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

Ameriprise Financial, Inc. (NYSE:AMP) Q4 2023 Earnings Call Transcript January 25, 2024

Ameriprise Financial, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to the Fourth Quarter 2023 Earnings Call. My name is Krista, and I’ll be your conference operator for today’s call. [Operator Instructions]. 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 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’ll 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 reference to various non-GAAP financial measures, which we believe provide insight into company 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 the 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 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 fourth quarter. Below that, you see 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. I hope that 2024 started off well for each of you. As you saw in our earnings release, Ameriprise delivered a strong fourth quarter to complete an excellent year. I’m proud of our team and what we’ve accomplished. We’ve navigated the environmental uncertainty well, supported our clients, and further demonstrated the strength of our value propositions. Regarding the operating environment. What was more positive to end 2023 and start the new year, we know there are questions regarding the continuation of economic growth, inflation and the timing of interest rate reductions. Of course, markets are unpredictable. However, at Ameriprise, our expertise is preparing both our clients and the business to be successful even in an uncertain climate.

Now with that backdrop, let’s move to our results. For the quarter, revenue growth continued to be robust, up 8%, reflecting good organic growth and positive markets. We again generated strong earnings growth with EPS up 10% or 14% normalized for the items referenced in our press release. And our nearly 50% ROE is consistently among the best in the industry. We also delivered excellent full year adjusted operating results. Excluding unlocking and the items we referenced, revenue was $15.4 billion, up 8%. Earnings increased 18% to $3.3 billion. And our EPS was $30.46, up another 24%. In fact, these are record results for Ameriprise, and assets under management and administration were near an all-time high at $1.4 trillion. Across the firm, we’re very well positioned to help investors with our compelling client experience and complement the businesses, capabilities and talented team.

With regard to some business highlights. Wealth Management delivered another strong quarter. Our efforts are centered on engaging more people in our advice-based client experience, which helps our clients achieve more of their goals and creates higher satisfaction, net flows and productivity growth. Client acquisition was up nicely in the quarter, especially in the $500,000 to $5 million client segment. Total client assets increased to a new record of $901 billion, up 19%, and client flows were approximately $23 billion. Total transactional activity picked up a bit in the quarter. However, given the environment, clients continued to maintain higher cash levels with assets and cash products growing to about $82 billion. Over time, we expect these assets will be further deployed as clients return to the markets more fully.

Year after year, our adviser productivity growth is consistently among the best in the industry. In fact, it increased another 11% to a new high of $916,000 per adviser in the quarter. Our field force is highly engaged, and they value the Ameriprise culture. As to the experienced advisers we recruit. In the quarter, we brought on board 166 productive advisers, which includes the Comerica advisers who joined us. Recruits tell us that associating with Ameriprise has given them a strong client value proposition integrated technology and the leadership support they need to provide first-class service to their clients and grow their practices. Our bank continues to provide benefits and grow nicely. Bank and certificate assets increased 28% to $37 billion.

We see good opportunity here to further deepen client relationships and bring in more of our client assets that they hold at other banking institutions. As you can see, our consistent focus and investment in the business is driving strong results. And we’re not standing still. We continue to invest significantly to drive further efficiency and organic growth. Advisers using our integrated e-meeting capability, customer relationship platform and online adviser dashboards find that these tools enhance their ability to deliver for clients and manage their practices, as well as identify growth opportunities. We’re also leveraging advanced analytics and accelerating enhancements to our mobile and digital experiences on our public and secure sites to engage more clients and prospects.

I’d also highlight that Ameriprise brand awareness is strong and steady, and our growth opportunity continues to be significant. Clients and prospects across segments need meaningful contact and advice more than ever, and that’s where we’re concentrating. Earlier this month, I met with our field leaders to kick off the year. They are highly engaged and energized about our position and ability to build on our success in 2024. Next, in Retirement & Protection, we’re driving good sales. These solutions help serve our clients’ comprehensive needs and the business is consistently a strong earnings contributor. The team is focused on providing a best-in-class experience with an ease of doing business and it’s resulting in better sales. Total variable annuity sales were up 15%, with good sales in our structured product.

