Ameriprise Financial, Inc. (NYSE:AMP) Q3 2023 Earnings Call Transcript

Ameriprise Financial, Inc. (NYSE:AMP) Q3 2023 Earnings Call Transcript October 26, 2023

Operator: Welcome to the Q3 2023 Earnings Call. My name is Chris and I will be your operator for today’s call. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the call over to Alicia Charity. Alicia, you may begin.

Alicia Charity: Thank you and good morning. Welcome to Ameriprise Financial’s third 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’d be happy to take your questions. Turning to our earnings presentation materials that are available on our website on Slide 2, you see a discussion of forward-looking statements. Specifically, during the call, you will hear references to various non-GAAP financial measures, which we believe provides insight into the company’s operations. Reconciliation of non-GAAP numbers to their respective GAAP numbers can be found in today’s materials and on our website. Some statements that we make on this call maybe forward-looking reflecting management’s expectations about future events and overall operating plans and performance.

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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 third quarter 2023 earnings release, our 2022 annual report to shareholders and our 2022 10-K. We make no obligation to publicly update or revise these forward-looking statements. On Slide 3, you see our GAAP financial results at the top of the page for the third quarter. Below that, you will see our adjusted operating results, followed by operating results excluding unlocking, 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.

We completed our annual unlocking in the third quarter. Many of the comments that management makes on the call today will focus on adjusted operating results. And with that, I will turn it over to Jim.

Jim Cracchiolo: Good morning and thanks for joining our call. Yesterday afternoon, Ameriprise reported strong third quarter earnings. The business continues to perform very well in a fluid and uncertain operating environment. Across the firm, we are helping clients navigate external pressures with our high-quality advice solutions and service. As you can see in our results, Ameriprise continues to benefit from the complementary strength and flexibility of our business and our talented team. Regarding the economic landscape, while inflation has come down a bit, it remains elevated, so it’s likely we will see higher interest rates for longer. Economic growth in the United States continues to hold up well even with increased rates.

However, consumer sentiment in the United States is declining and we may see soft economic growth in the future. Additionally, the geopolitical climate is causing further volatility. Equity markets have been resilient and were up year-over-year but down slightly in the quarter. At the same time, many investors are holding greater levels of cash and feel comfortable earning competitive yields in cash products. Our assets under management and administration reached $1.2 trillion, up 12% and financials were also strong. We delivered record operating results in the quarter. Excluding unlocking and a regulatory accrual, total adjusted operating net revenue grew nicely, up 10% to $3.9 billion, and earnings were also quite strong, up 18% with EPS up considerably, an increase of 24%.

Additionally, our return on equity was 49.9% compared to 48% a year ago. Very few firms in our industry achieved nearly a 50% ROE on an ongoing basis. Our complementary businesses consistently generate strong financial results. Let’s start with wealth management. Our advice value proposition is built for the current environment. Advisers are focused on ensuring clients are highly engaged and deepening relationships with them. Importantly, client satisfaction remains at an excellent 4.9 out of 5 stars. Total client assets increased 15% to $816 billion with good client net flows of $8.9 billion in market appreciation. We continue to attract more new clients and move up market as we grow our client base. And we know from industry research that more investors need guidance.

In fact, among the fluent households, many investors in the marketplace still don’t have a formal plan to manage assets, income and expenses and retirement. As we highlighted previously, our advisers continue to hold a higher level of cash for their clients with the highest short-term yields they’re able to attain and the market uncertainty. Therefore, we continue to see a lower percentage of our assets moving into wrap with $5.4 billion in the quarter. As markets settle, we expect that money will ultimately be redeployed into wrap and other solutions. Our re-entry back into the banking business came at the right time and is very beneficial for the firm. Assets in the bank and certificate company continued to increase substantially up 37% to $35 billion.

