Ameriprise Financial, Inc. (NYSE:AMP) Q1 2023 Earnings Call Transcript

Ameriprise Financial, Inc. (NYSE:AMP) Q1 2023 Earnings Call Transcript April 25, 2023

Ameriprise Financial, Inc. beats earnings expectations. Reported EPS is $7.25, expectations were $7.21.

Operator: Welcome to the Q1 2023 Earnings Call. My name is Boothe (ph) and I’ll be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. And as a reminder, the 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 first quarter earnings call. On the call with me today are Jim Cracchiolo, Chairman and CEO; and Walter Berman, our Chief Financial Officer. Following their remarks, we’d 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 insights 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 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 2023 earnings release, our 2022 annual report to shareholders and our 2022 10-K report. 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 first quarter. Below that, you’ll 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.

James Cracchiolo: Good morning, everyone, and thanks for joining today’s call. As you saw in our release, Ameriprise had an excellent first quarter, building on a strong year in 2022. As you know, equity markets were choppy up for the quarter, but still down 9% from a year ago, and interest rates were up strongly year-over-year. However, questions around whether we’ll see a hard or soft landing continues to play in the background. And the failure of certain regional banks and another large financial institution caused investor concern. To confirm, Ameriprise has no exposure to the recently affected banks. With regard to our bank, our deposit base is extremely stable, our investment portfolio is high quality with a short duration and it’s all held as available for sale.

In addition, all of our client cash sweep deposits in Wealth Management and the bank are FDIC or SIPC insured. As we reflect on the quarter, I’d like to reinforce some important points. Ameriprise remains strong and stable. We navigate environmental uncertainty extremely well for our clients in the business, and we demonstrated that again. Ameriprise is a diversified business with Wealth Management representing two-thirds of the firm’s earnings, complemented by our Retirement & Protection Solutions and Asset Management businesses. This diversity enables us to generate strong results and multiple revenue streams across market cycles and offset pressures. We can also quickly capitalize on opportunities and deal with risk. Last and importantly, our financial foundation, risk management and expense discipline are all excellent.

We’re able to consistently invest in business growth across market cycles and return to shareholders at attractive levels. With that as background, I’ll discuss the strong adjusted operating results we achieved in the first quarter. Revenues grew 3% to $3.7 billion, driven by double-digit growth in Advice & Wealth Management. Earnings were up nicely with pre-tax adjusted operating earnings up 20% and EPS up 25%, which is significant. And the return on equity, excluding AOCI, was 50%. Our return on equity continues to be among the best across financial services. Our assets under management and administration ended the quarter at $1.2 trillion. It’s down from a year ago due to lower markets and a negative impact from foreign exchange translation, which was partially offset by our strong client flows.

Let’s turn to business highlights. In Advice & Wealth Management, we delivered another excellent quarter. We’re bringing in strong flows as we focus on providing more advice to more clients and deepening our relationships. Client inflows continue to be robust, more than $12 billion in the quarter, up 18% and very close to an all-time high, and this builds on our record year in 2022. Both wrap flows and transactional activities were impacted due to market volatility. We expect to see a pickup in wrap and other solutions as markets and the environment settle over time. The Ameriprise client experience helps drive leading client engagement. Our advisers are supporting clients with our excellent market volatility resources and advice-based client experience.

Even during this period of heightened uncertainty, client satisfaction remains very high at 4.9 out of 5 stars. Our adviser value proposition is another differentiator. Ameriprise Advisor retention is among the best, and productivity continues to grow nicely, increasing 5% to $847,000. Advisors continue to tell us that they love our technology, tools and support. For example, we’re rolling out a great new capability called e-meeting that reduces adviser meeting prep time down to just a matter of minutes and generates a highly personalized professional presentation focused on client goal achievement. In addition to our legacy advisors, our experienced advisor recruits appreciate our client and advisor value propositions as well as the firm’s financial strength.

