommodate and maybe over time move more to virtual that we're also reviewing based on the way we can do business.

We have excellent technology capabilities. We're all set up in the cloud. And so our environments are able to accommodate that and enhance the way people operate and doing it that way. So I think we'll see over time that probably 100% of what was, where we were, even though we had flexibility in work-from-home, we'll probably get more so as businesses move forward.

It's Walter. I will just add to what Jim said to your question about savings. Yes, we certainly would anticipate getting savings as it relates to T&E and other aspects of printing and on that basis and, potentially, real estate. So it really does afford us a process reevaluation. Of course, we have been so effective in working from home. And so I think that's what Jim has asked us to evaluate, but there's certainly potential.

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

Just a follow-on, on that line of questioning in terms of expenses. I think you indicated earlier this year you're looking at opportunities for further expense reengineering. Can you kind of talk about how you're thinking about G&A expenses outlook for the coming quarters as you start to maybe potentially implementing some reengineering?

Yes. Let me start, and I'll have Walter follow.

Jim, you want to take a shot?

Yes. Let me start, and then I'll have Walter complement it. So the -- our business, as you saw, is performing quite well. We have really good client engagement and activity, and we would like to continue to keep that focused. We've made some really good investments, as we told you over the last few years and, particularly, we had accelerated some of those last year that we've sort of completed, which was great. The timing was excellent for us.

And as you saw in the first quarter, overall for the firm, our expenses came down and actually were quite good and tight. And even in AWM, where we were making some of those expenses, the actual expense rate ex the bank was only up 2% with 9% revenue growth. So we are now -- what we're doing is, as Walter said in the last question, we have tightened up, as you would imagine, things like T&E and all that stuff, discretionary programs, things that don't make sense in this environment that will give us savings.

My team and I are already working on what other reengineering opportunities. But we are also looking to protect the staff. We don't want to reduce staff due to the pandemic, and we have good people. And as long as they're really productive, which we are driving in a sense of what we can do, we want to keep and maintain that. But we've restricted new hirings, additional hirings, et cetera. We've looked at everything that is more controllable on a case-by-case basis, and we'll continue to do so. And based upon how things are playing out, even including to the last question, we see opportunities that we could reduce expenses going forward.

Now with that, we'll always work to re-enhance our reengineering processes, which we have in place. But the tax benefit does give us a little more leeway, and that was what it's for relief on, so that we can maintain our staff levels a bit more at the same time that we work through this pandemic. So we feel really good, but we will control expenses tightly. But we will try to maintain the flexibility so that we don't have to hit the staff levels, which I think would be really positive because we have a good business, and we have good people.

This is Walter. I'll just add to Jim, because he covered pretty much it. We always, to your point, are very focused on ensuring that we have process and improvements that relate to reengineering opportunities. And as Jim said, we just -- with -- this change heightened that, and that's really -- so what we're feeling that we are certainly focusing on that category to ensure that we are effective and are protecting margins to -- from that standpoint to the degree we can too, okay? So it is really a major focus on the part of the firm.

That's helpful. And then I know for Protection, it's a relatively small part of the business and also you have closed LTC book. As we think about the impacts from COVID-19, do you -- can you provide some color in terms of the claims exposure? How should we think about the net mortality sensitivity to the number of deaths that you may see?

Sure. And certainly, from our standpoint, we have evaluated our coverage both from a protection standpoint and also looking at some of the benefits that you derive in the other products. The one thing to keep in mind is 75% of our mortality is reinsured. So we have a substantial benefit. And we've looked at all the aspects of the protection, annuities, long-term care offsets, the impact to us is minimal. And when we've done evaluations on and as it looks at, if there's a 100,000 deaths, a couple of hundred thousand deaths, we -- so we feel very comfortable with our proactive approaches and the way we've managed that.

The last question comes from Andrew Kligerman from Crédit Suisse.

