Ameriprise Financial, Inc. (AMP) Q2 2019 Earnings Report, Transcript and Summary

Welcome to the Second Quarter 2019 Earnings Call. My name is Sylvia, and I’ll be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Alicia Charity. Alicia, you may begin.

Thank you, operator, and good morning. Welcome to Ameriprise Financial’s second 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 two, you will 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 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 second quarter 2019 earnings release, our 2018 Annual Report to Shareholders and our 2018 10-K report. We make no obligation to update publicly or revise these forward-looking statements. On Slide three, you’ll see our GAAP financial results at the top of the page for the second quarter. Below that, you see our adjusted operating results which management believes and 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.

Thank you, Alicia, and good morning, everyone. Thanks for joining us. As you saw in our earnings release Ameriprise continues to perform well. We've delivered another strong quarter completing a good first half of the year. Today, I'll discuss a few important themes. First, our wealth management business is leading the way. It's the front end of Ameriprise and our growth engine. Second, our high quality asset management insurance and annuity businesses complement our leadership in the growing wealth management space. They deliver both competitive profitability and strong free cash flow. And third, we have an excellent financial foundation which provides important capital generation and flexibility. We continue to take steps to free up capital, invest to accelerate our growth and generate shareholder value while returning significant amounts of capital to shareholder. Turning to the operating environment; the economy continues to improve. Equity markets have recovered nicely from the pullback in the fourth quarter. Long-term interest rates have come down in the first half and it also looks as though the Fed may cut short-term rates in the near-term. During the quarter we achieved some new milestones. Assets under management and administration reached an all-time high of $916 billion, and Advice and Wealth Management retail client assets grew 7% to more than $600 billion also a new record. Additionally, we delivered double-digit EPS growth of 14% building on our track record. We've long maintained industry leading ROA and have taken it even higher to 37%, an increase of 670 basis points over the last year. Let's start with wealth management which is driving our growth. Our comprehensive advice based approach is highly relevant, effective and uniquely Ameriprise. Our approach is supported by a broad suite of solutions and anchored in strong personal relationships to meet clients evolving needs. Importantly, assets remain in Ameriprise through clients lifestages as their needs evolve from asset growth to preservation, income generation and estate planning. In fact, a recent report by research from Hearts & Wallets found an Ameriprise is a top performer in terms of average share of wallet across customers of all ages. This is an important distinction at a time when many investors are choosing to work with multiple financial service providers. We not only serve our clients full range of needs, we also derive consistent revenues for the business across market cycles. This recognition reinforces how we operate and serve clients. It complements our Temkin credential where across the investment industry Ameriprise number one in trust, number one in customer service, and number one in consumer forgiveness, and we're number one customer loyalty. Our advisors are also standing out in the industry. So far this year 335 Ameriprise advisors have earned prominent industry recognition including top rankings in Barron's, the Financial Times and Forbes. I'm proud to see our advisors recognized in the marketplace for their excellent client service and practice success. In terms of financials we're delivery meaningful revenue and earnings growth while we invest for the future. In fact, AWM generates nearly 80% of firm wide revenue when you include contributions from our complementary businesses. Our AWM margin remains strong at nearly 23% which is among the best in wealth management. One of our key growth drivers is fee-based advisory. Assets were 13% to nearly $300 billion. In fact, we had $4.8 billion of net new inflows in advisory, our ninth consecutive quarter of more than $4 billion. Another important metric is advisor productivity where we delivered a new record high, strong client flows coupled with the extensive support Ameriprise provides help drive a 6% increase. We've delivered excellent productivity growth quarter-after-quarter. Regarding advisor recruiting, we welcome 72 experienced advisors. As a group they were 19% more productive than advisors we brought in this time last year. This continues our track record of bringing in larger producers who appreciate the Ameriprise brand and our advice value proposition. I feel good about our results and the ability to grow. We see a significant opportunity to serve more clients with advisor, especially those with $500,000 to $5 million in investable assets who value and advice relationship backed by strong capabilities in a trusted firm. We're also investing significantly in our client experience. These investments include enhancing our advice experience with new digital capabilities. In early spring we began rolling them out along with extensive training. Advisors are sharing success stories with me about the different it makes in their clients lives and for their practices. We're also in the early stages of advisor uptake and looking forward to building on this initial success. Another key investment we'll discuss with you is our new customer relationship management platform that we're rolling out through the fall. This integrated system help advisors define and manage