Protection sales were up 6%, driven by our higher-margin product. In addition, we just introduced new enhancements to our core product lines to help further serve our clients’ evolving protection and income needs. Moving to Asset Management. We continue to serve clients in an evolving market. Assets under management grew nicely in the fourth quarter, up 9% to $637 billion driven by market appreciation and positive foreign exchange. In terms of some color on flows. Our U.S. retail mutual fund outflows were in line with the industry. Though they remained pressured, we had a bit of a pickup in gross sales and redemptions have slowed from a year ago. U.K. retail remained soft, and we’re seeing some improvements in Europe. For global institutional, our outflows were elevated as we expected due to the actions we set to realign resources, including portfolio management changes.

Our product capabilities are extensive and the team is concentrating on regaining sales momentum. Performance is critical to that, and we’re delivering consistent competitive investment performance that reflects our research expertise. Our 3, 5 and 10-year numbers are very strong, and we saw a nice pickup in the 1-year fixed income numbers. And I highlight that we continue to have 113 4- and 5-star Morningstar rated funds in our lineup. Like other active managers, we’re managing industry pressure and doing a great deal to refine our operating processes while reducing expenses globally. We’re enhancing our efficiency and effectiveness while making good investments, including in data and analytics. We’re focused on leveraging our performance as well as our global distribution and servicing capabilities.

So for Ameriprise, it was another great year and a continuation of our significant growth over many years. In addition, we built on our record of strong financial performance, including generating one of the best ROEs in the industry. And with that, we consistently demonstrate our ability to return to shareholders. In the fourth quarter, Ameriprise returned another $587 million, and for the full year, we returned $2.5 billion to shareholders. Over the last 5 years, we returned a substantial amount to shareholders that resulted in a share count reduction of 25%. As I look at Ameriprise, we continue to be well positioned. The strong performance we achieved is underscored by the industry accolades Ameriprise consistently earns. Over the course of the year, this is the type of recognition we received.

4.9 out of 5 stars in client satisfaction from our clients. Our employee and adviser engagement ranks among the best across all industries. We have one of the highest customer trust scores in financial services. J.D. Power has awarded us for outstanding customer service experience for our adviser phone support 5 years in a row. Ameriprise is the winner in the Wealth Management category from Kiplinger. In addition, we’ve been recognized as a military-friendly employer in 9 years in a row and as a best place to work for disability inclusion. Finally, Ameriprise is among the Best Managed Companies of 2023 on the Wall Street Journal Management Top 250 list. For the firm overall, as we enter 130 year in the business, our foundation and business are strong.

I’m immensely proud of our people, and we have a great opportunity to continue our success together in 2024. Now I’ll turn things over to Walter, and then we’ll take your questions.

Walter Berman: Thank you, Jim. As Jim said, strong results this quarter continue to demonstrate the leverage of our diversified business model across market cycles. Underlying EPS grew 14% to $7.75 after adjusting for items in the quarter that we called out in the release. These included $0.28 of expense related to a regulatory accrual, $0.14 from severance expense, and elevated mark-to-market impacts on share-based compensation expense of $0.13 resulting from Ameriprise’s substantial share price appreciation. You would not have been aware of these items and their associated magnitude. Assets under management and administration ended the quarter at $1.4 trillion, up 15%, benefiting from $36 billion of client flows in 2023 and market appreciation.

Across the firm, we continue to manage expenses tightly relative to the revenue opportunity within each segment. G&A increased only 2% normalized to the items I noted. We continue to take a disciplined approach on discretionary expenses across the firm to manage margins given the uncertainty in the macro environment as evidenced by the $26 million of severance recognized in the third and fourth quarters. At the same time, we continue to make investments to drive business growth, particularly in Wealth Management. As we move into 2024, we will continue the same discipline and we’ll maintain a flat expense base for the year at a minimum. Our consolidated margin was 26.4% excluding the items I noted. And we have a best-in-class return on equity of 48.5%.

