Alicia A. Charity - Senior Vice President-Investor Relations James M. Cracchiolo - Chairman & Chief Executive Officer Walter S. Berman - Chief Financial Officer & Executive Vice President.

John M. Nadel - Piper Jaffray & Co (Broker) Yaron J. Kinar - Deutsche Bank Securities, Inc. Alexander V. Blostein - Goldman Sachs & Co. Thomas G. Gallagher - Credit Suisse Securities (USA) LLC (Broker) Suneet L. Kamath - UBS Securities LLC Erik J. Bass - Citigroup Global Markets, Inc. (Broker).

Welcome to the Q2 2015 earnings call. My name is Vivien, 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. Please note that this conference is being recorded. I will now turn the call over to Alicia Charity. You may begin..

Thank you, 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 glad 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 future events 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 2014 Annual Report to shareholders, and our 2014 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..

people that are accumulating assets as well as those who are transitioning to retirement. Our Confident Retirement approach generates higher satisfaction, deeper relationships, more assets, and higher referral rates.

In fact, for the affluent, satisfaction rates we're earning with clients served through Confident Retirement are some of the highest I've seen. Based on the results we've seen, there is more we can achieve as more of our advisors begin to adopt a simplified and engaging approach.

Now we're expanding Confident Retirement for wealth builders, people who are in the accumulation phase. This expanded approach has proven effective in our initial consumer research as well as with our advisor palette we tested in the quarter, leading to nice lifts in both productivity and flows.

We plan to roll it out nationally to our entire field force beginning in the fall and through next year. Also in the fall, we're kicking off a new brand and advertising platform, and we're shooting the ads for it this week, and will be working closely with advisors to take advantage of the campaign in their local markets.

I feel good about its potential to engage our advisors, clients, and prospects in continuing to tell our story as well as demonstrate the benefits of working with Ameriprise.

We're also enhancing our digital presence in the Ameriprise website, incorporating responsive design to make it easier for consumers to access their information from multiple types of devices.

As a result of these and other efforts, our advisors continue to grow productivity, which increased 9% year-over-year to a new record of $512,000 over a 12-month basis. Overall, we're delivering nice growth and profitability across the business with strong opportunity for further growth.

In regard to Annuities and Protection, year-over-year operating earnings were down in these businesses, but there are a number of items from both the current and previous quarter that Walter will discuss. In terms of Annuities, variable annuity account balances were relatively flat, but that was largely due to outflows in our closed book.

Within Ameriprise, we had good sales growth up nearly 10% from a year ago, and we're seeing nice traction from the introduction of two new living benefit riders in the quarter.

We also continued to see strong adoption of variable annuities without living benefits, reflecting good wholesaling activity and a positive reaction to helping clients and advisors understand the advantages these products can provide. This has contributed to a good and moderate shift in the mix of variable sales products without guarantees.

Sales of VAs without living benefits represented about a third of total VA sales in the quarter. There's essentially no change in fixed annuities given the current rate environment. In Protection, we continue to work with our advisors on the benefits and insurance for our clients.

Life & Healthcare sales were up 10% from a year ago with continued strength in Indexed UL. And our overall client retention in these solutions remained high. This helps enhance the long-term nature of the Ameriprise client-advisor relationship.

We're simplifying marketing and sales materials, processing new business more efficiently and enhancing our digital capabilities. We also refreshed our disability income insurance product line in the quarter, as this remains an important feature of a comprehensive financial plan. These enhancements should begin to show in the third quarter.

In Auto & Home this quarter, we were particularly impacted by the storms that were more severe than usual in the central part of the country. In regard to the overall business, Auto & Home has a good client base with good distribution that garners a very high client satisfaction and retention.

As we discussed with you, we have a number of actions on the way to address some increased developments we've experienced. This includes adjusting pricing, tightening underwriting, as well as improving claims management in certain areas across the book.