contacts, consolidate client's data and track client progress. This will make it even easier for advisors to engage client to personalized contact. We're also taking steps to fully integrate our investment advisory platform. Later this year we're introducing a customer advisory relationship program moving from multiple different programs to one cohesive program where our various strategies can work better together freeing up time and effort for advisors to serve clients. And we launched the bank in the second quarter. And in June, brought more than $2 billion of money market cash sweep balances on our balance sheet. Later this year and in 2020 we'll add new deposit base product, credit cards, mortgages, as well as price lending. Ameriprise is a well-established advice leader with an excellent reputation. I'm energized about what we have today and what we're doing to further strengthen our position as a leading wealth manager. Now, I'll turn to asset management where we continue to deliver competitive profitability and focus on targeted growth opportunities. Overall, we have a high performing lineup across equities, fixed income and asset allocation strategies and where we had pockets of underperformance we've seen good improvement this year which bodes well. Our overall investment track records remain competitive and strong. In terms of flows we've seen an improvement in the level of outflows that we experienced from the last two quarters. Our market share in North America improved that several of our top intermediary firms with good flows into strategies where we're placing more emphasis such as a dividend income, strategic income, mortgage opportunities and municipal income. In fact, we saw a meaningful reduction in our outflows each month of the quarter. We think we can gain even more traction in fixed income both in the strategies I've mentioned and in a number of others where we have good investment performance. We're beginning to position these strategies even more prominently. The risk of trade in Europe and the ongoing uncertainty of Brexit impacted outflows. That said, outflows have stabilized with improvement in the UK, Benelux, Italy and Spain. You may have also seen that we won a $2 billion UK equities mandate with the majority of the funding occurring in the third quarter. In institutional, where net outflows reflecting the market environment where investors were a bit more cautious. That said, we're making progress in our global investment solutions business that we've invested in. We're building a good pipeline and we won some mandates in the quarter. We're also working to grow our SMA model delivery business where the fee levels are in line with institutional mandates. We now have more than $10 billion in assets under advisement. In addition we won a new 800 million mandate in the quarter. And as you know these mandates are not included in outflows. These are few areas where was seen good progress. And as you know industry headwinds for active managers continue. Despite these pressures earnings overall Columbia Threadneedle remain strong and we ended the quarter with $468 billion in assets under management. Our net adjusted operating margin in this business of 37.1% remains very competitive within our targeted range. We're investing where we see long-term growth opportunities and benefiting from our reengineering to help offset higher Brexit and regulatory expenses that we and others are experiencing in the UK and Europe. Keep in mind, we run this business as part of Ameriprise with a long-term perspective. With regard to insurance and annuities these are well-managed books. These businesses provide earnings diversification and stability. They are seasoned books of businesses that replenish with client flows generating strong free cash flows for a company. With regard to the quarter our variable annuity flows were down from last year. And while VUL and UL sales were down year-over-year we saw improvement from the first quarter driven by a pickup in the VUL. Given the environment these results are what we would expect. We built the business to serve our Ameriprise clients and therefore have differentiated risk characteristics. We effectively hedge variable annuity guarantees. In fact, our net amount at risk as percent of account value is one of the lowest among major variable annuity writers. With regard to our long-term care business we continue to be proactive in managing our book. In fact this current year, we saw greater rate increases and benefit adjustments than we did in past years. The Auto and Home business continues to show improved results and we're on track to close the transaction in the fourth quarter. That brings me to a capital strength and flexibility. Both are clear differentiators. We're generating substantial free cash flow that we reinvest for growth and return to shareholders. You can expect us to continue to build on our track record of strong capital management. As we've grown we've consistently return about 100% of our adjusted operating earnings to shareholders through steadily increasing dividends and buybacks annually. In this last quarter based on freeing up additional capital we began to take up our buyback consistent what we've shared with you. We are in an excellent position to continue to generate shareholder value. Our priorities on the capital front are clear. Continue investing in the business, evaluating inorganic opportunities and maintaining a return in capital to shareholders at attractive levels. Lastly, I'm pleased to share that in June Ameriprise reached a 125th anniversary, very few public companies in the U.S. has reached this milestone. We're proud to have been in business for more than a century and I believe it's because we've always put client's needs first and have constantly evolved. As we look to the future we're energized about the growth opportunity ahead, the strength of our business and our financial foundation. Now, Walter will take you through the numbers.