The balance sheet fundamentals remain strong. Our excess capital and liquidity positions remain strong and we’ve seen a significant $1.8 billion reduction in the net unrealized loss position to only $1.5 billion. Our diversified business model benefits from significant and stable 90% free cash flow contributions across all business segments. This allowed us to return $2.5 billion of capital to shareholders in the year, a continuation of our differentiated track record. Lastly, I mentioned that Ameriprise successfully expanded its presence in the financial institutions channel. The closing on our partnership with Comerica Bank in November that added an initial $15 billion of client flows. Given the timing of the conversion, there was limited financial benefit in the quarter.

On Slide 6, you’ll see our strong results in 2023 were driven by business momentum across key measures. Assets grew 15%, with revenues up 8%. Pretax adjusted operating earnings grew 10%. And the pretax adjusted operating margin was 26.4%. The diversified nature of our businesses strengthens our model and drives our consistent performance. It is this balance that enables Ameriprise to consistently drive shareholder value across market cycles. The key growth driver of Ameriprise is the Wealth Management business, as you can see on Slide 7. Wealth Management client assets increased 19% year-over-year to $901 billion, driven by strong organic growth and client flows, along with higher equity markets. We had $53 billion of net inflows over the past year, with $23 billion coming in the quarter from new clients joining the firm, the deepening of existing relationships and adding experienced advisers.

Revenue per adviser reached $916,000 in the quarter, up 11% from the prior year, from higher spread revenue, enhanced productivity and business growth. On Slide 8, you can see how the business performance drove strong financial results for Wealth Management. In the quarter, adjusted operating net revenues increased 8% to $2.4 billion from growth in client assets in both wrap and brokerage accounts and improved transactional activity. This included about $15 billion of initial flows related to Comerica partnership, in addition to the $8 billion of underlying client flows. While markets were favorable in the quarter, we did not realize the full benefit of the market appreciation in the quarter given our beginning-of-month billing practice. We are starting the year with the wind at our backs with the significant market appreciation to end the year.

Total cash balance, including third-party money market funds and brokered CDs reached a new high this quarter at $81.5 billion. We have seen stability in our underlying client cash positions with free cash up 4% sequentially. This stabilization has continued into January. Additionally, we continue to see new money flowing into money market funds and brokered CDs as well as into our certificates. This creates a significant redeployment opportunities as markets normalize for clients to put money back to work in wrap and other products on our platform over time. The financial benefits from cash remain significant and will be a sustainable source of earnings going forward. Adjusted operating expenses in the quarter increased 9%, with distribution expense up 10%, reflecting higher asset balances.

Excluding the regulatory accrual, G&A declined 1% in the quarter and was up only 4% for the full year. We will continue to invest in this growing business while maintaining this expense discipline in 2024. In total, the underlying margin expanded 40 basis points to 30.3%, reflecting our revenue growth combined with expense discipline. This level is consistent with our margin for the full year. Turning to Asset Management on Slide 9. Financial results were very strong in the quarter, and we are managing the business well through a challenging environment for active asset managers. Total AUM increased 9% to $637 billion, primarily from higher equity markets and foreign exchange translation, partially offset by net outflows. Like other active managers, we experienced pressure retail flows from global market volatility and a risk-off investor sentiment.

In addition, we had $3 billion of institutional outflows that included $2 billion of expected breakage from portfolio management changes made as part of our reengineering initiatives. Investment performance is another critical area of focus and long-term 3-, 5- and 10-year investment performance remains strong. We also had notable improvements in 1-year fixed income performance in the quarter from strength in mortgage opportunities, tax exempt and strategic municipal income strategies. In the quarter, operating earnings increased $194 million as a result of equity market appreciation, disciplined expense management and higher performance fees which more than offset the cumulative impact of net outflows. Performance fees are an important part of our business and reflect excellent performance in our hedge fund and other institutional accounts, but the recognition of performance fees is uneven throughout the year.