So I want to drill down a little bit more on some of the earlier questions, particularly with regard to the bank. Could you give a sense of where you're investing and the durations of those investments? And then in terms of where the assets are coming, is it predominantly coming from the sweep accounts, which now total over $32 billion? And could you get a large chunk of those sweep assets?

So -- Andrew, it's Walt. Let me take a shot. So we previously have been certainly positioned in floaters from a -- mortgage back-floaters and things. But what we did is we really heightened that when we saw that we -- there was a huge opportunity to get spread with high-quality paper. And so we invested a substantial amount in basically fixed term that was giving us benefits that were giving us 300 basis point spreads. And so we were feeling comfortable about that. And we deployed money as it relates to that. So -- and yes, the majority of the money is coming from certainly sweep. But some money is coming -- just coming into the bank from our clientele. So yes, I think it gives us a good opportunity to really get spread income, especially when the sweep accounts are really now dropped to minimal, minimal earning rates from Fed funds.

And so Walt, do you think you can get a large chunk of that sweep business?

We can transfer it. Yes, we can still have opportunity to transfer more into the bank, certainly.

Terrific. And then this is kind of a tough one just given the investment management environment. But you mentioned how retail sales were up 50% year-over-year in the quarter. You certainly ended the fourth quarter on a very high note with improvement. So as you look out to the subsequent quarters, and maybe it's just too hard, but do you think you could replicate the improvement in the near term that we saw in the fourth quarter? Or is it just going to be a very pressured environment as we look to the next 3 quarters?

So Andrew, thank you for asking that. It is one of -- if you looked at the quarter on a relative basis to a lot of our -- the competitive frame that's been in close to $10-plus billion of outflows in the quarter for some number of them, we were quite good. And the main outflow for us was really in a very low fee account just like a few basis points and some ex parent activity, which we usually get from the insurance book.

But if you looked at the improvement, as I mentioned in the January and February, we were strongly nice in net inflow and then with the extra redemptions in March. And those redemptions sort of have slowed now that the market stabilized a bit that you're going to see when the markets get more volatile like that people start to reallocate or go to cash. The sales through April are opening up quite well on a consistent basis, which is real positive, and we're good about that.

And our institutional, we have some good product that there -- has some interest in. So we feel still good about this. This is one that we're not taking our foot off the pedal here. We feel like we got good product to sell out there. And our product is performing well in many categories. So no, we're hoping that this will continue, and that's really been our focus. And you can -- you sort of track that improvement over the last number of quarters.

And even with the dislocation that has occurred, you can even look at our outflows compared to the industry, which are quite improved and, on a relative basis, quite good. So that's where we're going to continue to maintain the focus. We think the team is doing a good job of keeping that focus even in this environment where people are working from home.

Got it. And then just lastly, I kind of -- this whole environment makes me think back to 2009, 2010. And you made that despite the pressures in the asset management sector, Columbia has been a fabulous acquisition. What are you seeing out there right now? Are there opportunities? Do you want to kind of sit tight with your excess capital because there might be an opportunity in lieu of buybacks?

So we always, as we've mentioned to you, we feel like -- and that's what we explained to you through the discussion we had at the end of last year at our community meeting, that we are -- we do have a good hand. We've made a lot of improvements. We got good product. We've enhanced our distribution capabilities, our technology capabilities. And so we're continuing on that path, and we feel good that we can continue to make good progress there.

Again, I do believe that you will find that sometimes when you have dislocations, people realize that maybe there are some other things they should look at, maybe consolidation will continue to occur in that light. So we have capability. We've been one of the few firms that have successfully acquired and integrated. We know that we have that capability. At the same time, we're not looking to rush out to do anything right now. We don't need to. We have a good -- but we have flexibility in case something comes along strategically. That can be a complement to what we have. So we're just looking.

And as we said, we feel good about where we are. We feel good about how our capital situation but also our earnings. So -- but if something comes along down the road that makes some sense, we'll look at it. But right now, we really don't have any impetus to want to drive to something at this point in time unless it really fits neatly.

We have no further questions. This concludes today's conference. Thank you, ladies and gentlemen, for participating. You may now disconnect.