Another 83 experienced advisors joined us in the first quarter. The quality of the people we’re bringing in continues to build in terms of practice size and productivity, and we’re seeing a nice recruiting pipeline ahead. As you know, we began building the Ameriprise Financial Institutions Group channel a few years ago. Since then, we partnered with a number of quality financial institutions who want to work with a firm like Ameriprise that can provide excellent client and advisor service. In the quarter, we announced a new bank partner, Comerica Bank. This partnership will bring approximately 100 financial advisors and $18 billion in assets by the end of the year. Regarding our bank, it’s growing nicely. We’re adding additional deposits, have grown it to $20 billion in just a few years.

It’s an attractive complement to gain spread revenue in this rate environment. And we had strong growth in our certificate business with assets now close to $12 billion as well as good growth in our pledge loan business. At the end of the quarter, we launched a new savings product and we’ll follow that with our home brokerage CD in May, as well as preferred savings vehicle later in the year. As we grow in the marketplace, we continue to build on our strong brand awareness. In the quarter, we launched the next phase of our advertising to further promote our referable advice value proposition and the excellent client satisfaction we consistently earn. And the Ameriprise team and I are also immensely proud to be recognized for how we operate and do business.

Some of our recent awards include being ranked as one of the most trusted wealth managers by Investor’s Business Daily. Ameriprise is also ranked number two in trust on Forrester’s U.S. Customer Trust Index. In addition, we were named one of America’s Best Customer Service companies for 2023 by Newsweek. And for the fourth consecutive year, J.D. Power’s recognized Ameriprise for providing an outstanding customer service experience for our phone support for advisors. Overall, for our Wealth Management business, earnings were up strongly again, 58% year-over-year and our margin was 30.6%, a new record for Ameriprise. Turning to Retirement & Protection. We continue to perform nicely while adding value and stability in this environment. This business consistently generates good returns and strong free cash flow.

We maintained solid books and our investment portfolios are high quality. With the improved interest rate environment, we’re able to reposition our portfolio and as investments mature, we’re able to reinvest and generate better returns. In terms of priorities, as you know, we are very much focused on asset accumulation products that align with our client needs and our risk profile, which results in a very solid liability base. Our structured annuity product is our best seller, combined with our RAVA annuities without living benefits. And in our Life business, we’ve shifted to concentrate on VUL and disability products that are appropriate for clients in this environment and generate strong returns. Sales are down, but we are similar to the industry.

Even with slower sales, we continue to generate good earnings up 11% from a year ago. In fact, last year, our Life Company was ranked as the second highest returning company in the industry. Now let’s turn to our Asset Management business. We’ve been impacted by market volatility and industry-wide sales pressure. However, the business continues to perform well and generated good returns and margin. Assets under management was $608 billion at the end of the first quarter, down 13% from a year ago, largely driven by lower markets and the impact of negative foreign exchange translation. Regarding flows, total outflows were $1.7 billion, excluding legacy insurance partner flows. In U.S. retail, like others in active management, we remain in net outflows as gross sales were pressured from market volatility.

That said, redemptions are better sequentially. In EMEA, our flows improved a bit from a year ago. In institutional, we had another good quarter. We had inflows of $2.8 billion, excluding Legacy insurance partner flows, driven by wins and fixed income, real estate and LDI. Expanding our alternatives capability as a long-term priority, including global real estate, where we are building out the business and earned a large mandate in the quarter. With regard to investment performance, we continue to have stronger long-term performance across equities, fixed income and asset allocation strategies. While our one year numbers were impacted by market volatility, primarily in certain fixed income strategies, we’re starting to see those numbers come back this year as interest rates stabilize and given our strength in credit.

And we maintain 118, 4 and 5 Morningstar rated funds globally. Across regions, we’re earning important recognition, including recent Lipper awards and other accolades. In addition to focusing on investment performance, we continue to work through our EMEA integration. We plan to complete much of it by the latter part of the year and look forward to deriving additional synergies. In Asset Management, we also continue to manage G&A tightly. So overall, I feel very good about the firm, how we’re engaging clients and the results we’re driving. We have not had to divert from our chartered costs and we’re generating strong growth and returns in a rocky climate. We continue to have strong free cash flow as well as the ability to return to shareholders.