With interest rates at this level, we’re able to gain meaningful spread revenues that are sustainable when the Fed does start to cut rates. We will also be launching new products in the bank that will bring over additional client cash that they’re holding at other banking institutions. And overall, after a bit of a slowdown last year, we saw a nice increase in transactional activity up 11%. As you know, we continue to invest to put great capabilities in advisers’ hands to drive high satisfaction and growth and deliver an exceptional experience. We’re using advanced analytics to deliver an even better client and adviser experience. This includes a complete practice dashboard to enhance practice management, prepare for client meetings more efficiently, identify opportunities to grow their business and deepen their client relationships.

In the quarter, we were back in the market with our successful Ameriprise brand advertising across TV, digital and social channels. We also redesigned our client website to even be more engaging, highlighting the unique benefits of working with an Ameriprise adviser. Adviser productivity increased another 10% to a new high of $901,000 per adviser in the quarter. Our adviser retention and growth are both consistently among the best in the industry. Regarding recruiting, we brought in another 64 experienced productive advisers. We had a bit of a seasonal slowdown of activity to begin the quarter but saw a nice pickup in September and we believe that we’ll return to more normal levels as we move through the rest of the year. Our reputation is an important differentiator.

We recently learned that Ameriprise is being recognized for both a high level of customer trust and service. We received one of the highest customer trust index scores among financial services firms and foresters 2023 U.S. Customer Trust Index. And for the fifth consecutive year, J.D. Power has recognized Ameriprise for providing outstanding customer service experience for phone support for advisers. These awards build on the external recognition we have received over the years and are a testament to the dedication and expertise of our team. Finally, in terms of profitability, Wealth Management continues to generate strong pre-tax adjusted operating margin at more than 30% and earnings growth of 23%. Now let’s move to Retirement and Protection which is part of our wealth management solutions offering.

We’re driving good sales in targeted focused areas that serve our clients’ comprehensive needs and generate good risk-adjusted returns. In our life business, we focused on variable universal life and disability products that are appropriate for this environment. Life and health sales were up nicely, increasing 22%, with the majority of sales in higher-margin accumulation VUL products. We’re also seeing positive initial results from our accelerated underwriting modeling, that’s highly automated and will drive further efficiencies as we roll it out more fully. In variable annuities, our structured product continues to attract good interest. Combined with our variable annuities without living benefits, sales were up 18% from a year ago.

In the quarter, our RiverSource Retirement interactive tool which helps advisers create customized client presentations was recognized with several industry awards for innovation and ease of use. With the increase in rates, we’re able to garner improved yield in our high-quality investment portfolio. Excluding unlocking, pre-tax adjusted operating earnings were more than $200 million. Our RPS business has been highlighted as one of the most profitable in the industry. Let’s turn to Asset Management. As you saw in the quarter, assets under management were $587 billion, up 7%, it remains a challenging time, both in asset management and the active space in particular. Our flows were largely consistent with the industry. In retail, as we know, people are still hesitant to put money to work, so gross sales were a bit weaker.

However, redemptions have improved and our overall flow rates in the U.S. are in line with active managers for the product disciplines we compete in. And in Europe, our flows have improved a bit from a year ago. Institutional mandates can be lumpy, but we were in net flows, excluding legacy insurance partners. We’re earning mandates in a number of areas, though LDI flows in total were down compared to a robust quarter a year ago. In regard to our investment performance, we have strong short- and long-term performance across equities, fixed income and asset allocation with a nice pickup in the short-term fixed income. And now about 70% of our asset-weighted funds were above the median for 3- and 5-year periods and more than 85% for the 10-year period.

This is a positive and will help our ability to garner flows in the future. Also in the quarter, we completed one of the largest aspects of the EMEA integration, the transition to our global order management system. With that, we have now completed all of the large integration activities. We are now focused on adjusting our global operating model and expenses so we can continue to generate good margins in a tough climate. For Asset Management, adjusted operating margin was 36% and above our targeted range. G&A was down 3% adjusted for foreign exchange. We also have taken action to tightly manage expenses and we’re looking more fully across the business to continue to reduce expenses and leverage more operating efficiencies for the rest of this year and into 2024.

