Ameriprise Financial, Inc.

Welcome to the Q3 2019 earnings call. My name is John, and I'll be your operator for today's call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. During the question-and-answer session, if you do have a question, press star then 1 on your touchtone phone. Please note the conference is being recorded. And now I'll turn the call over to Alicia Charity.

Thank you, Operator, and good morning. Welcome to Ameriprise Financial's third quarter earnings call. On the call with me today are Jim Cracciolo, 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 two you will see a discussion of forward-looking statements. Specifically, during the call you will hear references to various non-GAAP financial measures which we believe provide insight into the company's operations. Reconciliations of non-GAAP numbers to their respective GAAP numbers can be found in today's materials. Some statements that we make on this call may be forward-looking, reflecting management's expectations about future events and overall operating plans and performance. These forward-looking statements speak only as of today's date and involve a number of risks and uncertainties. A sample list of factors and risks that could cause actual results to be materially different from forward-looking statements can be found in our third quarter 2019 earnings release, our 2018 annual report to shareholders, and our 2018 10-K report. You make no obligation to update publicly or revise these four looking statements. On slide three, you will 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. The comments that management makes on the call today will focus on operating financial results excluding unlocking. And with that, I'll turn it over to Jim.

Good morning, and thank you for joining us. As you saw yesterday, Ameriprise delivered another strong quarter. We're executing well, investing for growth, and are well positioned to capture a larger share of the need for advice and solutions. This morning, I'll give you my perspective on the operating environment, then I'll highlight our results and the traction we're getting across the business. Turning to the markets, volatility increased given slower global growth and uncertainty around trade policy. The Fed cut short-term rates again, and long-term rates remain volatile. U.S. and European equity markets have been mixed, so our average weighted equity index was relatively unchanged. Next, let's review our business results in the quarter. I'll start by reinforcing three key areas of focus. First, our wealth management business continues to stand out, producing strong results quarter after quarter. In today's climate, our advice value proposition is more relevant than ever before. and we're innovating to serve more of our clients' and advisors' needs and strengthening our position further. Second, we consistently generate good returns with our asset management and insurance and annuity businesses. These are well-managed, highly profitable businesses that deliver strong free cash flow and play an important role in how we serve our clients. Third, our financial strength distinguishes Ameriprise. and we're taking steps to further increase our capital flexibility. We're investing for growth and steadily returning capital to shareholders at very attractive levels. At a consolidated level, our third quarter results were quite good compared to a year ago. On an adjusted operating basis, excluding unlocking, we delivered revenue growth of 3%, solid EPS growth of 8%, and a return on equity of 38%, which remains well above many peers. Our assets under management and administration were $921 billion. And within wealth management, AmeriPrize retail client assets rose nicely to $612 billion. And advisor productivity increased to $650,000 on a trailing 12-month basis. We're proud of our track record and how we're helping clients while consistently delivering for shareholders. That brings me to our wealth management business, our growth engine. Advice and wealth management continues to perform well, and we're investing for further growth. We delivered good revenue and earnings growth in the third quarter, and our margins increased to 23.5% among the best in wealth management. Responsible investors want relationships with an advisor and a firm they trust. They're seeking perspective to help them make informed decisions. That's what we deliver, holistic advice across a client's full investment life, not a single stock trade. Comprehensive advice is a large and growing market, and we're at the center of this opportunity. The way we deliver advice is setting us apart, particularly with investors with $500,000 to $5 million in investable assets. There are some key factors driving our traction in wealth management. First, total client assets are up and client flows into fee-based advisory business continues to be strong. This is our 10th consecutive quarter of more than $4 billion of inflows into the advisory, bringing total RAF assets to nearly $300 billion. We also saw a good pickup in transactional activity. Advisor productivity increased 5% from strong client flows and advisors leveraging the support and resources of Ameriprise. And on the recruiting front, we welcomed 96 top-performing experienced advisors from firms across the industry. Top-branded and independent advisors are attracted to our value proposition and the growth potential of bringing their practices to Ameriprise. We feel great about what we've put in place, but we're not standing still. Consumers continue to seek a personal relationship with an advisor complemented with digital capabilities that enhance the interaction and information flow. We're committed to meeting and exceeding that expectation, building off the strong capabilities we already have in place. To that end, we continue to invest significantly in our client experience, capabilities, products, and solutions. We have strong personal relationships with our clients and we're using our goal-based advice expertise to expand our base and deepen these relationships even further. Here are highlights on four of our key initiatives in these areas. Our advice experience is coming alive as we work with more clients and continue rolling out additional digital capabilities as part of our confident retirement approach. We've been training advisors to implement our integrated suite of tools, and we're hearing good initial feedback. Clients who have gone through