The steps we're taking should get us back on track to the level of performance and return we previously delivered. It will take time as our initiatives work through the book. We expect to see good benefits in 2016 and beyond.

Now let's move to Asset Management, where we have a strong foundation of assets and are generating solid earnings and competitive margin. Assets under management were down slightly from a year ago, but that was largely driven by the foreign exchange translation.

We're executing our strategy while investing in the business and being diligent about expenses. We're generating strong investment performance versus benchmarks and peers. In the U.S., we continue to generate strong equity performance in short as well as longer-term time frames, particularly in large cap, core growth, and quantitative products.

In addition, our small and mid-cap growth products continue to improve in the short term. Taxable fixed income performance has performed in line with our risk profile. Tax exempt performance remained strong.

While the Acorn Fund is still underperforming over the medium-term, its performance has improved versus both against benchmark and peers in the short-term. In EMEA, we continue to generate good short and longer term track records, especially in equities. While UK performance has been somewhat mixed recently, longer term performance remains strong.

Both U.S. and European equity performances continue to improve and longer term track records are quite strong. In Asia, all of our locally-managed funds now have one-year track records and, in each case, are beating their benchmarks and peers. Let me highlight some other things we're focused on, starting with retail.

In the U.S., retail gross sales are up almost 10% from last year. We're adding to our leadership talent and distribution, marketing, and product, and we'll soon announce our new national sales manager that will compliment the leadership changes that we've made over the last few quarters. Wholesaling focus is improving.

We're strengthening our product training and better aligned our sales strategy. And we're investing in our marketing and advertising to reflect new Columbia Threadneedle Investments' go-to-market strategy. Our plan is to be in the market later this year with new creative. While these actions are beginning to take hold, there's still more work to do.

In the quarter, retail outflows were elevated in the Acorn Fund, which lost a large DCIO client. However, we're very focused on improving Acorn's performance. We're managing the planned leadership transition and increased concentration of our top holdings, returning the investment process to its roots and strong legacy.

In the UK and Europe, we're generating good retail growth sales and had net inflows of about $800 million in the quarter. We also have a very good UK property business with assets of about $13 billion that provide a meaningful contribution. In addition, at U.S. Trust, we experienced a level of outflows consistent with prior quarter.

We've renewed our relationship with U.S. Trust, which remains strong. Over the next quarter or two, we expect outflows in some low-margin fixed income portfolios that U.S. Trust will take in-house. In institutional, other former parent related outflows included a larger than usual outflow in low-fee Zurich assets, due to the sale of an annuity block.

The underlying run rate of outflows have returned to normal levels as we serviced this closed block. That said, we're driving growth in our higher fee third-party business, including more than $900 million of net inflows in the quarter, as nearly all the mandate wins we expected to see in the first quarter funded in the second.

Client service, consultant relations, and sales are managed globally now, which has enhanced our support and ensures that sales teams offer our full portfolio of strategies. Our institutional sales pipeline is healthy and we have a good pool of high potential sales.

We expect that over time, third-party Institutional will become an even larger component of the business. This includes the solution space where we're continuing to build out our capabilities and investing in our infrastructure and sales efforts to support longer-term growth.

More work remains to be done in Asset Management, but we're making progress on a number of fronts and believe we can continue to gain traction in key areas. We will still experience one-off impacts and legacy flow dynamics, and like the industry, we continue to deal with current market and geopolitical conditions.

Our focus remains on improving our overall flows, as we continue to deliver competitive financials and look to earn share across key markets. Now, let me turn to an issue that we're all focused on, the Department of Labor's fiduciary proposal.

We support the DOL's objective in ensuring that investors, particularly those saving for retirement, receive advice that's in their best interest. The industry has supported a uniform fiduciary standard for years. Ameriprise has long served clients and served them well under a fiduciary standard.