I’d like to now come back to set the stage in the total firm. Our complementary businesses continue to give us the ability to deliver for our clients and generate very strong financial results over the years. Our capital strength and flexibility remain excellent. Our capital return to shareholders is among the highest in the industry and we have consistently generated strong financial returns over the years, including with our best-in-class ROE of approximately 50%. Ameriprise is situated very well, including with the complementary addition of the bank, which allows us to sustain the benefit from higher rates. We’re not standing still. We’re focused on areas of opportunity for growth and at the same time, we’re examining the entire expense base across the firm to further prepare, if the economic environment slows as we move into and through 2024.

In closing, it’s the totality of our complementary business and the benefits that it provides back to our excellent team that enables us to consistently achieve this level of results. Now Walter will elaborate on our financials. Walter?

Walter Berman: Thank you. As Jim said, strong results this quarter continue to demonstrate the leverage of our diversified business model, with adjusted EPS, excluding unlocking and regulatory accrual up 24% and to $7.87. Growth in fee-based and spread-based revenues, coupled with disciplined expense management drove excellent financial results which is a continuation of our strong and sustainable trend across this market cycle. Assets under management and administration ended the quarter at $1.2 trillion up 12%, AUMA benefit from strong client flows and market appreciation. Across the firm, we continue to manage expenses tightly relative to the revenue opportunity within each segment. While we continue to make investments in the bank and other growth initiatives, particularly in wealth management, we are taking a disciplined approach on discretionary expenses to manage margins across our businesses given the uncertainty in the macro environment.

G&A expenses were well managed in the quarter, up 4%. Excluding the regulatory accrual General and Administrative expense grew 2% from higher business volumes and growth investments. Our G&A expenses remain on track with our expectations for the year. Our consolidated margin reached a record high of 27.5%, excluding unlocking and regulatory accruals. Balance sheet fundamentals remain strong. Our portfolio is well positioned, and we have strong capital and liquidity positions. This allowed us to return $663 million of capital to shareholders, a strong return of 81% of our operating earnings, excluding unlocking and a continuation of our differentiated track record. Turning to Slide 6. Revenue growth was strong at 10% from higher interest earnings and the cumulative benefit of client net inflows with average equity markets up 11%.

Excluding unlocking and the regulatory accrual, pretax operating earnings increased 20% from last year, with meaningful benefits from strong client flows higher interest earnings and well-managed expenses. Let’s turn to individual segment performance, beginning with Wealth Management on Slide 7. Wealth Management client assets increased 15% to $816 billion driven by strong organic growth and client flows, along with higher equity markets. We’ve had $43 billion of net inflows over the past year, with $9 billion coming in this quarter from new clients joining the firm, the deepening of existing relationships and adding experienced advisers. Clients remain defensively positioned with a lower level of flows into wrap than we have seen historically.

Our flexible model and broader offerings allow advisers and clients to pivot as markets and client preferences shift, while the money stays within the system. Revenue per adviser reached $901,000 in the quarter, up 10% from the prior year from a higher spread revenue, enhanced productivity and business growth. Turning to Slide 8. I’d like to provide an update on client cash levels. Our total cash balances reached a new high this quarter at $72.5 billion as we continue to see new money flowing into money market funds and brokered CDs as well as into certificates. This creates a significant redeployment opportunity as markets normalized for clients to put money back to work in wrap and over products on our platform. Cash sweep is launching working cash for our client accounts.

While there is some seasonality with cash levels, cash remains an important component of the client’s asset allocation. Cash sweep and certificate balance ended the third quarter at $40.5 billion, down $5.8 billion from a year ago and down $1.5 billion sequentially. Since the end of August, cash levels have been essentially flat. Our sweep cash has an average size of $6,000 per account and 67% of the aggregate cash is now in accounts under $100,000, and we have seen very limited movement out of these accounts. The financial benefit from cash remains strong. This will be an important and sustainable source of earnings going forward. We continue to manage our investment portfolios prudently. Our bank portfolio is AAA rated with a 3.6-year duration.