the experience are feeling more confident and satisfied about how we're helping them track against their goals, and we believe this increased engagement will translate into higher productivity over time. In our advisory business, the rollout of our integrated customer advisory relationship is underway and will be completed in the next few months. With this program, our various advisory strategies work together on one technology platform, giving advisors more flexibility to deliver personal investments and solutions based on client goals. This is a key capability as we serve a more affluent client base. We're also moving to a new customer relationship management platform that will help advisors manage and act on client data and activity in one place. This is an important enabler of the Ameriprise client experience. This conversion is on track and will be completed by the end of the fourth quarter. And following the bank launch, we continue to add deposits in the quarter with $2.5 billion of cash sweep now transferred. In September, we launched a new line of Ameriprise Visa Signature Premium credit cards and converted the existing Ameriprise portfolio. Looking ahead, we will be adding a new mortgage program and a savings product next year. In terms of these initiatives, it takes time to go from introduction to full engagement, so we expect to see the benefits as our advisors uptake these programs and capabilities over time. And it's important to note that whenever we introduce new tools and capabilities, we fully integrate them into our ecosystem. I often hear from advisors who have joined us that this is a real point of differentiation for Ameriprise compared to other firms who simply provide advisors with individual tools. Let's turn to our I&A businesses. These are strong books that provide earnings diversification and stability. In the quarter, we delivered a combined $189 million in adjusted operating earnings, excluding unlocking. From a sales perspective, variable annuity sales were up 2% in the quarter. In protection, we had nice growth in VUL sales reflecting the launch of a new VUL product earlier this year. However, total life sales were down driven by IUL in this rate environment. Overall, sales remain stable and help to replenish the book. We're focusing on managing risk appropriately and ensuring we have the right product design for the environment. That includes our successful VA hedging program, which we continue to enhance. We've also made several product adjustments, including lowering cap rates on certain IUL products and pricing and benefit changes for our variable annuities. In regards to our closed long-term care block, the strong actions we've taken in terms of rate increases and benefit changes are driving positive results and helping to offset the rate environment. As you know, we've reinsured a portion of the fixed annuity book and look to reinsure the remainder of the blocks when rates improve. Now I'll turn to asset management, where we've delivered another quarter of solid earnings and remain focused on pursuing long-term growth opportunities. We've built a global business and have good scale as well as investment strength, and we're expanding distribution in key markets. In a highly competitive marketplace, we're competing as a long-term player and making progress. Investment performance remains quite good over one, three, and five-year timeframes. On an asset-weighted basis, More than 60% of our equity funds are outperforming, and in fixed income, the outperformance is over 80%. Turning to flows, they've improved $6 billion from a year ago, with net outflows of $1.3 billion. And if you adjust the former parent outflows in the quarter, we're slightly positive. Let me take you through the drivers. In U.S. intermediary, though there continues to be pressure from passive, when making progress and gaining share inactive with many of our large focus firms having consistently . Redemptions have slowed and we're generating good momentum and strategies. I would highlight dividend income, strategic income, strategic municipal income, and mortgage opportunities. When we look at our flow rates compared to active peers, Columbia Threadneedle retail equity rates have improved considerably. In fact, We're in the top third of active players we benchmark ourselves against. For fixed income, our flow rate continues to improve, and there's an opportunity to move this further. In EMEA, the challenges from Brexit and slowing economies have pressured retail flows for the industry. We remain focused on building on our strength in the UK market and continue to expand our presence in key markets in Europe. Importantly, our flows in the quarter were institutional, reflected the benefit of a large UK equity income mandate from an established wealth management that I mentioned last quarter. In addition, we began to pick up some other wins in high yield and other strategies. Overall, in asset management, our assets under management ended the quarter at $469 billion, and the earnings contribution to Ameriprise remained good. We're managing expenses well and delivered an adjusted margin at 38%, which is in our targeted range. As we look forward, we're working to better deliver client solutions and investment strategies, generate consistent competitive investment performance, and further improve our operational efficiency. Now I'll turn to our capital strength, a clear differentiator. As you are aware, we successfully completed the sale of Ameriprise Auto and Home earlier this month. We worked hard to ensure a smooth transition of the business, including securing all regulatory approvals. Our priority was to find a strong partner and a good fit for policyholders and employees, and we delivered. With the completion of the sale of Auto and Home on October 1st, we received over $1 billion and freed up $700 million of capital, adding to our strong excess capital position. We continue to focus on generating substantial free cash flow that we're reinvesting for growth and returning to shareholders. As we informed you, We increased our buyback in the quarter, returning nearly 120% of adjusted operating earnings in the period. Due to the share price volatility in the quarter, we were able to pick up additional shares. In summary, it was a very good quarter for Ameriprise. We're in a strong position and we're executing our plans. With that, I'll turn it to Walter before taking your questions. Walter?