Thank you, Jim. Ameriprise achieved another solid quarter of financial results. With earnings per diluted share up 14% even with marginal equity market appreciation compared to a year ago, this was led by strong performance in Advice and Wealth Management and continued stable results in our other businesses. We delivered an industry-leading return on equity of 37% which reflects a 670 basis points improvement. We are generating substantial free cash flow and maintaining excellent balance sheet fundamentals to underpin our businesses with excess capital of $1.9 billion to the end of the quarter. I will take you through the details beginning on slide six. First, I'd like to note that our weighted equity index was up only 3% versus last year, much lower than the growth seen in the S&P 500 year-over-year. Typically, our WEI trends similarly to the S&P 500 and the disconnect of 4% this quarter is much larger than usual primarily due to underperformance of European indices. Ameriprise's adjusted operating net revenue was up 3% to $3.2 billion driven by revenue growth in Advice and Wealth Management. The impact from marginal market appreciation was offset by strong growth in wrap assets and improved transactional activity. Asset management revenue was on target 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 only 2% and we returned over 100% of adjusted operating earnings to shareholders through increased share repurchase and dividend. This results in very strong EPS growth of 14% and ROE of 37% as I mentioned. Turning to slide seven, you can see that our business mix continues to evolve with Advice and Wealth Management generating over half of the company's earnings up from 36% just three years ago. We've seen the consistent trend over the past few years and it should continue as we focus substantial growth investment on areas where we're seeing opportunity within the wealth management business. Additionally, wealth management sources the majority of the company's revenue 80% over the past 12 months. Let's turn to Advice & Wealth Management beginning on slide eight. AWM continues to perform well across all dimensions. Advice and Wealth Management adjusted operating net revenue and pretax adjusted operating earnings grew 7%, this growth rate was impacted by the marginal growth in the WEI from last year. That said, the quarter benefited from underlying organic growth that was quite strong with wrap assets up 13%, with net inflows up $4.8 billion in the quarter and 6% improvement in transactional activity sequentially. Higher interest earnings on brokerage sweep balances and expenses were well controlled. In addition, we launched back in the quarter and continued strong advisor recruiting both of which benefit revenue and earnings going forward. Expenses remain well-managed when you factor in the following. We had higher volume related expenses due to the increase transactional activity I mentioned. We continue to make substantial investments for growth including the bank. There was a mark-to-market impact on our advisor deferred compensation program and there was an additional payroll day on a sequential basis. We anticipate expenses will remain in this range for the remainder of the year. Finally, our margin remained very strong at 22.7%. As I indicated, we have strong organic growth trends in Advice & Wealth Management that you can see on slide nine. Total client assets were up 7% to $608 billion with wrap assets up 13% both of which have benefited from the solid trend that continued wrap net inflows over many quarters. Advice and productivity continues to trend upward reaching 638,000 per advisor on a trailing 12 month basis. Strong experienced advisor recruiting, new digital tools and capabilities and serving more of our target client market are key drivers of this trend. Lastly, brokerage cash balances came down $1 billion sequentially to $24 billion. We earned 210 basis points, up 157 basis points from a year ago, but down a couple of basis points sequentially. As other firms have mentioned, we too are monitoring potential Fed announcements and intend to pay us a longer portion of a Fed rate cut to our clients, while remaining competitive. Let's turn to asset management on page 10. Revenue and pretax adjusted operating earnings performed well. Similar to AWM we had a marginal benefit from equity market appreciation. In addition, the year-over-year growth rate was impacted by cumulative outflows and unfavorable foreign exchange translation, which was offset by the time of performance fees. Additionally, Jim mentioned several recent mandates won and the benefits from those will be seen in future quarters. We remain focused on tightly managed expenses while making target investments in appropriate areas for future growth and managing required regulatory changes. Margin in the quarter increased to 37% returning to our target range of between 35% to 39%. Turning to page 11; results in annuities and protection are solid. Annuities earnings were up 6% to $229 million, primarily from lower sales and higher living benefit writer fees. While sales remain down year-over-year, we saw a 19% increase in variable annuity sales sequentially, which support the improved transactional activity I described in Advice and Wealth Management. Protection earnings were up 3% to $65 million. Claims continue to be within our expected ranges and the underlying business is performing well. Clearly, interest rates remain a headwind for these businesses. We are currently completing our unlock and review and we'll discuss the outcome of the review in the third quarter. It's likely that interest rates will have a negative impact on our unlocking. However, there are numerous factors that contribute to our unlocking. 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 reach $1.9 billion and we expect this to grow further when we closed the sale of our Auto and Home business later this year. Our investment portfolio is well-positioned, diversified and high quality. Our hedging program remained extremely effective. These factors combined with strong financial performance across our business support our differentiated return of capital to shareholders. In the quarter, we return $570 million to shareholders through buy back and dividends, which was 102% of operating earnings. We expect to have nearly $2.5 billion of excess capital at year-end 2019, while targeting to return a 110% of operating earnings to shareholders for the full year. With that, we'll take your questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Erik Bass from Autonomous Research.

