Ameriprise Financial, Inc. (NYSE:AMP) Q4 2022 Earnings Call Transcript

Ameriprise Financial, Inc. (NYSE:AMP) Q4 2022 Earnings Call Transcript January 26, 2023

Operator: Welcome to the Q4 2022 Ameriprise Financial, Inc. Earnings Conference Call. My name is Dennis, and I will 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. . 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, operator, and good morning. Welcome to Ameriprise Financial’s Fourth 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 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 the 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 fourth quarter earnings release, our 2021 annual report to shareholders and our 2021 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 fourth quarter. Below that, you’ll 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.

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 our fourth quarter earnings call. As you saw in our release, Ameriprise delivered a strong fourth quarter, completing an excellent year in 2022. We continue to navigate uncertainty and serve our clients exceptionally well. I’ll give you an update on the business, and then Walter will discuss our financials. Let me start with the market environment. Equity markets were down 19% year-over-year, with the average equity markets down 3% sequentially. So far this year, we’re starting to see markets rebound to some extent as inflation eases, However, inflation is still at a high level. The question is, will the Fed have to continue to raise rates a bit more? Or will they maintain higher rates for longer if inflation remains stickier?

With that backdrop, Ameriprise continues to be in a strong position. Revenues were good at $3.6 billion, only down 2% from a year-ago relating to the impact of the equity and fixed income markets. Earnings were up nicely with EPS up 13% for the quarter and 11% for the year, both on new records, and ROE continued to be excellent among the best in the industry. Importantly, we’re also managing expenses well with total expenses down 5% compared to a year-ago. Assets Under Management and Administration were down to $1.2 trillion largely driven by the steep decline in equity markets, lower fixed income markets and a difficult foreign currency translation and Asset Management. As in previous quarters, our combination of businesses generates a consistent level of free cash flow and good returns across market cycles.

We’re able to consistently invest in the business, which is strengthening our competitive position and our ability to deliver differentiated results. Now I’ll talk more about our businesses. In Advice & Wealth Management, we continue to deliver very strong results and build on our leadership positions. We had good client flows in the quarter as clients remained engaged working closely with their advisors and benefiting from our comprehensive advice and solutions. Total client flows for the quarter were more than $12 billion, which is very strong, and in fact, the second highest quarter we had and just below our record fourth quarter last year. And I’ll highlight that client flows were a record for the year at nearly $43 billion. With the investment climate this year, we’ve seen an even split into the mix of flows into advisory and non-advisory accounts, which is appropriate in this environment.

We’re maintaining an appropriate level of cash balances with good growth in our certificate business and the Ameriprise Bank, which is a key growth area for us. With regard to the bank, we’ve been consistently investing to expand our capabilities. The bank provides important flexibility in this interest rate environment and enables us to further engage and deepen our relationships with clients. Our bank has grown more than 50% this year to nearly $19 billion. We have good growth in our pledged loan business, and we’re on track to launch more deposit and lending-based products this year. Our certificate company has also grown to nearly $10 billion, up $4 billion for the year. Clearly, 2022 was a very challenging year for investors to navigate the market volatility.

That’s why our high level of engagement and advice is so important. Clients highlight the positive experience they’re having with Ameriprise and our advisors. And that satisfaction leads to a strong level of trust, which we’re being recognized for. And just recently, we ranked #2 for trust in 2022 in Forrester’s new Financial Services Customer Trust Index, and that complements our Newsweek rating as one of America’s most trusted companies last year. Let’s look at advisor productivity, which also remained strong, up 4% to nearly $830,000 per advisors in a challenging market environment. One of the reasons our advisors are so productive as the level of support and tools we provide, we’re making important investments, including our branding, marketing and integrated technology.

We’re helping advisors engage clients really well in driving growth in their practices. And for the fourth consecutive year, Ameriprise was recognized by J.D. Power for providing outstanding customer service experience for phone support for advisors. Turning to recruiting. We had another good quarter with 72 highly productive advisors joining the firm. advisors are attracted to our value proposition and the strength and stability of the firm, and the pipeline looks good. So overall, we are consistently investing in the business, including the bank, which is helping to drive organic growth and continue to generate strong results. Advice & Wealth Management continue to drive the firm’s results with earnings up 41% year-over-year. Now let’s turn to Retirement & Protection Solutions, where earnings were up 25% in the quarter due to the improved rate environment and our ability to invest out.