We believe that our track record and the high client satisfaction rates we consistently earn demonstrate that we have a beneficial business model for the delivery of advice. We take the DOL seriously when they say that they intend to preserve beneficial business models for the delivery of advice.

However, we think the DOL's proposal as currently drafted could have some significant, unintended negative consequences. We have submitted our recommendations and are supportive of the comments from the major trade associations, other member firms, and FINRA.

These provide vital perspective on the broad range of issues that must be addressed and are responsive to the DOL's request to help them get it right. Importantly, just in the last few days, the DOL has said that they will make significant changes to the proposal.

We hope that that means that the concerns raised by many stakeholders in comment letters are being heard and will be addressed. Given they intend to make changes, all stakeholders should wait to see how the comments to the DOL are addressed before making definitive conclusions.

We've dealt with regulatory changes before and we will work with our trade associations and other stakeholders throughout this process to advocate for our clients with a goal of most appropriately satisfying the DOL's objectives.

We continue to believe that Ameriprise is situated well and has the ability to respond to appropriate requirements to satisfy the DOL's objectives. In closing, as I look at the company overall, we've been able to consistently generate good growth in EPS and strong ROE.

We have a good combination of businesses and people to continue to execute the strategy we have in place. And I feel good about our ability to continue to generate strong free cash flow with our mix of businesses as well as to navigate the market and consistently return to shareholders as we have. Our capital management remains a real strength.

We recently increased our quarterly dividend and also increased our buyback in the quarter, as we saw more dislocation in the stock. With that, I would like to hand things over to Walter for a detailed review of the numbers..

Thank you, Jim. As Jim indicated, Ameriprise delivered another solid quarter of financial results in the face of a fairly volatile market. Operating net revenues was $3 billion, up 2% from last year. Revenue growth was muted by the impact of a CLO liquidation in the prior year, as well as an unfavorable foreign exchange translation.

Without these items, underlying revenue growth was 4%. Operating EPS was $2.33, up 12% from last year. However, it was impacted by several one-time items that we announced last week, specifically elevated CAT losses in Auto & Home, a reserve release in long term care, and an unfavorable mean reversion.

Excluding these one-time items, operating EPS was $2.38, up 15%. And the operating return on equity reached a new record level of 23.5%, which is above our targeted range of 19% to 23%. Turning to slide four, you'll see that our business mix shift continues to evolve.

Advice & Wealth Management and Asset Management represented 65% of pre-tax operating earnings this quarter, fueled by strong growth in AWM. As we grow, we expect the mix shift will continue towards an intermediate 70%-plus target. Turning to segment performance starting with AWM on slide five.

The Advice & Wealth Management business is performing well across key growth and activity metrics, and delivered solid financial results, particularly given the market volatility. Revenue was up 6% to $1.3 billion, largely driven by an $18 billion increase in assets.

While total expenses increased 5% year-over-year, it was driven by higher distribution expense.

We kept G&A expenses essentially flat year-over-year, while still investing in key business growth initiatives, including more productive experienced advisor recruits, advisory platform product expansion, and investments to improve the ease of doing business for advisors and clients.

This resulted in earnings of $220 million, up 13%, and a record margin of 17.3%, up 110 basis points from last year. Let's look a bit more closely at the drivers of AWM's profitability improvement on slide six. We continued to generate good growth in advisor productivity, which reached a record level of $512,000, up 9% compared to last year.

Productivity improved nicely in the franchise channel, which reached $532,000, up 8%, and we saw more substantial growth in the employee channel, where productivity increased to $433,000, up 12% from last year.

Improved advisor productivity along with strong experienced advisor recruiting and expense discipline continues to support strong margin expansion. Margins have grown 350 basis points since 2013, when we established our 20%-plus margin opportunity. Looking at it by channel, margins in the more established franchise channel are now 18%.

Margins in the employee channel were almost 12% this quarter and continue to expand nicely. Over time, we intend to drive employee channel margin expansion, and they should approach the level of the franchise channel.