Hi. Thank you. Can you talk about the outlook for Advice and Wealth margins especially as a short term interest rates do you move to being a headwind? And related how much were expenses elevated this quarter due to the investments you're making it higher comp? Can you talk about how you see the investments flowing through to the bottom line over time?

Sure. This is Walter. From margin standpoint again assuming the Fed does cut. That certainly will affect them, but we still that the margins will stay in the approximate rate, but again, we have good revenue growth and good profitability coming through. So it's difficult to take full -- exact estimate. But certainly we believe that the margins will remain in this range. As relates to the investment, the investment spending is a large portion of the expense increase and as we indicated we continue to expect that we can factor through the remainder of the year. And they are generating good returns. I don't have the quantification of that. But they certainly are giving us the paybacks as we see strong revenue growth.

Got it. I think you'd mentioned a couple of higher comp expense items as well. Are those things that could recur? Or are those more one-off expenses in the quarter?

The comp there -- if you're talking about an AWM?

Yes.

In AWM that was really on deferred comp and is related to basically -- we hedged portions. Some portions can't hedge. And that was the differentials that impacted us. So it's really subject to markets. But – and we are certainly mitigating some of them.

Got it. And then finally, can you provide an update on your targets for the bank and the timeline for bringing on the credit card portfolio and other products you've talked about?

The credit card portfolio will come on the balance latter half of this year. And the rest of the products will start coming through beginning in 2020 going through the year. But the credit card will come on in probably the third, beginning of the fourth quarter.

Got it. Was there any way we should think about the earnings kind of building from here, I think it's probably neutral to a slight drag this quarter and you've talked about being profitable by the end of the year. But with those products coming on how should we think about the build out?

Okay. What you're going to see for -- the bank came on basically in June and so there's very little of the sweep balance that was moved over. It was impacting the profitability. You'll see that obviously impact the third and fourth quarter. And we're targeting with certainly, a changing interest rate. We'll probably be a small positive for the year. As it relates us, we're building at the bank and the credit card portfolio would really be a slower build on that in 2019 and start building in 2020.

Okay. Thank you.

Our next question comes from Humphrey Lee from Dowling & Partners.

Good morning and thank you for taking my questions. Walter, just to follow-up on the cash sweep, how should we think about the difference in terms of economic between sweeping to third parties versus just keeping them on your balance sheet?

Sure. Okay. As related to the initial funds that we've moved over that was basically – that full benefit will – it was being realized by us was came out of them, basically a money markets on that basis, so that is a full benefit to us picking up majority of that from the investment less the amount that we're creating to the client. As we go into the transferring additional sweep balances, obviously from that standpoint the difference becomes much less because it's the investment trade-off sweep account versus what we then gap on to the balance sheet. But there will be a positive element of incremental earnings relating to monies that are moved over. This environment we just have to gauge the impact of it, obviously the interest rates where they are.

Okay. Got it. And then you talked about the Fed cut or potential rate cut, you will be looking to pass along some of the impacts to clients. How fast can you pass along that? Is there kind of like anything that preventing you to move the impact directly to the clients?

So, this is Jim. If it’s one rate cut, let's say 25 basis points will be able to pass along a piece of that. Just like we took a piece and gave it to the client as the rate came in. As that rate -- if the Fed cuts more than that rate we'll again adjust, but bulk of that will just be absorbed by the firm similar to what we did on the uptake. So, what I would say is the first cut, part absorbed by the client, part absorbed by the firm and we're able to handle that as we continue to make our adjustments of shift with the bank et cetera. But it depends on the number rate cut just like we increase our margin because of the rate cuts. The margin will be adjusted down to some extent based on in the short term. Now aside from the margin increase from interest rate, we've got nice margin improvements from the core business. So we still expect us to continue on that path. But remember when we moved from the high-teens into the 20s, part of that was due to the increases in the Fed rate and therefore some of it will come back down in a similar fashion.

It's Walter. Let me just amplify on one thing as your question on frequency. It's fairly quick because majority money is invested in Fed funds and so the influences of the credit rates are adjusted as so are earning rates.

Got it. Thank you.

Our following question comes from John Nadel from UBS.

