Welcome to the Ameriprise Financial Second Quarter 2014 Earnings Call. My name is Ellen, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Alicia Charity. Ms. Charity, you may begin.

Thank you, and good morning. Welcome to Ameriprise Financial's Second Quarter Earnings Call. On the call today with me are Jim Cracchiolo, Chairman and CEO; and Walter Berman, Chief Financial Officer. Following their remarks, we'll be happy to take your questions. During the call, you will hear references to various non-GAAP financial measures which we believe provide insight into the company's operations. Reconciliation of the non-GAAP numbers to the respective GAAP numbers can be found in today's materials available on our website. Some statements that we make on this call may be forward-looking, reflecting management's expectations about the future and 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 today's earnings release, our 2013 annual report to shareholders and our 2013 10-K report. We take no obligation to update publicly or revise these forward-looking statements. And with that, I'll turn it over to Jim.

Good morning, and thank you for joining our second quarter earnings call. I'll start with my perspective on the quarter and how I'm feeling about the business. Walter will cover the numbers in more detail, and then we'll answer your questions. As you saw in our release, it was another strong quarter for Ameriprise, marking a very good first half of the year. We had meaningful operating net revenue growth, up 8% to $2.9 billion. Operating earnings were also strong at $408 million, with operating earnings per diluted share up 31% to $2.08, excluding the Cofunds gain from a year ago. Assets under management and administration reached an all-time high, increasing 15% to $810 billion, reflecting strong advisor client flows and positive markets. We're executing our strategy well, and I'm pleased with how Ameriprise is performing. Maintaining an excellent financial foundation is core to how we operate the company. Our capital and financial position is very strong, and we continue to generate significant free cash flows to return to shareholders. During the quarter, we returned $464 million to shareholders through share repurchases and dividends. And year-to-date, as of June 30, we returned $921 million to shareholders in excess of our total earnings. With our strong earnings and capital return, we delivered record operating return on equity, excluding AOCI, of 21.7%, up 380 basis points from a year ago. Let's get into the business, beginning with Advice & Wealth Management, where we're achieving excellent results. Operating net revenues were up 11% to $1.2 billion. A strong fee-based growth continues to offset the weight of low interest rates. I'm very pleased with the revenue growth we're delivering. Clients are engaged and active. Total client assets increased 16% to $435 billion, and we continue to have meaningful flows in our investment advisory programs.…

Thank you, Jim. Ameriprise delivered another quarter of excellent financial results. Let's start with operating net revenue growth on Page 3. In total, operating net revenues grew 8%, excluding the gain on the sale of Cofunds last year, driven by strong operating fundamentals. This was led by particularly robust growth in Advice & Wealth Management. Revenue growth, combined with continued expense discipline, resulted in a record 16.2% margin in AWM and a 38.7% margin in Asset Management. Together, Advice & Wealth Management and Asset Management operating earnings grew 25%, excluding the gain on Cofunds and account for over 60% of the earnings, demonstrating our continued business mix shift. Turning to Slide 4. Operating return on equity reached another all-time high of 21.7%, up nearly 400 basis points and solidly within our targeted range of 19% to 23%. Operating earnings per share also reached a new record level of $2.08, up 31%, excluding the gain of the sale of Cofunds, a credit to solid business growth and continued strong capital management. Moving to Slide 5. We continue to deliver excellent business metrics and financial results in Advice & Wealth Management, with 11% top line growth. Pretax operating earnings were up 29% to $194 million due to improved advisor productivity and continued strong asset growth. As we have discussed previously, we are seeing continued improvement in the earnings and margins in both the employee and franchise channels. In total, margins reached a new record high of 16.2%, up 230 basis points. These results were achieved with no benefit from interest rates on over $22 billion we have in short-term funds. Spread earned on the $18.5 billion of brokerage cash was just 17 basis points this quarter. So there remains a substantial upside potential from an increase in short-term rates going forward. Overall,…

[Operator Instructions] The first question is from Alex Blostein with Goldman Sachs.

First question on the flow dynamic. Look, I mean, I guess we've seen the legacy related and the parent -- legacy parent-related, sorry, outflows for quite some time. And in your prepared comments, sounds like at Columbia, in particular, maybe they've gotten a little bit better, but flows are still fairly, I guess, disappointing. So it implies, I guess, the rest of the business may have gotten a little bit worse. So can we just get, I guess, an update on what do you guys still think is at risk. And help us parse out the outlook for flows from here.

On flows and looking at the quarter. Obviously, you saw that from our standpoint, there was -- the activity levels slowed. And basically, that was -- we evaluated the situation that the rebalancing was slower and which resulted in lower gross sales. And also, it's basically the same with the redemptions and the sales of basically a complacence. These people are pretty content where they are. We've checked through, and we've seen this trend with the industry in several of our peers. So we do see that we are making progress, and as we indicated, the flows from the former parent and certainly related are within the ranges and actually performing. So again, we're on track. It's, again, work to be done. But it is -- I think, we are making progress and still progress to be made.