As part of our strategy, we focused on products that meet our risk tolerances. Overall, sales were down consistent with the industry. We’re very much focused on variable annuities without living benefits, our structured products of variable universal life and DI products given our move away from fixed products. This business is very stable and delivers a very good cash flow and returns. I’d note that RiverSource was recently ranked as one of the most profitable life insurers. Now I’ll cover Asset Management. 2022 was a tough year when navigating the volatility as we focused on our clients and execute our strategic priorities. Similar to the industry, our Asset Management business faced significant headwinds due to markets depreciating in the U.S. and globally, which pressured earnings.

Equity markets were down 19%. With this, assets under management were down 23% to $584 billion, driven by market declines as well as a negative FX impact. Overall flows in the quarter were $0.4 billion out that included $1.7 billion of legacy insurance partner outflows. In retail, overall, we were in net outflows of $3.7 billion, including reinvested dividends, which were driven by the weak market conditions that both pressured gross sales and increased redemptions. In addition, in the U.S., we believe there was a heightened level of tax loss selling in December. Turning to Global Institutional, we were in net inflows of $5 billion, excluding legacy insurance partners with some nice wins in LDI strategies. With regard to investment performance, we continue to have solid three, five and 10-year numbers.

However, we have weakness in one year’s numbers given market volatility. In Asset Management, we are maintaining our expense discipline while continuing to invest in long-term priorities. They include our investment research, alternatives, responsible investment, globalizing our operations and BMO integration, which is on track. We have a strong lineup of products and capabilities, a clear focus on serving our clients. And as the environment improves, we will be well situated. Overall, Ameriprise is in a position of strength entering 2023, and we’re very much focused on engaging our clients and continuing to execute well in this environment. And with the strength and diversification of our business, including the growth of the bank, we continue to be able to invest across the firm, while continuing to return capital to shareholders at a differentiated level.

In the fourth quarter alone, we returned $610 million to shareholders. I’ll turn it over to Walter, and then we’ll take your questions.

Walter Berman: Thank you, Jim. Results this quarter were very strong, and we continue to demonstrate the strength of the Ameriprise value proposition. Adjusted EPS increased 13% to $6.94 in the quarter and increased 11% for the full-year. Our diversified business mix supports good performance across market cycles, which was certainly demonstrated in the quarter. Fundamentals & Wealth Management, particularly in its cash businesses were very strong. In total, Wealth Management now represents 64% of adjusted operating earnings up from 48% a year ago. Asset Management, like the industry, is facing substantial headwinds and earnings from this segment declined in the quarter. And the Retirement & Protection Solutions business continues to generate solid financial results and free cash flow.

We remain focused on the aspects of the business that we can control. We are executing our priorities, including investing for profitable business growth, expanding the bank and completing the integration of BMO all while meeting and exceeding client needs and maintaining a disciplined approach to managing expenses. In fact, total expenses, excluding BMO, were flat for the year. Our balance sheet fundamentals and free cash flow generation remains strong. In the quarter, we returned $610 million of capital to shareholders, totaling $2.4 billion for the full-year, while continuing to grow the bank and certificate company. We have dedicated significant capital to grow these businesses. Let’s turn to Slide 6. As you would expect in these markets, Assets Under Management and Administration ended the quarter at $1.2 trillion, down 17%.

This was driven by depreciating markets with equity and fixed markets down 19% and 12%, respectively. Additionally, Asset Management AUM levels were impacted by the weakening of the pound and the euro, with 36% of Asset Management AUM outside the U.S. at the end of the year. Despite the lower AUMA levels, operating net revenues declined only 2% to $3.6 billion as a result of higher interest earnings and pretax earnings reached a new high of $973 million reflecting the diversified revenue dynamics I discussed, coupled with the excellent expense discipline. Let’s turn to Advice & Wealth Management on Slide 7. Wealth Management continues to deliver strong organic growth and business momentum, a reflection of our differentiated value proposition.

With the challenging market backdrop, clients’ assets declined 12% to $758 billion in 2022. However, we have sustained growth of 4% over the past two years. Total client net flows remain very strong at over $12 billion in the quarter and reached a record $43 billion for the full-year. While we continue to see a solid level of flows into ARAP accounts. There has been a distinct pickup in flows going to brokerage accounts and certificates as clients navigate the market backdrop. Revenue per advisor reached $827,000, up 23% over the past two years from continued enhanced productivity and business growth. On Slide 8, you can see Wealth Management profitability was exceptional, up 41% and reached a record margin of 30% as strong organic growth and higher interest earnings exceeded pressure from market depreciation and lower transactional activity.