Hey. Good morning. I have a couple of questions. But Walter I want to come back to a statement. I think it was in your one of your final slides thinking about the capital return. I think you mentioned that you're targeting 110% of operating income for the full year, not just for the second half of the year. So, if I'm calculating it correct I think you're running it just south of 100% in the first half of the year. It seems -- I think what you're indicating to us is that the pace in the back half of the year is going to be substantially above the 110% to get to a full year 110%. I just want to make sure I have that right?

You do have it correct. Obviously, it will be factoring. But that's our intention right now that we will certainly have to increase that substantially to get to that 110% for the full year approximate.

Got it. Okay. That's helpful. And then maybe one for, Jim, I'm just -- I'm thinking about the fixed annuity book and your commentary about accelerating the free up of capital from various portions of the enforced block. After the transaction with Global Atlantic on the first 20% of the block, I think the message was very clear that you're looking to accelerate that free up. How much has the drop in long-term rates since then impacted the potential of moving forward with additional capital raised from the remaining fixed annuity block or from other pieces of the portfolio?

So, I'll let Walter to cover a little more of the detail. But the way we think about it is as you'd see we have a good amount of flexibility. So it's not as though in this rate environment if rates continue to go down that we need to execute a transaction. What was really good about what we did so far and Walter and team is, it set up that capability for us and then we will work appropriately based on the appropriate arrangements and the timeframes that we're interested in with the rate environment to execute those transactions. And so I think that gives us some more flexibility if we wanted or needed. And at the same time we don't necessarily have to do it just based on what circumstances dictate today.

So it's Walter. John, certainly with our access position we don't have to do it now, but – and the interest rate will impact it will have to evaluate that. But as Jim said we have the capability in place and certainly are evaluating that and. And it's our intention in the right set of the circumstance we will then commence the remainder of it.

Okay. That's helpful. And then if I can sneak one last one in on Advice & Wealth Management. If I look at the first half of the year, G&A growth was around 8%, but revenue growth, little over 5%. That's the first time in a long time that I can recall that there's been that kind of differentiation or a disparity between G&A growing faster than your revenues. If G&A is going to stay around the same level as the 2Q for the remainder of this year, if we set aside the Fed and its actions, should we expect the operating margins going to decline from here?

So, let me let me start and then Walter can continue. As you heard in my opening remarks we're taking the opportunity. First of all, I've mentioned to you about recruiting as an example. We're bringing in much larger books of businesses across and doing that just the transition close to people coming on board and [Indiscernible] and all that stuff. Our transaction revenue has gone up. We've had some mark-to-markets on our deferred comp that's also in those numbers. So part of the 8% is having to do with some of that. In addition, I've mentioned some of the investments we're making. So I'll give you an example. Putting in a new CRM platform you've got all the implementation because you're actually paying for two systems overlap for the year. So there are a number of things like that. But we feel that in this timeframe where we see the growth opportunity the strong margins we have AWM as well as our potential for growth. This was a time for us to increase those expenses. Remember, in the last year I had a cut back a bit of them because of all that DOL expense and the regulatory. So we wanted to shift that back to growth investments. We think those investments will pay us good dividends moving forward. But that's part of the reason why the G&A. So if you ask me for the future outside of those investments and some of the things I've mentioned to you. Would that continue? The answer would be no because we will firmly control our expenses particularly in a more difficult environment. But we feel right now making those investments even though G&A is up a bit. Remember we've been able to hold the line pretty well with a strong growth business. My margins are significantly above some of the other people that you guys look at and track. And my returns are significantly higher. And that's fully loaded. That doesn't – that's not EBITDA, that's PTI. So what I would just look at is, the expenses will be higher for this year, but it's based on the things I've mentioned, if for whatever reason the market slows down and other things will climb back on their expenses. But some of that is due to the investments we make in the overlap and the growth in some of the other things that we covered in the activity levels.

So John, it's Walter. The only thing I'll add to that is, listen, obviously we have good revenue trajectory, but one thing is in the second quarter we only had two weeks of the earnings coming from the bank as related to the transfer. You'll have the full impact of that starting in the third and fourth quarter.

Yes. That's kind of where I was going. It was -- so the bank will be a partial offset. Then if I can paraphrase for you, Jim, it sounds like what you're articulating is, as we turn the page to 2020, you'd expect us to be seeing revenue growth exceeding G&A growth?

Absolutely, I mean that's what we're focused on that what we've been able to deliver. But I just wanted to say to you. I mean even with the incremental it's not as significant based on what we've been able to do. But we think this will pay some good dividends for growth in the future and the expenses will come back in line along those means.