Yes, Alex, I think we -- to Walter's point, we saw a bit slowing in the sales. Outside of the x parent -- I mean, the Zurich, we're always going to have that and we also will always have part of the outflows from the large base that we have for the affiliated. That's more of a natural rebalancing that will continue to occur. So we're not concerned about that. In fact, those look like they actually, similar to what Walter said for the industry, sort of slowed a little bit because the redemptions weren't as high and even though the sales were a bit lower. I think the 2 things that probably affect us a little more in the second quarter was we continued to get the outflow from the U.S. desk that we had in Threadneedle, and that's in the retail side. We had booked the same change as an institutional mandate. And then, in the U.S., a bit more, as Walter said in his comments and I said in the DCIO, where there was a little bit more of an outflow that we experienced there in some of the Wanger product and in one of the funds. And so I think adjusted for that, we would have saw some improvement. But we did see across the industry a bit of a slowing, and we did have a bit of a slowing in sales in the second quarter in retail.

Yes -- no. And I totally appreciate just the slow of flow dynamics in the industry as well this quarter. But I guess, if we were to think about the 3 buckets, one being Columbia, former parent-related AUM, how much is there still that's sort of risk? And then the same comment, I guess, on Threadneedle from the U.S. team that left. How much AUM is there and how much is at risk? So this way we can kind of rank [ph] them. What should be potential in your runoff versus the progress that you're making on the [indiscernible]

Right. So in the affiliated at Columbia, there are, I don't know, a few billion dollars left. Some Bank of America, some Balboa, et cetera. And that will flow out a little over time. We should see a bit of that come out in the fourth quarter. But again, we don't know exactly. The Balboa, as an example, it's a little lumpy, but that has come down a lot. So that would be one area. Then we have what would be ongoing distribution with Bank of America. And just based on the natural evolution of those assets as they further diversify from some of our mandates, whereas when the new sales go into a broader group of mandates, we're going to continue to see some outflow there. We mentioned over the course of the year $3 billion to $4 billion in total. But again, that actually got a bit better in the second quarter. So -- but that will continue. And then the Zurich, we roughly tell you, is going to be roughly about $4 billion a year U.S. And that's just the natural flow. Now having said that, those assets have good retention of what's there with appreciation. So it's not as though we're losing the fee, but it will still go through the flow line item. Now where do we see uptick? We see good uptick in our institutional mandates. We have a good pipeline that's being built, and some of that's starting to win -- we won and we'll fund. So we feel good about that both domestically and internationally. We still have good retail sales in the U.K. and Europe and Threadneedle. So that, we feel good about. We have more work to do in the U.S. intermediary. We're making some changes there, both from a leadership perspective as well as from a product and marketing and various things of how we align that to get on various platforms, and that we're putting a lot more focus and concentration on with a new leadership lineup there. So we feel good about that. And we also feel good about some of the new solutions business that we're putting some time and effort in that we think will pay some good dividends over time that would even build the institution, and even in retail for some of the products that we'll come out with. So the retail is still a bit more of a work in progress in the U.S. It's actually built momentum in the U.K. and Europe, and institutional is moving along nicely.

Alex, as I said in my prepared remarks, the other [ph] thing as related to the U.S. equities. For TAM retail, they actually were flat, absorbing the $1.5 billion on U.S. equity outflow. So they're -- we're having strong inflow performance. We can -- we've seen it slow obviously in the June time frame, and Diane's performance has been quite good. So we're gauging it right now. But it's -- I think we have a little ways to go, but we just don't have an exact number. It's tracking, I guess, in the range where we thought at this stage.

Got it, that's helpful. Second question on the margins and I guess both AWM and the Asset Management business. You guys continue to put up really strong results in AWM. And I think this is the question that kind of comes up every call, but you guys continue to kind of, I guess, surpass even the expectation of the layout [ph] for yourself. But where do you guys see this margin shaking out, I guess, towards the end of year as some of these new FAs come in? Because it does sound like the cost control in G&A front [ph] was pretty good.

Okay. Obviously, last quarter, I was talking about being at 15.5% to 16%. The market's really -- we have a solid base of assets and certainly strong flow performance. So I would say, again, I hate estimating these things. But certainly, we -- this level seems comfortable. Again, subject to market changes, everything of that nature.

I think what I would say, Alex, with that is you always get adjusted [ph] quarter-to-quarter or various things, but our expense trends and what we're doing there is holding. We are getting good leverage off of the investments we've made. We're continuing to make good investment. So I want to be very clear. We're not doing that because we stopped investing. We're still investing nicely in a number of new capabilities and products and services that we've just -- including just what we launched last quarter and what we're putting behind [ph]. So we're making good investments, but we're managing our expenses well. We're getting leverage of the investments that we mentioned to you previously that we invested in, in technology. That's also deriving some savings for us as we lower call [ph] volume and other activities, transaction, manual efforts that we used to do. Our advisors are seeing productivity lifts from taking up these things, including our Confident Retirement approach and our focus in the market. So I think a combination of factors. We feel good about the margins. So we're going to continue to want to grow our productivity which, hopefully, will add to margins as we go on. And as you still know, I mean, we're probably at an all-time low in interest rate effect, just because old contracts have rolled off and we're probably at a very low level now. So any pickup there will be a benefit over time. So no, we feel very good about the progress we're making. We're going to continue to look to make progress. So I'm not saying we'll stop here. And the other side of it is our focus has been on driving our asset levels and our productivity, which will then, as we maintain and leverage the expenses in the investments we've made, will build the margin.