While we had $30 million in performance fees in both 2023 and ’22, the fourth quarter this year included $21 million in performance fees and the fourth quarter of 2022 only included $5 million. We are finalizing the integration of BMO and are looking globally at areas where we can enhance operational efficiency and manage expenses so we are well positioned going forward. G&A was down 4% excluding the impact from foreign exchange translation and performance fee compensation. And the margin was in our target range of 32% in the quarter. Looking ahead, as Jim said, we will continue to take further expense action in 2024 given the environment to preserve margin in our target range. Let’s turn to Slide 10. Retirement & Protection Solutions continued to deliver good earnings and free cash flow generation, reflecting the high quality of the business that has been built over a long period of time.

Pretax adjusted operating earnings in the quarter increased 2% to $202 million, reflecting higher investment yields. Overall, Retirement & Protection Solutions sales improved in the quarter, with protection sales up 6% to $72 million, primarily in higher-margin products. Variable annuity sales grew 15% to $1.1 billion, with the majority of sales in structured variable annuities. Turning to Slide 11. Ameriprise delivered excellent growth in 2023 and has done the same over the longer term and through changing market cycles, reflecting our focus on profitable growth. In 2023, revenues grew 8% from higher interest earnings, higher equity markets and solid client net inflows. Earnings per share increased 21% from last year from revenue trends, well-managed expenses and differentiated capital return.

And ROE increased 290 basis points to nearly 49%. Over the past 5 years, we have generated 6% revenue and 15% EPS compounded annual growth and 1,170 basis points of improvement in ROE. This is differentiated performance across multiple cycles compared to our peers and speaks to the complementary nature of our business mix and the growth of our Wealth Management business. Turning to Slide 12. You can see Wealth Management was a significant contributor to Ameriprise’s successful performance, driving 2/3 of the company’s operating earnings. Our advisers are becoming more productive with the support of our advice model, with revenue per adviser of $916,000 in the year, up 8% on an annualized basis from 2018. And we are growing profitably with 16% growth in pretax earnings since 2018.

And over that time frame, our Wealth Management margin has expanded 840 basis points to nearly 31%, putting at industry-leading levels. Now let’s finish with the balance sheet on Slide 13. Our solid balance sheet fundamentals and free cash flow generation have supported our ability to execute a consistent capital return strategy, while continuing to invest for growth. In 2023, we returned $2.5 billion to shareholders, with $587 million in the fourth quarter. But over the past 5 years, we returned $12 billion to shareholders through dividends and share repurchase. This included the repurchase of 41 million shares at an average price of $215, resulting in a net reduction in our share count of 25%. Looking ahead, capital management will continue to be a point of differentiation for Ameriprise.

With that, we will take your questions.

See also 15 Highest Quality Boot Brands in the US and 19 Best Reusable Water Bottles on Amazon Under $50.

Q&A Session

Operator: [Operator Instructions]. Your first question comes from the line of Brennan Hawken from UBS.

Brennan Hawken: I’d like to start with the bank. So we’ve got $3 billion. I believe you’ve indicated that there’s expectation for $3 billion of maturities expected. Can you give a sense, given where rates are in the market today, what kind of yield pickup you’re likely to see on those balances? And whether or not you have visibility into what those maturities might be in 2025.

Walter Berman: Sure. So the — let me — in ’25, we anticipate it will still be $25 billion. Again, these are payoff from that standpoint. And when we look at it — let me answer the question this way. From a net interest income standpoint, why we evaluate looking at various scenarios and using the forward curves, the generation in 2024 and ’25 will be higher than that in 2023 because again, the rates we have been adding at are very — rates close to 6%. And that runoff will be basically coming through. And our reinvestments, the differentials, will still allow us to have a higher net interest income in 2024 and ’25. But it’s $3 billion in both years.