Perfect. Thanks for all the time. Thank you.

Our following question comes from Andrew Kligerman from Credit Suisse.

Hey, good morning. I want to follow-up quickly on John's question about the 110%. That would imply buybacks of close to 600 million per quarter for the next two quarters. But I think about the capital position where Ameriprise sits, $1.9 billion excess capital, another 700 plus incremental by the end of the year from Auto and Home. And then you talk about these annuity blocks. So would it be fair to consider that perhaps you could ramp up the buyback considerably more even than $600 million a quarter. Where would you be thinking more about acquisitions?

So, what we would say is, we feel very good about to your point the ability to return. We'll be ramping up our buyback and opportunistically continuing to look at that depending on market conditions. But it also gives us a lot of flexibility moving into 220 both from a whether it's a return of capital or it could be based on some incremental acquisitions depending on the market and the climate and the valuations and the type of business opportunities we see. So what I would say it's a good sort of a hands to sort of play. But as Walter said, we'll be stepping it up a bit towards the end of the year depending on market circumstances if the opportunity arises, maybe more. On the other side of that, it gives us a lot of flexibility moving into 220, which I think would be a positive in your thought process.

Great. And I mean historically as I've seen Ameriprise, you've acquired when market conditions were weak, when others didn't have the capital. I mean, is that still the mentality? Or do you see a lot of opportunities out there that you'd like to take advantage of with this capital?

So there maybe some opportunities come along. They're opportunistic depending on strategic and what we think. But having said that, I do favorably believe in the Warren Buffet mentality and we have a lot of flexibility to do that. As you know, we are actually quite strong in a down market as well.

Okay. Two quick questions. I thought I heard Walter you mentioned a variable annuity unlocking. Could you provide a little more color around that is if something coming that would be material?

Okay. So, Andrew, right now we're going through the process. We have not completed it. And so we'll do that at the end of the third quarter. We were just making the statement that the interest rates will have a negative impact. But right now, it’s a little bit behavioral. The other aspects we're working through it, but we don't see anything surprising as yet.

Got it. So nothing overly material is that from…?

Nothing we're seeing now.

Okay. And then lastly just…

It [contemplates] but nothing we are seeing.

Okay. So far. Okay. Rate increases in long-term care. You mentioned that you are getting better than what you had anticipated. Could you give any sense of the magnitude there?

No. Right now it's on two fronts. Obviously, we have instituted appropriate, but increased rate increases. But we're also making benefit shifts that we're seeing good percentage take-ups that are higher than we've seen previously. So we have not yet quantified, because that's part of the unlocking also. But we are certainly seeing positive aspects, both on the rate increase side and the benefit shift proposals that we've made, there is more acceptance.

Great. Thanks so much.

You are welcome.

Our next question comes from John Barnett from Sandler O'Neill.

Thanks. Given the risk transfer that was completed for the annuity segment, can you talk about a possible reduction in stranded costs going forward for that business?

Are you are talking about the fixed annuities?

Yes.

Basically it's been profit neutral. So technically there is no stranded cost implications to us from that standpoint, because it's not large in its space anyway from that standpoint.

Okay. And then now that we're kind of one quarter into the bank launch. Can you talk about maybe lessons learned that you can position the business for growth in the next year or so? I know when you're planning for a launch, you think things are going to go in certain way and it happens and you learn some lessons from it.

Okay. It's interesting, because this is our second launch. So we've had experience in doing it. And I can say that, it's actually been quite smooth from that standpoint. And certainly the -- bringing back to credit card portfolio is moving quite well. And from the transfer of the sweep accounts and then bringing up the infrastructure, we've actually not had a lot of surprises. And like I said, we've done this before. So I think it's moving well.

Good. And then my final question. It sounds like there was a nice client win in the quarter for the Asset Management business. Can you talk about maybe where you're seeing opportunities in the market and how you're positioning the company in a fee pressure environment? Thank you.