Thank you, Jim. Ameriprise achieved another solid quarter of financial results. Ameriprise's adjusted operating net revenue was up 3% to $3.3 billion, with limited equity market appreciation of only 1% year-over-year and year-to-date. Revenue growth was driven by strong 8% revenue growth in advice and wealth management from an increase in RAP assets and improved transactional activity. Asset management revenue was within expectations given the cumulative impact of net outflows as well as lower market appreciation than we've seen in recent quarters. And annuities and protection are stable businesses with limited revenue growth. We continue to manage expenses well across the firm, with total expenses up 4%, excluding unlocking, and general administrative expenses up 3%. And we returned approximately 120% of adjusted operating earnings to shareholders including increased share repurchase of $547 million, or 4 million shares, as well as $129 million of dividends. This resulted in a solid EPS growth of 8% and a return on equity of 38%, which reflects a 680 basis point improvement. Turning to slide 6, you can see that our business mix continues to evolve with advice of wealth management generating over half of the company's earnings up from 42% two years ago. This profitability improvement has been driven by fundamental organic growth and well-managed expenses while investing for future growth. We've seen a consistent growth over the past few years and expect this to continue as we focus substantial investments in areas of opportunity within the wealth management business. Let's look at what took place in the court beginning on slide 7. AWM continues to perform well across leading and lagging indicators. Advice for wealth management adjusted operating net revenue grew 8%, with pre-tax adjusted operating earnings of 12%. This growth rate was impacted by the marginal growth in the WEI from last year, as well as headwinds from recent Fed rate cuts. That said, The quarter benefited from underlying organic growth that was quite strong with RAP assets up 9% with net inflows of $4.1 billion in the quarter and 6% improvement in transactional activity year over year. We had an excellent quarter for experienced advisor recruiting with 96 advisors joining us from other firms in the quarter and a nice pipeline as we head into the fourth quarter. and expenses were well controlled. B&A was up only 4%, excluding the bank. We were continuing to make substantial investments for growth and seeing elevated volume related to expenses given our activity levels. Finally, our margin was excellent at 23.5%, up 80 basis points year over year. As I indicated, we have strong organic growth trends in advice wealth management that you can see on slide eight. Total client assets were up 4% to $712 billion, with RAP assets up 9%, both from which have benefited from the solid trend of continued RAP net inflows in an environment where equity market appreciation was only up 1% year to date. The buys of productivity continues to trend upward. reaching 650,000 per advisor on a trailing 12-month basis. Strong, experienced advisor recruiting, new digital tools and capabilities, and serving more of our targeted client markets are key drivers of this trend. Lastly, brokerage cash balances came in at $24 billion, down slightly from the prior year and prior quarter. We earned 204 basis points, up from 173 basis points a year ago, but down sequentially from 210, reflecting recent Fed rate cuts. As other firms have mentioned, we too are monitoring potential Fed announcements and intend to pass along a portion of a Fed rate cut to our clients while remaining competitive. Let's turn to asset management on page 9. In the quarter, we saw a substantial $6 billion improvement in net outflows to $1.3 billion, excluding former parent-related flows who were breakeven in the quarter. This improvement reflects better trends in North America Intermediary, as well as the $1.8 billion mandate from St. James Place that funded in the quarter. However, flows in the EMEA continue to be impacted by pressure from Brexit. From a financial perspective, the business continues to generate substantial revenue on pre-tax adjusted operating earnings for Ameriprise. Pre-tax adjusted operating earnings were down 12% to $173 million, driven by the cumulative impact of net outflows with limited offset from equity market appreciation of only 1% year-over-year and year-to-date. We remain focused on tightly managing expenses while making targeted investments in appropriate areas for future growth and manage required regulatory changes. Margins in the quarter increased to 38%, remaining in our targeted range of 35% to 39%. Turning to page 10, results in annuities and protection are solid. Annuity earnings were down 8% to $119 million, primarily from continued low interest rates, and net outflows. Unlocking was a favorable $1 million for annuities, which I will describe in more detail shortly. Protection earnings were up 8% to $70 million. The prior year included a one-time unfavorable cost related to reinsurance. The year-over-year change was in line with expectations, given claims remained within expected ranges despite being higher than than a very favorable claimed quarter last year for our disability insurance, as well as the impact from lower spreads. Unlocking was an unfavorable $13 million from interest rates. Let's turn to unlocking on page 11. In total, we realized a negative unlocking impact of $20 million, which includes an unfavorable $118 million relating to interest rates. However, before we get into interest rates, I will explain some of the favorable offsets in unlocking. Annuities benefit from changes in equity market volatility and correlation assumptions, and long-term care benefited from the substantial work we have done to get higher expected premium rate increases and better uptake of benefit reduction offerings, which more than offset morbidity impacts. We have an established consistent methodology for setting our interest rate assumptions. Every year, we assess both the ultimate rate and the path at which to get to the ultimate rate. Given the liabilities for these blocks of businesses are long in nature, over 50 years in some cases, we assess historical rate changes that can occur over a long period of time, and we only make changes to our assumptions when there is a compelling evidence that warrants a change. Until recently, interest rate increases were consistent with the trajectory we have been modeling. As of 6-32-18, the 10-year rate was 2.85% and increased to 3.24% by early November. By September 2-19, rates dropped about 175 basis points. During a 10-day period in September, the 10-year rate recovered 44 basis points, then dropped again. This volatility and velocity of change in recent periods supports our belief that this movement is anomalous in nature and is not representative of the long-term expectations for the block over time. So we left our ultimate rate at 5%. Based on this volatility and velocity of change, we felt it was appropriate to extend the grading period to reach our ultimate rate by a year and held the near-term rates flat. These interest rate assumption changes, combined with the true-up for the actual interest rate at 63019, relative to our prior assumption, drove an unfavorable impact of $118 million. In the future, if we lowered the ultimate interest rate by 50 basis points, we estimate that the impact would be $65 million after tax. However, if we determine the environment was less volatile, We could change the grading period if it was warranted, and it could reduce the impact. Now let's move to the balance sheet on slide 12. We continue to generate substantial free cash flow, and our balance sheet fundamentals are excellent. Our excess capital was $1.8 billion at the end of the third quarter, and it will increase in the fourth quarter from the auto and home closing. Our strong balance sheet fundamentals and consistent financial performance across our businesses support our differentiated return of capital to shareholders. In the quarter, we returned $676 million to shareholders through buyback and dividends, which was approximately 120% of operating earnings. This puts us on track to return 110% of operating earnings to shareholders for the full years. With that, we will take your question.