In the quarter, we returned another $641 million in buyback and dividends and we just announced another dividend increase up 8%, our 19 increase since going public in 2005. To close, Ameriprise delivered an excellent quarter and we’re well positioned to continue to navigate the environment, manage expenses well, while investing for growth. Now, Walter will provide further detail on our financials and we’ll answer your questions after his remarks. Walter?

Walter Berman: Thank you. As Jim said, results this quarter continue to demonstrate the strength of the Ameriprise value proposition as adjusted EPS increased 25% to $7.25. Wealth Management business momentum, higher interest rates and expense discipline more than offset the equity and fixed income market dislocation over the past year. This reinforced the value of our diversified business model. Wealth Management earnings grew 58% and represented 66% of the firm’s adjusted operating earnings, a new record. This is up from 49% a year ago. Asset Management was challenged with industry flow pressures as well as substantial market impacts to AUM. And Retirement & Protection Solutions delivered a good 11% growth primarily from opportunistically repositioning the investment portfolio as well as from the lower sales levels given the environment.

Across the firm, we continue to manage expenses tightly relative to the revenue opportunity within each segment. As a result, we continue to make investments in the bank and other growth initiatives, particularly in Wealth Management by prudently managing overall firm-wide expenses. In the quarter, G&A was down 1%. Our balance sheet fundamentals remain strong, and we saw limited impacts from the significant market disruption in the quarter. Our portfolio is positioned well and no assets are accounted for as held to maturity. We have strong capital and liquidity positions as well as effective hedging. This allowed us to return $641 million of capital to shareholders, a strong return at 80% of our operating earnings. Let’s turn to Slide 6. Assets under management and administration ended the quarter at $1.2 trillion, down 8%.

While AUMA benefited from strong client flows, we experienced significant market impacts. Equity in fixed markets were down 9% and 5%, respectively, year-over-year. In addition, asset management AUM levels were substantially impacted by weakening of the pound and euro, resulting in non-U.S. AUM down to approximately 36% of the total. The portfolio effect of our business mix garnered robust earnings growth with pre-tax earnings up 20% from last year with meaningful benefits from strong client flows and interest rates more than offsetting significant negative equity and fixed income markets and foreign exchange impacts. Free cash flow generation remains strong. Let’s turn to individual segment performance beginning with our strongest growth business, Wealth Management on Slide 7.

Wealth Management client assets declined 3% to $799 billion. Strong organic growth in client flows was more than offset by significant market depreciation over the past year. Total client net flows remained strong at $12.3 billion, up 18% from last year, evenly split between wrap accounts and non-advisory accounts. Our flexible model and broad offering allow advisors and clients to pivot as markets and client preferences shift, while keeping money within the system. Revenue per advisor reached $847,000 in the quarter, up 5% from the prior year from higher spread revenue, enhanced productivity and business growth. Turning to Slide 8. I’d like to provide some additional insights into the sustainability of our client cash. The safety of these deposits and our investment approach managing cash that is at our bank and certificate companies.

Our cash balances are relatively stable in total at $44.3 billion in the quarter and about 5.5% of total client assets. While there is some seasonality with cash levels, particularly with tax payments in March and April, cash has always been a component within the client asset allocation and generally remains above 4% of client assets. Sweep cash specifically has an average size of $7,000 per account and over 60% of the cash is in accounts with less than $100,000. As I mentioned, we have a broad set of product offerings to meet our client needs across environments. From a cash perspective, we have our sweep cash and certificate offerings with many options for clients seeking yield and looking to ladder their liquidity. In the quarter, we launched a new savings account option within the bank and will be adding a preferred savings account and broker CD later this year.