We remain focused on driving improved profitability through continued productivity improvements, as well as recruiting and retaining advisors. In addition, we see the opportunity for margin expansion when short rates rise. We have approximately $20 billion in client cash sweep accounts earning about 22 basis points.

Since we have not benefited from short rates yet, we would expect a substantial margin lift when the Fed funds rate increases. Together these growth dynamics demonstrate the strength of our model, success of strategies to grow this business, and the opportunity we have to drive profitability even higher.

Our strong performance on the absolute basis is matched by our strong relative performance as you'll see on slide seven. Our AWM segment revenues are almost $1.3 billion, which is a 9% CAGR over the past two years. Over that same time period, our margins have expanded 340 basis points, substantially surpassing the margin expansion of peers.

We believe our growth has been quite competitive on a relative basis, including relative to other large wire houses and online brokers that benefited from banking and market-making activities. Asset Management continues to provide a solid contribution to Ameriprise's revenue and earnings as you'll see on slide eight.

Operating net revenues declined 1% to $832 million. However, the year-over-year comparison is distorted by the timing of the COL (sic) [CLO] (21:45) liquidation of $23 million in the prior year, and an unfavorable $17 million impact from foreign exchange translation in the current quarter.

Adjusting for these items, underlying revenue growth was about 3%. Pre-tax operating earnings were down 1% to $197 million. Again, adjusting for the timing of a $17 million CLO liquidation in the prior year, and an unfavorable $6 million impact for foreign exchange translation, underlying earnings were up approximately 12%.

Expenses continue to be tightly managed, and we were essentially flat, adjusting for the items I just described. We remain focused on maintaining profitability and margins at the current level, while investing in growth initiatives to improve flows. Turning to Annuities on slide nine.

Annuities pre-tax operating earnings were $150 million, down 12% from last year. However, the prior-year results included several items distorting the year-over-year comparison. Adjusting for these items, earnings increased 6%.

Underlying variable annuity pre-tax earnings grew 7% from a year ago to $123 million, when we adjust for the year-over-year impact of clients moving to managed volatility funds and mean reversion.

While the move of clients to managed volatility funds drove a significant initial earnings benefit last year, it also improved the risk profile of the block. Underlying earnings growth was driven by higher account values of variable annuities sold through our own advisor channel and the runoff of the closed block distributed through third-parties.

Fixed annuity pre-tax operating earnings was flat at $30 million, as the benefit of repricing the block was offset by elevated lapses. Lapse rates are in line with our expectations given the current interest environment. There are limited new sales and, as a result, this book is expected to gradually run off, and earnings will slowly decline.

Turning to the Protection segment on next two slides. Protection pre-tax operating earnings were $72 million in the quarter, impacted by $48 million of CAT losses in Auto & Home, and an $18 million reserve release related to our long term care disabled life reserve, both of which were previously disclosed.

Let's focus on the Life & Health business first. Underlying Life & Health pre-tax operating earnings were impacted by higher claims activity and a lower interest rate environment. On the claims side, life claims were elevated in the quarter and slightly higher than expected.

While disability claims were still quite good in the quarter, they were higher than a very favorable experience in the prior year. I would like to take a few minutes to discuss the long time care disabled life reserve review that we conducted in the quarter.

As you are aware, we announced $32 million reserve increase in the first quarter, following a review of our claims reserve based upon information we received from Genworth. After reviewing the documents we received from Genworth, we decided to engage a third-party consultant to validate their analysis.

This additional review identified that actual claims and termination experience for our block was more favorable than the information Genworth initially indicated. As such, we released $18 million of claims reserve that had been booked in the first quarter.

We are working with Genworth to improve the accuracy of the data provided and enhance the processes associated with setting the claims reserves. The reserve review conducted over the past couple of quarters is related to claims reserves only, since we used data from Genworth to set that reserve.