Thank you, and I'll begin the question and answer session. If you have a question, please press star then 1 on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, press star then 1 on your touchtone phone. And our first question is from Andrew Legerman from Credit Suisse.

Hey, good morning. Maybe just starting off on capital. So you ended the quarter at $1.8 billion. On October 1st, you received another roughly $700 million of capital freed up from the auto and home sale. So basically $2.5 billion of redeployable capital. Do you think you might go above the 110% target in terms of repurchases in the fourth quarter? You did 120 this quarter. Or do you see any attractive potential acquisitions out there that might be available and of interest? And maybe you could give a little color on that.

Okay. Thank you, Andrew. As you saw, we did pick up a buyback in the third quarter, and that was 120% of earnings. We actually picked up over 4 million shares because of the price volatility. We're continuing to think favorably. Our stock value is, we think, undervalued against any of the metrics we look at or a competitive frame. So we think there's good value there. And as you said, we do have the capital. So I think one of the things that we will definitely be focused on is returning at a good rate to shareholders over time. In regard to acquisitions, we feel like we've got a pretty good hand now. And we think that in time, there may be some opportunities that come along, but we're not in any rush to use the capital that way unless there's something that really fits nicely and that we can get a really good return appropriate to our strategy. So that's the way we're playing it right now. And we think we're in a good position because... We have a very solid balance sheet. We're hedged really well. We've got really good liquidity and good cash flow, and it's a good thing to have right now.

Okay, great. And then maybe a little color on the bank that you started up. I understand there were $8 million of expenses. Could you tell us what the incremental earnings were in the quarter, where you think they'll be in 2023? And maybe, you know, is there a way to mitigate potential Fed fund rate cuts into that promontory account that you have, the big sweep account with the $24 billion? Can you move some of those assets out to your bank and maybe mitigate any spread pressures that we might be anticipating?

Okay, Andrew, it's Walter. In the quarter, we had about $3 million of incremental profitability. Now, if you looked at our basic staff supplement, you would see that it's in the certificate line with the bank, so the certificate went down, but that was about the profitability we had there. Going forward, We do anticipate the bank's profitability will be increasing as we get into the full year. The rate environment is a bit challenging, but you're correct. By bringing it onto our balance sheet, we can certainly take up our spread on that as we go forward.

And won't there be an opportunity to move a significant portion of the $24 billion?

Well, yes, as we indicated previously, we will be moving portions of it, and we'll evaluate the tradeoff of doing that. But there's clearly an opportunity to move that profitably into the bank and use the spread capability. It's a tough environment, but we'll certainly be able to do that.

And, Andrew, as we've mentioned, we do have a – and the reason the probability isn't there yet, but it will be growing nicely is because of the ramp-up expenses that we bring on the resources, the platforms, and do the launches of the various initiatives and products, et cetera. So that's well on the way and very much appropriate to the plan we put in place.

Excellent. Thank you.

Our next question is from Eric Bass from Autonomous Research.

Hi. Thank you. For advice in wealth management, what is your expectation for G&A expense going forward, given some of the investments you've talked about and the continued ramp of the bank? Are there any seasonal impacts we should factor in for the fourth quarter?

Sure. As you indicated, yes. We are completing the initiatives for growth, and certainly as we plan for the year, and as you saw, our G&A declined sequentially. We do expect the expenses will come back to historic levels, but seasonally in the fourth quarter, we do have higher expenses, but we do expect that seasonally, excluding that factor, it will return to that level.

And when you say that level, you mean the historic level of growth in G&A kind of on a year-over-year basis?

Yes, that's correct.

Got it. And fourth quarter, I think there's maybe some comp expense. Is there a way to think about what size that's been historically?

Not yet, but historically, I think last year, I think it was about $10 million. But this year, again, it changes, but that's the sort of seasonality. And we do have some year-end expenses of it in the comp, but it's seasonally, it'll be in that range.