Lastly, we have no assets that are accounted for as held to maturity, and our portfolios are constructed under the rigor of our asset liability modeling approach. Our bank portfolio is AAA rated with a 3.1 year duration. The overall yield on the portfolio is 4.3% and the yield on investments made in the first quarter was over 6%. Our certificate company portfolio is highly liquid with over 55% of the portfolio in cash, governments and agencies. It is AA+ rated and on average, with a 0.8 year duration. The yield on this portfolio was 5.3% and purchases in the quarter were at a yield of 5.2%. On Slide 9, we delivered extremely strong results in the Wealth Management on all fronts. Profitability increased 58% in the quarter with strong organic growth and the benefit of higher interest rates offsetting the impacts from market depreciation.

Pre-tax operating margin reached nearly 31%, up over 910 basis points year-over-year and up 70 basis points sequentially. Adjusted operating expenses declined 2% with distribution expenses down 5%, reflecting lower transactional activity and asset balances. G&A is up 7% in the quarter as we continue to invest for growth, including the bank. Let’s turn to Asset Management on Slide 10. We are managing the business well through a challenging market. Total assets under management declined 13% to $608 billion, primarily from equity and fixed income market depreciation and negative foreign exchange impact. Asset Management, like the industry was in outflows in the quarter, continued strength in our global institutional business offset a meaningful portion of retail outflows.

Like others, we experienced pressure from global market volatility, a risk-off investor sentiment and continued geopolitical strain in EMEA. As a reminder, flows in the prior year included $2.6 billion related to the U.S. asset transfer associated with the BMO acquisition. On Slide 11, you can see Asset Management financial results reflected the market environment. As anticipated, earnings declined to $165 million, reflecting market depreciation, foreign currency weakening and outflows as well as lower performance fees than a year ago. Importantly, we continue to manage the areas we can control. Expenses remain well managed. Total expenses were down 13%, aided by a 11% decline in G&A, which benefited from lower performance fee compensation.

We continue to make market-driven trade-offs and discretionary spending and remain committed to managing expenses very tightly in the current revenue environment. Margins in the quarter improved sequentially to 31%, returning to our targeted range of 31% to 35%. Let’s turn to Slide 12. Retirement & Protection Solutions continued to deliver good earnings and free cash flow generation, reflecting the high quality of the business. As you are aware, the long duration targeted improvement accounting change went into effect in the first quarter. Our current period and historic results are now being reported under this framework. While this accounting change impacts GAAP equity and earnings, it does not impact our dividend capacity, excess capital or cash flow generation, which are based upon statutory accounting framework.

In the quarter, pretax adjusted operating earnings was $194 million, up 11% from the prior year, primarily as a result of higher investment yields from the portfolio repositioning we executed over the past six months. We estimate that LDTI will reduce RPS earnings by approximately $50 million for full year 2023 versus the $63 (ph) million impact in 2022. As it relates to the year, we remain comfortable with the $800 million run rate taking into consideration the impact of LDTI and the benefit from portfolio repositioning and higher rates. Sales in the quarter, similar to the industry, declined as a result of the volatile market environment as well as management action to discontinue sales of variable annuities with living benefits to further reduce the risk profile of the business.

Protection sales remain concentrated in higher-margin asset accumulation VUL, which now represents over one-third of the total insurance in force. Annuity sales in the quarter were in lower-risk products without guarantees and structured variable annuities. These products represent over 40% of our total VA account value. 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 only 1.3% of the portfolio in below investment-grade securities. Despite significant market dislocation in the quarter, VA hedging effect in this remains very strong at 95%. Our diversified business model benefits from significant and stable free cash flow contribution from all business segments.

This supports the consistent and differentiated level of capital return to shareholders even during periods of market depreciation. In light of the LDTI accounting change, we incorporated a new non-GAAP disclosure in our earnings release of available capital for capital adequacy. This represents how we manage capital and is unchanged as a result of LDTI. During the quarter, we returned $641 million to shareholders and still ended the quarter with $1.3 billion of excess capital and $1.6 billion of holding company liquidity. With that, we’ll take your questions.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. We’ll take our first question this morning from Brennan Hawken of UBS. Please go ahead.