Yes. So the win was really in the UK in our equities area. As you saw there has been some transition, some fund managers, et cetera. And we're well thought about. We also see some opportunities. And again, I think all of us are a little surprised, et cetera, with the Brexit delay and that has caused a little more of people holding back and risk-off in Europe and the UK for Brexit as well as some of the signs on the European economy. But we're starting to see that stabilize. And we actually think that some of our activity will begin to pick up in Europe and the UK, as well as we move forward. And we're starting to see some more interest come back. And the other thing we're seeing is in our solutions business. Institutionally, we're starting to get some mandates. We just got one out at Asia and one or two at Europe. And the pipeline is building, and it takes time for you to really get in front of people with some of your capabilities. But I think that's starting to take hold. The other thing we see is, in the U.S., I mentioned, but from sort of our good capability, strong performance and income-oriented strategies, both from an equity perspective, as well as fixed income, we're seeing a pickup in sales. I actually would say, if you looked at the second quarter from an active equity, we're probably doing pretty well relative to the industry. We're not getting a strong inflow as we should in the fixed income and that's where we're putting more emphasis. We've always been known more of an equity shop and equities have been a little more active on the pressure, but we have really good strategies and fixed income. The sales group and distribution in North America is starting to shift some of their emphasis to include the fixed income more prominently and having more conversations around it. I think we could pick up some greater share there that would help the flow picture in North America in the active space. So, we're feeling good about some of those things. Having said that, the headwinds are still there. We are continuing to shift where our investments going into, things like better in and analytics, to better enable. We're putting emphasis around some of our research capabilities, investing in some of our new solutions and infrastructure and real estate. We're getting some wins starting in the real estate from the firm we bought. So there are some good things on the horizon. Having said that, as you know, this space has been a little more difficult, but we're starting to gain some traction that hopefully will reduce our outflows.

Thank you.

Our next question comes from Ryan Krueger from KBW.

Hi. Thanks. Good morning. I just had one follow-up on the bank. Can you give us a sense of the spread that you're earning on the $2.2 billion of -- that was moved into the bank?

That's 250 basis points.

And that's AWM's earning. Okay. Look at it from that way, it's not getting into the transfer pricing discussion, about 250 basis points from the AWM standpoint.

Okay. 250 basis points. Thanks. And then just how big are the credit card portfolios that you expect to move over the next couple of quarters?

It's about -- I think it's $200 million, $220 million, something in that range.

Okay. Great. Thank you.

Our next question comes from Alex Blaustein from Goldman Sachs.

Hey, guys. Good morning. Just on this last point and I had a couple of other questions on the bank. But 250 basis points, it's a pretty widespread given where rates were today. Can you tell us where you're investing that, if you look at agency spreads available out there? It seems a little strategy.

Basically, we were investing right now in -- basically, in mortgage floaters and high quality for paper. And what you really seeing is a spread, because candidly it's coming off the money market. So therefore that's where the bulk of the difference is. That is very little earning rate that we would. Okay.

Right.

It's not so much we're stretching the investments, the investments are all in high quality floaters.

Got you. And then the yield on the credit card portfolio. The $200 million you guys going to transfer in Q4. What is that? And I guess, what does that going to do to net interest margin at the bank in the near term? And then, I guess, bigger picture point, as you kind of look out a couple of years, I know you guys talked about, I believe, pre-tax income within five years getting closer to something about $200 million bucks. How is that going to evolve? So, maybe you talk about the size of the bank within five years, kind of aspirationally where you hoping not to be? What are sort of the composition now the book would look like? And within the $200 million target, what are you assuming for credit costs, because you do think largely that's going to be consumer loan portfolio?

That's a lot of questions. Let me-- I can't really give you [Indiscernible] because that work is now coming over from a third party, where we only get a small portion of the feed. Now we're going to start getting it. So I'd say, actually I don't have the exact amount on the credit card margin. So that one we can get back to you on. The issue as it relates to building the bank is really going to be in the basis. The bank is going to transfer over, as we said, substantial amounts of sweep accounts as we go through the period and certainly picking up the spread on that as we look at investing differently. So that is really going to be the lion share of the benefit that we're going to derive on that basis and getting into probably the range of $5 billion, $6 billion , $7 billion in total. And then the rest is going to come from a help of certainly a higher profitability on the credit card as we have that profitability since we're in the underwriting with one of our partners, and then building up, as Jim said, the pledge loans, the deposit base and the mortgage base as we go through. But the real contribution is going to come from being able to use the balance sheet more effectively from -- and garner more earnings versus the sweep.

Got it. Okay. So we'll circle back on some of those other ones. Shifting gears a little bit, just thinking about the rate sensitivity within AWM broadly, I think the brokerage cash sweep revenues are running at around $130 million this quarter. Obviously, it's a pretty clean way to think about the flow down from lower Fed rate cut. So that's pretty straightforward. I was hoping to get a sense on how the other piece of kind of the rate sensitivity in the model, so like that net interest investment income and the net expense against that. I think it's about $65 million a quarter for you guys. How is that going to evolve? I think it's basically you're certificates business with lower rate. Just not so clear on the sensitivity there to Fed cuts.