Adjusted operating expenses declined 5% with distribution expenses down 10%, reflecting lower transactional activity and lower client assets. G&A increased 11% in the quarter. And for the full-year, G&A grew 8%. Expense growth in the quarter was driven by continued investments in the bank and higher volume-related activity from strong organic growth. Additionally, the prior year included unusually low expenses relating to staff levels and T&A. Cash balances in the quarter increased year-over-year and sequentially to $47 billion, which included $10 billion of certificate balances. Cash rebalances have declined slightly, bringing it closer to historic levels. However, certificates have grown 76% year-over-year as clients are laddering liquidity to garner higher yields.

As a complement to our certificate offering, we are continuing to build out our savings and deposit products in the bank this year to meet the growing client appetite for yield. As a reminder, the majority of our clients sweep cash balances are working cash accounts with the average account size being only $8,000 and constituting over 60% of our total cash balances. And our operating rates continue to remain competitive with continuous benchmarking against the industry. This has translated into higher interest earnings in the quarter. The gross fee yield in the quarter reached 373 basis points, up 300 basis points from the prior year and over 100 basis points sequentially with bank and certificates driving most of it. The bank ended the year with assets of $19 billion with additional capacity to grow further.

This provides flexibility to capture the benefits of rising entries by investing in high-quality, longer duration securities. These investments will create sustainable multiple year benefits regardless of interest rate changes over that period. New mine purchases in the quarter were approximately 250 basis points above the spreads from worth balance sheet cash. This has been supplemented with strong growth within our certificate company with assets growing to nearly $10 billion in the quarter and a gross fee yield of nearly 400 basis points. As we move into 2023, we are on a trajectory to generate growth in interest earnings from the bank and grown on our incremental yield, while continuing to maintain high credit quality. In the first half of the year, we were moving $3 billion on to the bank’s balance sheet.

We expect to transfer additional balances in the back half of 2023. And as we previously indicated, we will reinvest approximately $3 billion of maturities into our yielding assets throughout the course of the year. Let’s turn to Asset Management on Slide 9. In 2022, the backdrop remained challenging for both us and the industry. AUM and was $584 billion, down 23%. This decrease was driven by double-digit equity and fixed income market depreciation as well as negative pound and euro foreign exchange impacts. Flows during the period remained challenged as global institutional net inflows during 2022 were more than offset by ongoing retail pressure. As a reminder, 2021 net flows benefited from the $17 billion BMO U.S. asset transfer, which had limited impact in 2022.

On Slide 10, you can see asset manage financials reflect the continuation of the challenging market environment and reflect deleveraging that occurs in this business. Earnings were $146 million, a 56% decline as a result of market depreciation and net outflows. In addition, the prior year period included $35 million in performance fees, while the current quarter only included $5 million as well as $12 million of unfavorable mark-to-market adjustments. As a result, margin in the quarter declined to 29%. Importantly, we are focused on the areas we can control and on executing our strategic priorities. Expenses remain well managed, total expenses were down 12% with G&A and other expenses down from continued expense disciplines, lower performance fee compensation and timing of mark-to-market expenses.

As a reminder, results last year include a partial quarter of BMO-related expenses. As we move forward, we will continue to make market-driven trade-offs and discretionary spending and remain committed to managing expenses very tightly based on the revenue environment. Let’s turn to Slide 11. Retirement & Protection Solutions earnings increased 25% with strong cash flow generation and a clearly differentiated risk profile. Results in the quarter were driven by enhanced yield from repositioning of the investment portfolio, lower deferred acquisition cost amortization and lower sales levels. We remain well capitalized with an estimated RBC ratio of 545% at year-end. Consistent with the industry, sales in the quarter declined as a result of the volatile market environment as well as the impact from our actions to discontinue sales of variable annuities with living benefits.

Now only $43 billion of account value is in products with living benefit guarantees, a $14 billion decline from past year. Protection sales remain concentrated in higher margin asset accumulation VUL, which represents one-third of total insurance in-force assets. The increase in investment income was a direct result of the actions taken to reposition the investment portfolio. In the quarter, we repositioned $600 million primarily into longer-duration corporate bonds, while maintaining a high-quality portfolio. These actions will generate higher investment income in 2023. On Slide 12, our balance sheet fundamentals remain strong and our diversified AA-rated investment portfolio is well positioned. During the quarter, new money purchases were AA+ rated at yields that were accretive to the overall portfolio.