The adequacy of the active life reserve is determined using our own data and is reviewed regularly. As part of our annual unlocking process, we will evaluate all of the non-equity market assumption across our life, LTC, and annuity products in the third quarter. Let's turn to Auto & Home on slide 11.

The Auto & Home business had an operating loss in the quarter, which was clearly impacted by the significant level of CAT losses. We planned for $23 million of CAT losses, but actual CAT losses came in at $48 million.

This was driven by higher exposure to the central part of the country that experienced an elevated level of severe weather in the quarter. Underlying Auto & Home results reflect the current year loss ratio provision.

As you recall, we are booking reserves for the 2015 accident year at a level consistent with the 2014 accident year loss ratio assumption we changed in the fourth quarter. As we discussed last quarter, we are continuing to phase in changes to our pricing to risk models, enhance claims and underwriting processes, and improve operations.

We are seeing clear indications that the changes we are making are working. There has been a slowdown in new policy sales across product lines with the most material decline in auto. We are on target to achieve marginal profitability for Auto & Home, excluding excess CAT losses in 2015 with a more meaningful improvement to earnings in 2016.

Let's turn to the balance sheet on slide 12. Our balance sheet fundamentals are strong. We have approximately $2.5 billion of excess capital. Our risk-based capital ratio is estimated to be approximately 560%. Our hedge program is effective, and our investment portfolio is well-diversified.

Our business mix shift is continuing to generate strong free cash flow, allowing us to return a substantial amount to shareholders. Given the share price in the quarter and our current valuation, we accelerated the level of share repurchase.

We returned $549 million to shareholders through share repurchase and dividends, which is our highest quarterly level. This equates to over 125% of operating earnings. As always, we will continue to monitor both the macro environment and our relative valuation, and look to bring down our excess capital over time.

In summary, Ameriprise delivered another good quarter of financial results. Our growth engine remains the AWM business, where strong fundamentals will continue to drive margin expansion. In Asset Management, we are maintaining competitor profitability and our business initiatives are focused on improving flows.

The Annuity business is delivering sound growth with an improved risk profile. Life & Health earnings remain solid and we're taking the necessary steps to improve the financial performance of the Auto & Home business going forward. Our business mix transition to higher growth, higher fee businesses is ongoing and generates strong free cash flow.

And all of this rests on a solid balance sheet and enterprise risk management framework, and is clearly driving shareholder value. With that, I will open it up to questions..

Thank you. We will now begin the question-and-answer session. And our first question comes from John Nadel from Piper Jaffray. Please go ahead..

Hey, good morning. Thanks for taking the question. My first one is around Advice & Wealth Management. You saw net revenues continue to grow pretty nicely, roughly in line with the growth in productivity.

I guess I'm curious, Jim, whether you saw any significant change in the underlying mix of the sales by product? And I know, for example, last quarter, you saw a fairly late contribution from Annuity sales. And I'm assuming that picked up this quarter with the overall VA sales growth..

Yes, that's correct. What we have seen is, again, strong take-up, again in our fee-based wrap businesses. We've seen an increase in our sales on the guaranteed, on the annuities side. Things like various transactional business and brokerage, such as REITs, are very low. It represents about – less than 1%, around 1% of our sales activity.

So, it is really, again, sort of the core products and services that we have offered. We have seen a good flow improvement and good activity across our network..

Okay.

And then anything this quarter that you'd characterize as a – sort of, a noticeable early impact from advisors, maybe, shifting some business in response to the DOL proposal, recognizing it is only a proposal?.

Not at all. In fact, our advisors feel very good about what they do for the consumer, whether in qualified or non-qualified. We've had a pretty consistent mix.

We get unbelievable satisfaction levels from our clients and they are really very comfortable and happy with – achieving their retirement goals, if it's in their – against their retirement needs. So, in fact, we think we're well-situated based on the business that we do. And again, the products that we sell in are needs-based.