Got it. Thank you. And maybe a bigger picture question. Recently, a number of brokers and wealth managers have announced some fee changes, including reducing or eliminating trading commissions, non-bundling advisory fees from investment fees for our separately managed accounts. Do you see this having any impact on your business, either from a revenue or competitive standpoint? And more broadly, are you seeing any pressure on RAP fees or any moves to unbundle the advice and asset management components for RAP?

At this point, so first of all, what people have done is moved to, you know, zero fees on online trading. But if you recollect, it's gone from 20 to 16 to 11 to whatever it is. to 9 to 4 to 0, we really have not seen any impacts over the years. We're not really in the online trading. It's a very minor activity for us, for our clients. From our perspective, some others have said they're reducing some trading transaction fees and advisory accounts. We don't have any transaction fees to our advisors or trading fees in our advisory accounts. And, you know, even the more recent one, I think UBS came out with something. We're unclear of what exactly it means. So if we do have discretionary accounts, Columbia funds, we don't charge a management fee for today. But SMAs are a small part of our activity as well. So we feel very good. As you heard in my opening remarks, we're very much focused on the value we provide against the holistic services we deliver rather than trading for a stock or a transaction. That's not why clients come to us. It's not what we ask our advisors to do. So we feel very comfortable with that. And the more that we can get our advisors to serve the clients more fully around the advice value, we feel like we can sustain a very good level of fee revenue. And even though if fees adjust over time, we feel like the services we provide are can really counteract that in a sense of what more we can do for clients. So I feel good about what we're doing and where we're investing so that we can sustain the type of business model that we have. But we're not in the, you know, trading for no transaction fees or doing that to get people to just give us deposits to compete with the banking community. So we're focused on really what we do well, and I think that's why you can see the investments that we continue to make.

Thank you. I appreciate it.

Our next question is from Humphrey Lee from Dowling and Partners.

Good morning and thank you for taking my questions. A question for asset management. Like you mentioned, the flows have been improving this quarter and then you called out in the press release that in North America the retail flows were notably better. I believe your fixed income products continue to get traction and you also got some new shelf space and added distribution were kind of some of the key factors. Do you expect more extension of shelf space and distribution relationship in the near term?

Yes. So, first of all, you fed that back very well in understanding what we did say. And we have been gaining good traction, particularly in the larger firms that we're serving. We're getting more product on their platform. As an example, some of the ones I've mentioned earlier, like our dividend income, our strategic income, unis, mortgage opportunities, et cetera, are actually gaining share and prominence, which is good because we weren't really known on the fixed income side that much, but we have excellent products and excellent performance. So these are the areas we want to continue to focus. penetrate and get more of a share that we think we can for the types of products and performance that we have. So we're hard at work there. The other benefit is, you know, in the past, some of our good performing funds underperformed a little bit in the period last year, and now the performance is back, and that will help us because we experienced a bit more attrition in some of those things that now that attrition or redemptions have come down, which is good. So the combination of those factors we feel good about, listen, it's a very competitive frame out there, and depending on what happens in markets and volatility, but for the underlying, we're making good progress, but we're going to keep at it. This is not a one event or a one inning, so we just got to keep it up for nine innings here.

That's helpful. Shifting gear to A&WM, the rep net flows continue to be good, but I think it was a little bit lighter this quarter compared to recent quarters. I think that may be related to a little bit of a slowdown in the summertime as opposed to maybe a change in investor sentiment. Looking into fourth quarter, I know it's still early, but can you talk about your pipeline for rep net flows and how you think about the full billing market going forward? Sure.

Yeah. So I think it was exactly what you said, a bit of seasonality, but also a bit of volatility that we all looked at in the markets. We had to stay tuned of what's going to happen, and you can see markets pulling back and then recovering. I think right now it feels a little more stable and balanced. So I feel that it's back on track, but there was a bit more of that volatility we experienced in the third quarter.

Thank you for the caller.

Our next question is from John Nadal from UBS.

Hi, hey, good morning. I have a couple of unrelated topics that I'm interested in. First, on the assumption review and specifically the interest rate component, Walter, so your ultimate earned rate assumption is unchanged at 5%, and I think that's a new disclosure for you guys. But can you tell us how long you're assuming it will take to grade to that level?

Yes. John, it will take – we added a year. It will take three and a half years. But for 2019, we are not expecting any increase in interest for those two quarters. So it won't grade until we get into the first quarter of 2020. Okay.

And what should we be using as a benchmark for that 5%? Is that like a single-aid, you know, 20- or 30-year corporate, or what is that?

Actually, if you look at our investments, and many of our investments, especially in long-term care and others, are actually above that. Our investment strategy is certainly of that quality, but we don't – it's mixed across the board. So on that base, it is really – It's a 10-year treasury, but our investment strategy and our AER right now is actually, in many cases, over that.

Okay. And then on the long-term care review, you mentioned that there's, you know, the benefit from premium rate increase is more than offsetting pressure from morbidity. I was just wondering if you could talk about what you saw in morbidity relative to your last assumption update a year ago. Obviously, it seems like it worsened. I was just wondering if you could maybe speak to order of magnitude there.