The next question is from Seth Tennant with Citi.

Yes, can you discuss your current interest in M&A and the type of properties you would be most interested in? Would you be looking at another large asset manager or more focused on filling specific product gaps?

As we continue -- we're investing in new product and capability and building out some of our solutions area right now with the talent that we've been adding and some of the global product that we're putting out between Columbia and Threadneedle. So we're going to continue to push forward there. We also launched a new fund in Asia, and we have now 3 or 4 up. So we're going to continue to do that. We will continue to look for -- in product areas and certain disciplines that we don't necessarily have here at Columbia. So we'll look around in some of those areas, but they wouldn't be major acquisitions. In regard to anything larger, it really would depend on whether it would add some larger capability to us or distribution that would make sense strategically. But as we continue to operate, we'll probably put a bit more in the first one I mentioned, which is more of product areas that would continue to build against our portfolio capabilities. Again, we don't rule out something wonderful that pops up. But having said that, we don't necessarily count on those things happening.

[Operator Instructions] The next question is from Suneet Kamath with UBS.

I don't want to take anything away from the strong AWM margins or the good flows in Asset Management, but I wanted hit on Protection in 2 places. First, on long-term care, another insurance company just reported a pretty weak result in long-term care, and I believe you've reinsured some of your business with that carrier. So I just want to get a sense of what your block looks like, how you're feeling about that block. And do you have any comments on how much of that business has lifetime benefits and when it was originally written?

Sure. Again, looking at our block, as we've been talking about, we have started program of appropriately raising rates for a while now. And our claims performance been within our target ranges. So again, we've been dealing with that, and it's small, relatively small to our situation. So these policies of -- I believe we're in the late '90s. Most of them -- I believe most of them were done back then. I don't recall the percentage on the lifetime side of it. But we've been certainly monitoring, looking and taking [indiscernible]. So we are feeling that, number one, as I said, it's small relative to -- as we talked about before and that we -- it's been performing, again, within ranges and, again, within the levels that we anticipated. So we don't see a concern at this time.

Okay, got it. And then I wanted to shift over to the Auto & Home business, because that's a business that, I think it's fair to say has been underperforming for several quarters now. And I know, Jim, in the past, you talked about your commitment to the business and all of that. But I'm just wondering if you've given anymore thought as to whether or not you need to manufacture that product or whether you can outsource manufacturing to some other P&C companies and allow your advisors just to sell their products.

Yes. We don't own the P&C business because of the sales per se to our advisor channel. It's one of the affinity channels that the product is sold to. So it's not necessarily, I would say, core against our franchise channel. We have and are continuing to focus on that business. We have been underperforming for the last few quarters. This last quarter, the underperformance really came from the cat losses. It was solely driven by that as you saw experienced in the industry and it's a nature [ph] part of that business. From that perspective, we feel like we can continue to get appropriate rate there. We know that there are things that we can continue to do that we're very much focused on that would enhance our various pricing and various underwriting and risk in certain areas that cause some of the underperformance in certain states based on changes that have occurred out there, both in the legal environment as well as with various other competitors. So we actually feel like there's a lot that we can do to get that business back to a more higher performing in its results -- bottom line results. We also know after further study, externally, by external sources, that this is actually one of the better businesses out there and the type of model that we have and the cost structure of the business and how we operate it. So if we can fix a few of the things that we know we can fix, which we will be working on, we could have a very high-performing business. Now that doesn't answer your question necessarily of whether it's a business that is long-term integrated in core. We like it because of its level of diversification. We like it that we're building appropriate scale in it. And if we can operate it to generate the type of dynamics, it will give us a lot of choice of what we do with it. So it is a little bit more of a work that we have underway, but we already start to see signs that, that will come to fruition. And at the same time, we're growing the business nicely and diversifying it. And so we're very happy with the business. I know it hasn't been reflected because of whether it's cat losses and storms or some of the extra reserves that we took recently. But we feel that, that reserving situation is behind us. And now we'll be focused on really dealing more with the external environment a little, as the industry is. But I think we'll start to see better bottom line returns coming over the next number of quarters.

Got it. Okay, that's helpful. And then maybe just one quick one for Walter on the variable annuities. How much more of your VA book could move potentially to these volatility managed funds? Because it seems like every time that happens, you get an earnings benefit. So I'm just wondering how much more could be in front of us here.

Well, actually, we've seen -- we've -- so far $5 billion has moved. We are seeing it slowing again and within anticipated levels. So it will be slowing as we head through the cycle. But there's a continuous element to it. We think it's actually a very good thing, because it's good for the customers and it's good for our risk profiling. And so it works for both of us. So it is definitely slowing, and we're seeing it from that standpoint. So it will be coming through, but I think it will be certainly at a lower level.

We have no further questions at this time. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.