So, at the end of the day, I think we're doing what we need to do appropriately, consistent with both the regulatory, but more importantly, from a client need and disclosure perspective..

Thank you. And then I just have two real quick ones in Asset Management. G&A seemed a bit higher than, I guess, I would have expected. It's not that significant, maybe it's about $5 million or so.

Just curious whether we should think about the $345 million of G&A in the quarter as a run rate, or if there was anything unusual there in the second quarter?.

No, I think the only unusual is, as Jim mentioned, I think, we launched our brand. And, certainly, we had the expense in there, but we believe the expenses will just be on its normal run rate..

Yeah, and we did the relocation of the Threadneedle premises in London. So, we had some additional expense there, so..

And then on the fee rate, it looks like you're starting to really see some upward momentum there. I guess I'm curious, based on what you're seeing in the underlying mix shift. I know you said some of the legacy outflows, maybe were elevated this quarter and maybe that had some impact.

But how much further do you think that fee rate can go, let's say, over the next couple of years, based on sort of an underlying mix shift there, Jim?.

Well, I think we had a little uptick in some of the fees from the performance fees in the quarter, which, you know, are not – doesn't happen on an equal basis every quarter, but there, I think there is a little more on the performance fee basis there..

Okay..

I do believe, as you said, some of the legacy lower fee coming out, and over time, I think, as we build a bit more on the institutional through third-party or some of the solutions, will be higher. Unfortunately, the Acorn was a little higher fee that we lost on the retail side.

So if we can stem that and continue to get some growth in the sales as we saw in the other retail channels like international and even domestic, I think we can offset that and start to add. But I would just say the bit of increase I think you saw was just a little lumpy from some of the performance fees..

That's helpful. Thanks a lot, Jim..

Thank you. And our next question comes from Yaron Kinar from Deutsche Bank. Please go ahead..

Good morning, everybody. Thanks for taking my questions. I want to start with the capital deployment.

So could you maybe explain a little more the rationale behind the elevated buybacks this quarter compared to I think a very consistent $350 million quarterly run rate the last three years? And can we extrapolate from that, or think of an elevated new run rate going forward?.

It's Walter. Again, as we've always indicated that we have the capacity and we will evaluate both the environment and our valuation, and we felt in this quarter that it was warranted to take that up. We did take it up $75 million. We will continue to evaluate that. We certainly have the capacity to do that.

And I think at this stage, we're going to be opportunistic as we look into for the remainder of the year..

Okay. And then in Advice & Wealth Management, the recruiting efforts clearly were quite strong, and then you say the pipeline remains strong as well.

Do you see any impact from the DOL proposal there? Do you see that impacting your recruiting capabilities?.

No, I think one of the things, again – the DOL will – once we exactly know what finally they come out with, we'll understand some of the implications. But we're probably situated very well in the type of business that we do, how we work with clients. We operate under a fiduciary standard across our network today.

We have very strong compliance structures and it's one of the benefits of people coming to us. They like how we handle our centralized compliance, our disclosures, et cetera. We have a very strong client value proposition. And so we've seen a very strong, good pipeline of highly productive people both in our employee and franchisee channel.

The pipeline remains strong. So, no, we feel pretty good about it. Again, we're not – I think we're in good shape relative to the industry in general. I don't see any differences between us or the industry when you look at it from a DOL.

In fact, I think we're very well prepared because we have a very strong advisory relationship around our financial planning activities today and our retirement value proposition.

So, again, we don't know exactly where the final regulation will come out, but I think you can see very strong responses out there from the industry, from the associations, even the regulators like FINRA. I just saw a note going out from the SEC Governor.

I mean, so there are a lot of responses out there that hopefully the DOL would understand what they need to accomplish. We're very supportive of that objective. We think we can satisfy that objective very well. But, again, it's the way they go about doing it I think is where the rub is..