Sure. So what we saw is, as you expect, as this experience continues and we get a more credible experience, an appreciable portion of that was related to that progression. And then we did see some changes taking place, but it was really – At that level, nothing that really surprised us as we looked at the cells and looked at the other elements. We had going up, things going down. But really, the thing to center on, as this ages through, this will naturally, you would basically increase that. So on the morbidity side, we're feeling quite comfortable with it. And as I indicated, with the strategies that we've put in place and the traction we've gotten on, it was more than, as you can see in the chart, more than offset that.

Yeah, no, I'm just thinking about some companies who are still sort of stubbornly assuming that morbidity improves over time. And I know you guys are not really assuming that. So that's what I was getting at, not really.

No, and, John, as we've told you, since we've started this, we have constantly taken – once we assess the actual experience, we've certainly adjusted for that. But there was nothing here of any surprise whatsoever.

Gotcha. And then the – The last one for you, I just wanted to follow up on the G&A question within wealth management. Maybe I can ask it this way. If we ignored the idea of some seasonally higher expenses related to comp and other, what's a better indication of sort of your underlying expectation for G&A? Is it the second quarter level that was closer to $350 million? Or is it the third quarter level that was more like $335 million?

What we're saying is the expenses are well managed. We're making the investments. We are indicating that we are certainly feeling comfortable about being at historic levels. And all we're saying is, of course, we're heading out of the third quarter. And so, of course, you're going to see the normal increases. So that's what we're trying to manage, people's expectation within that element. But we feel quite confident they're back and certainly be managed within the historic growth levels.

Okay. I mean, the only reason I ask is I think last quarter you guys indicated that the second quarter was what you expected to be a run into the back half, and obviously it did much better in the third quarter.

That's all. The only thing, you want me to – Actually, let me just try and reposition that. I think we said that the year would actually wind up, because the second quarter was high. We said we wanted to give people expectations that in the back half that would wind up lower and that the year would wind up about 6% in that range. Gotcha. Okay.

Thanks for the clarification. I appreciate it. Great quarter.

Thank you.

Thank you. Our next question is from Thomas Gallagher from Evercore ISI. Okay.

Good morning. Jim, just maybe starting on flows, you had highlighted that the U.S. is seemingly having better traction here, but still some headwinds in EMEA. And it does look like, though, for the last couple of quarters, we've inflected to a better level on flows. Do you think we're going to sustain some of the improvement here for a while, or when you consider You know, what's going on in Europe? You know, is there more of a chance that we'll revert to kind of that $6 billion to $8 billion of outflow quarterly level that you had been running at going back a year? Or do you think you'll sustain some of that improvement?

No, Tom, I think if I – it's hard to, you know, know what's going to happen in the market or the political climate. I think what I would say is we have seen – to your point, more consistent improvement, not just a one-time. I mean, we did get an extra win, but it's from a long-term client that we have gotten wins over the years. It was just a little more lumpy because of something that happened there where they allocated a bit more funds to us in one quarter. But what I would say is Europe is slower in the same thing with the U.K. because of the Brexit and because of some of the you know, the economic situation there. But if that was to resolve a bit more, I actually think that the gates would open a little more and flows would come back in. So my team in London, et cetera, feel good about where they're positioned, but... If you look at many firms there, the flow situation has slowed tremendously because of that situation. So I don't think it'll get worse. The question is, could it get better if they actually have some movement there? And the answer we feel is the answer might be yes. But, again, who knows? That's been going on. It looks like there's some positive movement, but we'll see if that happens. In the U.S., we've made some steady progress. We feel we can continue to make some steady progress. We feel like we've got some good product on the shelves and more that we think we can get on. And it's really in the U.S. more about, you know, volatility and what happens. But if the markets continue to be relatively in good shape, we think that the traction can maintain.

Gotcha. That's helpful. Walter, your comment on the cash sweep that you intend to pass on some of potential future Fed cuts, to customers, and I guess it would be kind of a split between how much you'll take and how much you'll pass on to customers. Is there going to be a point at which you can't pass any of it on to customers anymore, just assuming you hit zero crediting rate? Like how far are you away from that scenario, or do you still have a decent amount of room left?

Obviously, let me start with the thing that governs that is our competitive overview as we look at those rate cuts coming through, and that's what we've done, and we've indicated approximately for these cuts that have just occurred that we bore 80% and 20% was passed to the customer. We still have room. We will evaluate it based upon, again, the competitive element within that, but there is still room to certainly have that shared.

Gotcha. And I just wanted to get clarification on your balance sheet review. The 5% interest rate assumption, is that a 5% 10-year treasury interest rate assumption that you're using? Yes, it is. Okay. I guess the question on that is that's a bit above where peers are and well above what's implied by the forward curve. If it's If it's only a $65 million negative adjustment from lowering that, why not just lower it? Just because, as of right now, you're somewhat of an outlier in terms of using that assumption. I don't know if that's something that you all have thought about.