The Fed cuts, obviously that one is spread, it will be impacted. But again, we have -- I would -- it would be -- I can't give you an exact amount, because that one is really we manage through a very cautious program of protecting on the liquidity. So the investment impact will be reduced. I just can't give you the exact amount, it's going to be reduced, because that is invested out further with a bell bar effect invested in certificates and different longer-term investments, but it will be impacted less because the investment earnings are -- we have a large portion of that going out right now.

It shouldn't be significant.

Yes. A little more fixed, I think, on the asset side there. All right. And the last one, just a cleanup around some of the G&A discussion and just want to make sure that I'm getting the message here. So clearly the investments spend makes sense in 2019. As we look out into 2020, G&A in AWM is that essentially going to stabilize at kind of current run rate level and then we should go back to more of a normalized growth, which I think historically has been kind of in mid single-digit range for you guys. So kind of take whatever you guys are running out for 2019 that's in you run rate and then maybe just grows a little bit slower than it was in 2019?

I think that's a fair estimate. I'd say, that's definitely fair.

Awesome. Great. Thank you very much guys .

Our last question will be from Suneet Kamath from Citi.

Thanks. Good morning. Just wanted to come back to the AWM margin for a second again, just to make sure I'm understanding what you're communicating. So the idea here is that, the margin may kind of stay in this 22%, 23% range in kind of the rest of the year. You have the bank, but you have some of the things going on in terms of rates. And then it will resume, what has been a kind of a steady climb higher as you move into 2020. Is that a high level commentary that you're giving us?

So, what I would say, Suneet, would be along that lines, but again there is some variables in there depending. So the variables are very clearly how quick does the Fed cut, right? And you can do those calculations to figure out what that would look like. But let's say, hypothetically, if the Fed only cuts ones then we feel comfortable at the margins we have. And the expense growth that we have incremental over the business activities, advisor growth and stuff like that transaction. We have that extra investments in 2019 that -- which sort of come down thereafter. From a relative level of getting business growth that the environment is still as good, we'll start to grow back that revenue growth with the expense being well maintained again. The interest rate is the wild card, so to speak, some we can make up, for some we can't, some we will offset with as Walter said what we're able to do as we start to move more of our sweep activity into the bank and invest differently to offset some of that spread erosion from the Fed. But I think it all depends on market and rates and the instruments at the time. So it's hard for us to predict that. But those are some of the things that would be an offset, but if the Fed doesn't cut rates dramatically, then we'll be fine and continue to grow from there. But if they do, we'll try to offset it with the bank activities and as expenses come down from the investments, but some of it will hit the margin as you would well now in the short term.

Okay. All right. And then just two quick ones or two on Asset Management. First, I think the former parent outflows have moderated pretty significantly of late. So are we at a point where we're at this kind of a run rate kind of going forward and how big are the underlying assets in that category that you call former parent?

I don't have the numbers of -- we could get to get back to that. But the balance is there, as we've always said to you, the fee revenue from our relationship with Zurich maintains pretty well, the flows will always be somewhat negative based on just how that happens, but the asset base pretty much has maintained roughly where it's been over the last number of years. There's always some ins and outs if they close a pension or other things, but market has been able to offset that. The U.S. Trust business which is the other larger mandate. I think it's stabilized at a certain number. I don't have it in front of me. Alicia can get back to you with some of that information. But, yes, the outflows have slowed a bit and with market appreciation and dividend reinvestment, et cetera, they've maintain certain levels, but Alicia can give you that.

Okay. And then just my last one on Asset Management and I appreciate the improvement inflows that you're seeing. But also you've cited numerous pressures facing all companies in that industry. So, I guess, how top of mind is doing something more significant there, be it a sizable acquisition or joint venture? Thanks.

So again, we feel very good about the asset management business that we have and what the team has been able to put together. In some of the areas we feel like we're quite strong enable to continue to proceed well even in this difficult environment. Having said that, we do have capabilities for acquisition, we've proven that, we've been very successful in integrating. So it has to be the right property, we're open for way that we would work with partners and thinking about that. And if something they come along or the market in some way felt it's stressful for others more so than us, we will have the opportunity to work in some fashion. But again it's not something when needing to like have to do and we're really continuing to fine-tune our business, manage expenses, regear our activities to generate a good return in this environment, but I think -- we've proven our capability, we've proven our financial strength and we've proven our ability to look at alternatives in the right way strategically and that's what we'll try to do.

Okay. Thanks.

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