Got it. That's helpful. And a quick final question, if I could, also on the AWM segment. So I think you mentioned in the script that you're expanding into clients in the accumulation phase.

And would that mean that we should expect some maybe offsetting productivity pressure coming on the revenue per head just because you are now targeting individuals that are probably not quite at the same level of net worth that the existing base is?.

No, not at all. In fact, I think it'd actually be a great complement. What we are doing, we're rolling out to our advisors right now, we've done a lot of work and research, both a combination of our brand, our value proposition, our Confident Retirement approach, Confident Retirement accumulation approach.

We've built our – our heritage is based on accumulation for retirement, so I actually believe that we can serve the higher end of the mass affluent, and the affluent quite well and those really accumulating for retirement, the generation X coming up, et cetera.

So it's really getting our advisors a little more focused on going back to that opportunity and combination, and it's really against the upper market here. So I actually think it will be a good opportunity for us and complement to what we do, and longer term to build long-term relationships as we have in the past..

Great. Thank you very much for taking my questions again..

Thank you. And our next question comes from Alex Blostein from Goldman Sachs. Please go ahead..

Great. Good morning. Thank you. Question for you, guys, again on margins in the AWM. So clearly, really nice trajectory, nice expansion so far.

As we look out and kind of thinking of the current environment stage, sort of, what it's been for the last kind of six months, maybe a little bit more a range bound market, how quickly do you think you'll be able to get that 17% margin that you have, the 17.3%, slightly higher which I guess, you guys are targeting closer to 18%, assuming no higher interest rates?.

Yeah, well, Alex, I think as we said, I mean, we moved the needle pretty well and pretty fast over the last number of years, going first at our 12% target, then to 15%, now we're in the 17% and change rate here.

So I think if we continue to – just continue to execute, help our advisors just continue to drive their productivity and get our asset flow as we continue to focus our business even more on moving our center to a bit more on the affluent space, uptaking some of the tools and capabilities we're putting in place, we're coming in with a new branding approach at the end of the year.

We have a new wealth builder approach for accumulators. So we're recruiting pretty well. The people we're bringing in are higher productivity. We're attracting a good number of people in the higher end. So I think we're doing the things.

What that means quarter-to-quarter, I can't tell you, and I can't dictate sort of the market dynamics of just – but I think that in combination, we know at hopefully one point this year, the Fed is going to start to rise. Remember, we don't have contracts that are rolling off as some others where they're locked in.

We're actually at a low point, so any benefit there goes right to the bottom line for us as well. So I think we're situated well, and I think we're going to continue to work against that. We don't necessarily just focus on a margin improvement; we focus on a strength and growth in the entire channel that leads to that margin..

Alex, it's Walter. I'll just add, if I could.

As we talked about it, the employee channel certainly has been one that has demonstrated an improvement in its margin, and again, as we bring on years, and certainly a higher productive years, and they start building up productivity, they're making a greater contribution to the fixed, and that will also continue to go.

So I think there's a lot of things in play that will continue. Again, you can't just predict quarter-to-quarter, as Jim said..

Right, understood. Thanks. And I guess, shifting gears a little bit on the Asset Management business, can you just give us a since on the low margin fixed-income portfolio that you're saying U.S. Trust has been sourcing. And just from a modeling perspective, help us understand how much it is and what's kind of the fee rate on that business.

And then, Jim, you highlighted continued strength in the institutional pipeline. It would be helpful to kind of get us a sense at least directionally where that stands maybe relative to last quarter as we think about the kind of Columbia Institutional flows ahead..

Yeah, I don't know the exact number at U.S. Trust, but we're probably $1.2 billion or something like that. I'm not exactly positive. But it's more of some separate accounts, their lower fee. For us, it's not, though, they are a higher-margin business at all. But, again, it's something that makes sense for U.S. Trust as what they're doing.