Brennan Hawken: Okay. And then one sort of mechanical question. So quarter-over-quarter, off-balance sheet broker-dealer yield compressed pretty substantially. But it’s my understanding that that’s tied to the $2.5 billion of cash sweep tied to Comerica. So was — is that right? And was that due to like some kind of promotional or temporary crediting rate? And when is that expected to roll off and normalize?

Walter Berman: So if we’re talking about now the off balance sheet rate on a sequential basis, is that what you’re referring to?

Brennan Hawken: Yes, exactly.

Walter Berman: So that — yes, we did take on a $2.5 billion for Comerica, and that will transition through over the next 6 months. And the use of that, certainly that will work towards the rate increasing. But our base rate has basically stayed the same ex-Comerica. There’s been no change.

Operator: Your next question comes from the line of Ryan Krueger from KBW.

Ryan Krueger: First, I just wanted to follow up on the comment on net interest income. In terms of 2024 and 2025 expecting to be higher than 2023, what did you — can you give us any sense of what you assumed in terms of the forward rates when you made that comment? Was that using the forward curve, or any more color there?

Walter Berman: We are using the forward curve, and we run sensitivity. But what my statement was referring to was the forward curve as — the latest forward curve.

Ryan Krueger: Okay. Great. And then just in terms of the size of the bank. Can you give any color on kind of expectations for potentially moving some of the cash suite balance into the bank and how — what you think the bank asset size could grow to over the course of ’24?

Walter Berman: Sure. So right now, we are seeing stability and really little growth in our sweep accounts. So we feel very comfortable about it. And we still have buffer there. So we are evaluating that, but we’ll be more measured as we go forward because we’ve certainly placed and shifted a substantial amount. But you would see that it will be increasing but at a slower pace as we evaluate these sweep balances that support that. So I would say that it will be increasing but at a slower pace.

Operator: Your next question comes from the line of Alex Blostein from Goldman Sachs. Alex, please go ahead with your question.

Alexander Blostein: Can you guys hear me?

Walter Berman: Yes.

Alexander Blostein: I wanted to ask you guys a question around a substantial amount of cash that you guys have on the sidelines. I think it was north of $30 billion. I know you sort of talked about some of that coming into some of the investment products. But as you sort of think about what are the likely areas where this capital could go into with respect to wrap accounts or something else, how would you frame that? And maybe talk through some of the revenue lift that you could get from that?

Walter Berman: You’re talking about where our cash sits today on…

Alexander Blostein: So not stuff that’s in the sweep, right? But there’s been other capital that I think is actually earning you guys not a whole lot, whether it’s the CDs or money market funds. Where do those balances are and where that could shift?

James Cracchiolo: Yes. So those balances are in money markets and brokerage CDs short term that will roll off. And so as they do, I think advisers will evaluate whether they put that back into the market. And if they did, I would probably say a portion of that would go back, a reasonable portion, will go back most likely into wrap type programs, imbalanced type portfolios, which would include both equities and fixed income, et cetera, alternatives. On the other side of it, there, we’ve seen a bit of a pickup in some transactional activity as well in the fourth quarter. So some of that will go back into transactional type activities as they look at longer duration type products as well. So again, that’s really as advisers look at the market and they put money to work over time for their clients.

Alexander Blostein: I got you. And then my second question was just around operating leverage for the firm and obviously encouraging to hear your comments around G&A outlook. If you roll that through, it seems like the margin in the asset management business could be materially higher than sort of your longer-term ranges. Obviously, not a terrible thing. But as you sort of think about those historical targets, are they still something you’re trying to manage the business to? Or it’s really just kind of more of the output because the fees are obviously off to a very good start in 2024 and expenses are going to be very tightly managed?