The overall yield on the investments in the portfolio is 4.7% and rising with the new money yield on investments in the second quarter of 6.5%. Our certificate portfolio is highly liquid of over half of the portfolio in cash, governments and agencies. It is AA rated on average with a 1-year duration. In total, specific company portfolio is now yielding 5.6%, with new purchases in the quarter at 6%. On Slide 9, we delivered extremely strong financial results and wealth management. Profitability, excluding the regulatory accrual increased 26% in the quarter with strong organic growth, the benefit of higher interest rates and continued client net inflows. The pretax operating margin was very strong at 31.1%, excluding the regulatory accrual. Adjusted operating expenses increased 9% with distribution expenses up 9%, reflecting higher asset balances.

Excluding the regulatory group, G&A grew only 2%, which was in-line with expectations, reflecting investments for growth and higher volume-related activity. We continue to expect AW1 full year 2023 G&A growth to be in the mid single-digit range. We remain on track to close the Comerica investment program partnership in November, which will bring approximately 100 advisers and $18 billion of client assets. Let’s turn to Asset Management on Slide 10. Financial results were very strong in the quarter, and we are managing the business well through a challenging environment that is impacting the industry. Total AUM increased 7% to $587 billion, primarily from higher equity markets and foreign exchange translation, partially offset by net outflows.

Asset management, like other active managers, was in outflows in the quarter. Like others, we experienced pressure from global market volatility and a risk-off investor sentiment. Investment performance has been another critical area of focus, and we are seeing improvement, including in fixed income strategies. Overall, long-term performance remains very strong, and we had improvement in 1-year fixed income numbers. On Slide 11, in the quarter, asset management earnings increased to $199 million as a result of equity market appreciation, discipline and expense management, higher performance fees and $7 million of favorable timing-related items, which more than offset the cumulative impact of net outflows. The margin was 36% in the quarter. Importantly, we continue to manage the areas we can control.

Expenses remain well managed, total expenses declined 1% with G&A decreasing $1 million. However, excluding the impact from foreign exchange translation, G&A was down 3%, reflecting early benefits from expense management initiatives. As Jim said, given the environment, we are taking a very focused look of course of business globally to further reduce expenses. Let’s turn to Slide 12. Retirement & Protection solutions continues to deliver good earnings and free cash flow generation. Reflecting the high quality of the business. In the quarter pretax adjusted operating earnings excluding unlocking, were $204 million, up 4% from the prior year, primarily as a result of the higher investment yields from the portfolio repositioning we executed last year.

We continue to view normalized annual earnings of $800 million as a reasonable expectation for this business. We completed our annual actuarial assumption update in the quarter resulting in an unfavorable pretax impact of $104 million, primarily related to updates to persistency assumptions for variable annuities. Overall, Retirement & Protection Solutions improved in the quarter, with protection sales up 22% to $79 million, primarily in higher-margin UL products. Variable annuity sales grew 18% to $1.1 billion, with the majority of the sales in structured variable annuities. Our long-term care business continues to perform very well. The business is gradually running off as clients age. Our claims experience continues to perform very well and remain in-line with our expectations.

Additionally, I’ll assess with both rate increases and benefit reduction strategies have exceeded our expectations. You can see additional detail of this block in the appendix of this presentation. Now let’s move to the balance sheet on Slide 13. Our balance sheet fundamentals remain strong, and our diversified high-quality investment portfolio remains well positioned. In total, the average credit rating of the portfolio is AA with less than 1% of the portfolio and below investment-grade securities. VA hedge effectiveness remained very strong at 94%. Our diversified business model benefits from significant and stable 90% free cash flow contributions across all business segments. This supports the consistent and differentiated level of capital return to shareholders.

During the quarter, we returned $663 million to shareholders and still ended the quarter with $1.4 billion of excess capital and $1.9 billion of holding company available liquidity. With that, we will take your questions.

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