Brennan Hawken: Good morning. Thanks for taking my questions. I’d love to start on cash and the outlook for rate earnings in AWM. So you’ve seen growth in certificates. You mentioned a high-yield offering in bank that you just launched and then further brokered CDs. And certainly, this will satisfy demand for yield that we see for cash equivalents. But — do you think that the current level of NII can be maintained going forward? Is the increasing deposit costs enough to offset the shift to the bank or are you able — is the shift to the bank able to keep things steady here at the current levels? Thanks.

Walter Berman: Okay. So yes, the answer is yes. What we are seeing in that — certainly, we are looking at the way the sweep accounts have performed that we have the opportunity to shift more into the bank, and we’ll be evaluating that because of — basically, the way that it is performed right now, and that will give us additional yield as it relates to that. And also — we also see on the search that we will — based on timing, we will also see that the spread will increase in that. So we guess the answer is absolutely, yes, both from shifting additional funds into the bank, which has a higher profitability and also the asserts (ph) as we look at the spread increasing from a timing standpoint as we adjust. So yes, the answer is yes.

Brennan Hawken: Okay. Thank you for that. And then at this point, through April, you’ve moved $3 billion, which I believe you previously indicated as your plan for the year. Do you plan to move further balances into the bank. And then beyond the balance transfers, do you expect that these new savings offerings could allow you to actually see organic non-transfer oriented growth coming out of the bank as well? Thanks.

Walter Berman: Okay. So on the first one, yes. So as we look at the and certainly, in the first quarter, you always have the tax, but we — clearly, it is performing the way we thought and is slowing, and that gives us the opportunity. We’re evaluating that. But we do have additional opportunity with everything we have in our sweep accounts to move more in, and that’s what we’re evaluating — so that would — is a distinct possibility.

James Cracchiolo: Yeah. And I’ll take your second question. So we just in March, launched a savings product. We’ll be launching a brokered CD in May and then a high-yield savings account a bit later in the year. And we see the opportunity to garner more cash from clients of bringing it in from their banking institutions now that we’ll have some of these products. But in addition to what we’re holding ourselves and whether it’s a sweep or either in our certificate, we have much more cash that our clients are holding externally in brokered CDs. They put money in that came into the firm or in money markets. And so we think we can garner some of that cash back in. So in total, there’s about $66 billion of cash. We have about $44 billion.

We actually think by offering the brokered CDs and things like that, that will garner some of that, that have gone out to banking institutions that our clients have put money in that we feel much more comfortable having them at Ameriprise. So we think there’s an opportunity there for us as we continue to build out the bank. And we are also holding a lot more cash as general so that our sweep activities is only about 4%, which is really always been around that level for transaction of 4% to 5%. So we feel very good that there is opportunity for us.

Brennan Hawken: Okay. Thanks for taking my questions.

Operator: Thank you. We will go next now to Erik Bass at Autonomous Research.

Erik Bass : Hi. Thank you. broader question for advise and wealth and just how you are thinking the margin from here and do you still see potential upside to margins or is your goal more to maintain them at the current and at 30% level?

Walter Berman: Well, I think the way we look at it, listen, we are probably at one of the highest margins out there in the industry, including the big wires that have, had banking activities for a long period of time. But money is, as I said, so sitting on the sidelines and cash, we are holding up with $66 billion, some of that money, not necessarily from transactional activity at the hold for expenses and other things. Some of that money will go back into wrap. I mean, what’s so positive is we brought in 12 billion of client flows. We’ve been bringing in record numbers for us over the last some many quarters and that hasn’t been deployed yet. So as they put money back into transactions and contracts and wrap a business, that will also earn us fees.

So I can’t tell you exactly what that margin is, but I would say, it’s an excellent margin and our business has some good opportunity that continue and so from my perspective I think it was a very positive quarter building on a positive VA last year.