And it's a good point. Listen, we have studied this, and our actuaries have been through this, and we've looked at it, and we've been using the 5%. And actually, we were grading towards it, certainly as we exited in 2018, and certainly as we indicated, the rates were, for the last three years, grading towards that. So we did feel that this is an anomalous situation, and whether it be an outlaw or not, we feel that rate is appropriate looking at the long-term nature of our liabilities and other aspects. So certainly we will continue to evaluate as we go through, but we felt that was appropriate.

Okay, thank you. Our next question is from Ryan Kruger from KBW.

Hi, thanks. Good morning. As you think about your excess capital position and low interest rates and we get towards year-end statutory cash flow testing, would you anticipate much of a negative impact as you go through the statutory review at year-end?

Again, we're going through the review now, but my... Handicapping is no, probably not. But I think at this stage, again, as you all know, it's a complex formula.

Got it. Thanks. And then just a high-level question. I guess you have an investor day in about a month. I think it's your first one in quite a few years. Just curious if you can give us any kind of high-level sense of what your key priorities are for that.

Yeah, we'd like to walk you further through the transformation that we've made at the firm, areas that we've invested in and give you a little better flavor for what that looks like and how we're operating and what it could mean to us moving forward. And just have a further chat with you. It's always hard to do it in these type of phone calls, and so we thought it was time for us to spend a little more time with you.

Great. Thank you.

Our next question is from Alex Wilson from Goldman Sachs.

Great, hey, good morning, guys. A couple of follow-up questions on the bank. I guess first, sorry if I missed it, but how much did the bank contribute to net interest revenue this quarter? And I guess the credit card portfolio was only there for about a month, so maybe Walter, give us a sense of kind of what's the incremental benefit to revenues into Q4 from just kind of run rating the full quarter of the credit card portfolio coming over. Okay.

As I indicated, on the PGI basis, it was $3 million. I don't have the exact number now on the net revenue element of that. But, again, so, Alex, that started up in May. We can get you that number. The credit card, again, it's handicapping the contribution that's going to come from the credit card. It is a $200 million book of business. It is certainly well-seasoned, and it is going to have good profitability. I just don't have the exact number that we're anticipating at this stage.

Yeah, and now I just want to reconfirm, you know, as we're ramping up the bank, there's a lot of expenses, including, like, in the quarter, as you mentioned, the transfer of the credit card portfolio and the launch of that, et cetera. So the judge on profitability, it'll ramp up over time. We just got a lot of costs initially until we get the revenue streams ramped up.

Yeah, no, totally get the profitability point for now, and that actually kind of speaks into my next question. As you guys build out the bank, that could be an important shield to lower rates that you will be absorbing on the sweep account. So help us understand, I guess, maybe the difference in the spread between the name of the bank that you think you can realistically get today, given where rates are, versus what you are earning currently in the sweep account?

Sure. Obviously, we're in an inverted yield curve. So, again, our normal plans that we'd have in non-inverted situations certainly have to be reevaluated. But by investing out in different instruments, I think we can pick up 50, 60 basis points at least if we stayed in floaters.

Got it. Got it. Okay. Okay. And then when you guys talk about dexterous capital, I think I know the answer to that, but that already takes into account the future capital that you will need to contribute to the bank as you grow it. I think you moved some deposits over this quarter. I'm assuming, again, that will come with some sort of a capital dynamic as well and maybe help us think through, like, what are you ultimately managing that to? I think a lot of your peers kind of could hover around 10% leverage ratio or something like that. Is that a fair way to kind of think about the capital?

It's a little high, but certainly we have contemplated that into our analysis, as we indicated, growing the bank from that standpoint. And so the $200 million-plus we have in there now certainly was contemplated, and then that came off with the – if you just want to look at the reinsurance, there's some fixed annuities from that standpoint. But our excess capital building is quite strong, and certainly the element of capital that we'll need for the bank and the earnings that we'll be generating from the bank certainly not going to cause any issue at all. But you're a little high in the 10%, I think.

Okay, great. And then, Jim, just one question for you around more strategic angle. You know, the outcome management trends are clearly getting better. You guys made a lot of investments in the platform, and I think a lot is being rolled out, I believe, next year, which should make you guys more scalable. How important or a priority is M&A with investments for you guys now? The multiples have come down. quite maturely among the public players, maybe less so for the private, but you want to get your, you know, just check your pulse on the appetite for deals and the affirmation.

Yeah, so, Alex, I think we actually feel good about the hand we have, and so, you know, if something comes along that would really make sense or is appropriate, we can entertain it, but Right now, as we said, we're really managing against what we have in place, continuing our transformation, rounding out the house a bit more in that regard. And so it's more of, you know, if an opportunity came along that made a lot of sense, we would look, but we're not out there hunting.

Great.

Thanks very much. Our next question is from Sumit Kumar from Citi.

Thanks. Good morning. Just a question back on the assumption review. Should we be thinking about any ongoing impacts in terms of earnings from the actions that you took in the third quarter here?

No. Not in VA and on LTC, it's flat now, so we really – no. Okay.