Despite continued market volatility in the quarter, VA hedging effectiveness remained very strong at 97%, and excess capital and holding company liquidity remains strong. Our diversified business model generates significant and stable free cash flow. This enables the company to deliver a consistent and differentiated level of capital return to shareholders, while continuing to invest for growth. During the quarter, we repurchased 1.6 million shares returning a total of $610 million of capital to shareholders, bringing the total for the year to $2.4 billion. Our capital return strategy over the past five years has reduced our share count by 28%. 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. And your first question is from the line of Brennan Hawken with UBS. Please go ahead.

Brennan Hawken: Good morning, thank you for taking my questions. You flagged the certificate growth in the Wealth business, and that’s certainly consistent with what we’ve seen at other wealth management firms. So would you expect that as long as rates stay high, that type of shift and that type of growth should be sustainable? And how should we think about the corresponding impact of that mix shift on your deposit beta so that deposit beta seemed to take a step up this quarter. And so should we continue to think that, that will move higher?

Walter Berman: Yes. This is Walter. So the answer is yes you should, with our CGs, continue to see that sort of trend line. And certainly — and you’ll see in our bank, we are going to develop new products with and have them coming out in 2020, which will also enhance the capabilities for our advisors and their clients to certainly navigate this situation on interest rates and giving them choice. And from a deposit beta standpoint, looking on sweep, we are certainly — we are up. We are certainly being competitive from that standpoint. But we are offering a wide choice, and we see good significant opportunities as we move forward.

Brennan Hawken: Yes. That makes sense. And like I said, that’s consistent with many of your competitors in the wealth space. So when we think about — shifting gears a little bit for the follow-up and staying in wealth, strong overall net new asset trends certainly have been encouraging 7% annualized growth in that business and what — it’s been a challenging quarter for some competitors. As I understand it, it’s not really recruiting driving the numbers, but rather advisors growing their practices and expanding wallet share of existing clients. So what have you done to sustain and hopefully encourage that trend into the future?

James Cracchiolo: So this is Jim. We are very much focused on continuing really around having the advisors engage with the client through this market cycle and really providing the advice they need. Part of the journey really is how do you think about achieving your goals over time, not just based on a quarter or the market situation in the current time. And so that engagement and the tools and capabilities that we provided to help them do that, I think is paying really good dividends. And so as you saw last year, we had a record amount of client inflows for the full-year. And the fourth quarter was really strong at $12 billion. It’s actually the second highest quarter we had. The highest was actually fourth quarter of last year, and that was only $0.5 billion more. So we want to continue that journey around that advice value proposition and the engagement and helping the advisors really do that more consistently over time.

Brennan Hawken: Great, thank you for taking my questions.

Operator: Your next question is from the line of Steven Chubak with Wolfe Research. Please go ahead.

Michael Anagnostakis: Hey, good morning, Jim and Walter. This is Michael Anagnostakis on for Steven. I just wanted to start with one around AWM here. Certainly, the margin expansion in AWM was very impressive. You had 30% roughly. Assuming the Fed pause is here, what do you view as a peak pretax margin in wealth inclusive of the ongoing suites you plan to make at the bank? Thanks.

Walter Berman: Sure. So it’s Walter. What we achieved in the fourth quarter, we certainly see as sustainable and as it relates to 2023. And certainly the cash side of it is contributing to that, but we’re also having strong productivity and growth in our basically core activities. There is a shift and going with us going to basically the bank generating the earnings and certificates joining. So if the Fed does pause, we think we are well positioned with the sustainability of that profitability that is now basically has a duration play that will take it over multiple years. So we feel comfortable. Obviously, it will have some impact. We have to evaluate as it looks not just what the Fed is doing in the short end, but what happens on the long end, but we feel we’re in an excellent position as we grow those two activities to ensure that sustainability and profitability.

Michael Anagnostakis: Got it. Thanks. So — and for my follow-up, I just — I wanted to shift gears maybe to Retirement & Protection here. You had noted that results in Retirement & Protection only captured a portion of the actions you had taken in the portfolio. How much incremental benefit should we expect next quarter? And what do you believe could be the new run rate for that business versus that $180 million quarterly cadence you had provided in prior quarters? Thanks.

Walter Berman: Yes, so we certainly started the investments, and we weren’t completed in the fourth quarter. We still have some ways, a little ways to go in first quarter. But yes, we will see that probably what you’re estimating the run rate that we talked about, the $180 million, but it’s probably with that improvement that’s taking place with the yield. There’s always areas going in and out. But I’m comfortable with I’ve seen people being in the $200 million range, but it’s over a one-year cycle. So I would say more like the $800 million range for the year.

Michael Anagnostakis: Okay, got it. Thanks again for taking my questions.

Operator: Your next question is from the line of Suneet Kamath with Jefferies. Please go ahead.