And would the same be true if you lowered that ultimate rate assumption from 5% to, you know, say something, you know, 3%, 4%, whatever it is? Would that be a one-time adjustment or would there potentially be some ongoing impact? I believe that would be a one-time adjustment. Okay. And then on the fixed annuity, I think you had said that you're looking to offload the rest of the block when rates improve. Should we be thinking about more of an environment like the first quarter of this year would sort of be required to transact there?

Actually, if you go back to when we did it, the rate was probably in the range between 250 and 270%. So, again, then you do your calibration of, you know, what impact you want to have on seed. So, yeah, that's a reasonable level to think about.

Okay, great. And then maybe for Jim, at a high level in terms of the wealth management business, we I've just noticed that it seems like there have been a lot of practices being added to Ameriprise and also leaving Ameriprise. I don't know if there's anything in the environment that's causing an acceleration in practices moving around, but can you talk to maybe some of the departures that you've had over the past couple quarters? You know, you said the pipeline looks pretty good, but I just want to get a handle on what's happening when advisors are leaving you guys.

Yep. So, no, we on a net base, listen, there's always going to be recruiting, you know, against us, and we pull in advisors, et cetera. I think the difference today is that in the past it's always people who just try to recruit from us. So we do very well recruiting out in the industry. Our net pipeline and net production is quite good coming in. But you're always going to have some advisors leave for whatever reason or people want to pay up a little more. So that's the nature of the exercise, so to speak. But we feel good about our position. There's nothing that we feel is unusual. I think some players are just trying to pay a little more these days. We don't know how rational it is, but that's what they do. But having said that, our retention is quite strong. You can see it year over year is very consistent. And our net gain is from really higher producers coming in versus the ones leaving. So we're pretty much on track.

Okay, got it. Thanks.

Our next question is from John Barnage from San Roan Neal.

Thanks. This is a question back to the race for zero among online brokers. Could you actually see this as an event that could cause an increase in inbound interest from advisors at those platforms that are now interested in joining the AWM platform?

Well, I think the question comes as more of how those firms are thinking about what business they're trying to attract. and where they've always played. So to me, when they move from, as I said, $9 to $4 is the same as moving from $4 to zero. So they have continued to focus on what type of people they want to attract. Some of those firms, one in particular, is probably focused more on deposits. I mean, it's a tremendous part of their whole business right now. We're focused on wealth management and advisor planning and clients around longer-term wealth management and protection. So, in our regard... It hasn't fundamentally changed. As far as people attracted to us, they do come to us, to your point, based on the value proposition about the more holistic advice rather than a free trade or that they're going to someone who's looking at that activity in that regard or part of a banking activity more broadly. So, to me, it does situate us well, and that's the reason we are attracting some good people coming to the firm, but also our advisors feel really good about the investments we're making to further support them with this value proposition. So, it's an excellent question, but, yeah, I think it does have some aspect, but fundamentally the last move they've made, I think, is more to make headlines than anything else.

Okay, great. Then my follow-up question on the flip side is, younger investors generally are more comfortable with robo-advisors and index investing and maybe not engaging with wealth management advisors like prior generations have done. You know, what is Ameriprise doing to adjust to that type of environment and bring them in-house now, possibly keep intact the advisor-client relationship for that next generation? Thank you for your answers.

Yes, so I think the question is, we've done a lot of research around this, and actually what we've found is, don't get me wrong, just like if you go back a decade, two decades, as the discounters grew, there were some people who really continued to do self-serve or complemented their activities with some self-serve activities, and that continued to grow. What's happening now in the robo, et cetera, the people who are actually gaining most of those assets are still the same type of discounters that are there, if you look at where the growth is, as a switch from the mutual fund supermarket to whatever. So for us, in our research, we find that actually the millennials – are more attractive to working with a trusted advisor, but they want the digital capability, the information flow, the interaction. But they actually say to us that if they're going to entrust their money, they want someone that they can work with, that they trust, that they can converse with in some sense, but they definitely want to be surrounded by the digital capabilities, and that's why we're doing the investments we're making to round that out and further support. So for the people we go after, we call it the responsible mindset, we feel very good about continuing to appeal to them. And to your next question, what we're doing is the generational transfer. So we're trying to tie back, you know, their parents and grandparents to the children and grandchildren a bit more, and that's an area that we're very much focused on.

Thank you.

And our last question is from Nigel Daly from Morgan Stanley.

Great. Thanks. Good morning. A high-level question on the advice on wealth management margins. Over the course of this call, you've discussed several of the underlying drivers, some of the things with regards to the banking initiatives, the core underlying trends, what's happening with expenses. But on the negative side, we're facing the headwind of Fed rate cuts. Maybe you can pull that all together and discuss how you're thinking about the sustainability of the all-in margins you achieved this year as we look towards 2020 and beyond.

As you indicated, the areas of strength that we have and the other aspects, there are certainly some headwinds against this. But, you know, the margins, we believe, are certainly sustainable. Obviously, as we look at it, there will be some impact coming from the interest. But we do see a good trajectory with the growth we're seeing and the productivity. And certainly our ability to manage expenses is a key factor.

Great. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating, and you may now disconnect.