It's not a major to us, but I just figured, I noted it, because we sometimes look at the flow number rather than necessarily the revenue. From a perspective on institutional, it's quite strong. The pipeline's quite strong. The fee rate is quite good. We're getting mandates both domestically as well as internationally. Europe is picking up.

We think there is good opportunity for us, as we continue to look out. And again, we don't know exactly when those things go, and when they eventually even if you win them fund only because people are looking at the market situation, the geopolitical interest rates.

But having said that, I think we got a wide range of good pipeline there that we're competing with, and hopefully that will continue to show some strength..

Understood. Thanks for taking the questions..

Thank you. Our next question comes from Tom Gallagher from Credit Suisse. Please go ahead..

Good morning. First question on DOL. So, you have had three months or so since that proposal has come out, and I recognize it's still fluid and there might be changes, but just curious if you've done an internal analysis to assess, kind of, the range of potential impacts that you think this might have on your business? That's my first question.

I realize you haven't disclosed anything publicly, but have you done something internally yet, in a fairly comprehensive way, to assess potential impact? That's my first question..

So, I think as – we, as a business look at it, as many have, you don't have clarity yet of what the regulation is. There's an exemption that people say, yes, you can definitely sell an annuity, et cetera. And then some would say, well, maybe you can't. So, at the end of the day, it really depends on how you interpret that. It's not as clear.

What I could say to you is this – and this is one, maybe, that would be helpful in you analyzing it. We are a business that serves our clients for all of their life needs, including retirement. So, roughly 50% of our assets in qualified, similar to others in this industry.

In that regard, we have a majority of what we do in investment business in the qualified through advisory fees. We're one of the biggest and best-growing in the industry against that and we have strong platform capability to continue to drive that, if that's where the world goes appropriately. But we do look at the needs of our client.

We do put them in the product that's appropriate to them, and that's what we're asking the DOL to make sure that they look at the best interest of the client. And best interest may not necessarily be what they think at the upset.

And you can see that from many firms in their comment letters, including, whether it's FINRA, the SEC, you can look at it from the associations, you can even look at it from even major brokerage and even investment firms, including those in ETFs that have made the similar statements. So, I think, at the end of the day, that's what we're saying.

But, from a mix perspective, same thing with annuities, most of our business is in guarantees, which the Treasury Department said is important. If you looked what that would have done to the consumer not having those products in the last downturn, it was significant.

But we're no different than the entire insurance industry, annuity providers selling annuities and the percentage we have in qualified is similar. So, we're not an outlier in any of those things. Now, how is this interpreted across the industry? I think all of us can come to a little different equation on that. But, I don't think anyone knows for sure.

So that's what we're saying. And if we just quantify things based on how we interpret versus how others interpret, I've looked at what others said, whether that's correct or not, I don't know.

So I think that's what we're saying is until we know more, until you know more, until we know after this comment period and after what the FCC comes out with, but once that happens, we'll be very clear of what that means and how we can respond to it. I would just say that we have very strong capability here. We serve our clients well.

We have an unbelievable level of disclosure and compliance today. We know how to serve people with the best interest and across our entire network of advisors. And so we'll be able to respond.

Hopefully, it will be against what the DOL truly wants as their objective that would make it efficient and appropriate for us to do that, so we can serve even the smaller consumer..

That's helpful, Jim. And then, I guess, just a follow-up on that. Yeah, and I hear what you are saying, in terms of there is a fair amount of latitude and discretion you can probably use to interpret the context of the proposal at this point, so it would probably be pretty hard to quantify. So, let me ask it in a slightly different way.

If you had to look at some of the areas or issues out there, do you legitimately see this being a bigger issue for – we'll say, revenue momentum in the Advice & Wealth business, fee pressure in the Asset Management business, or just the overall cost associated with the implementation of this? If you look at those three areas, what would....

how does that align with the regulations already in place? Will the SEC change what they're require and how to think about it? I mean, there's a lot of case law behind this.

There's a lot of regulations built over very informed information over decades that people follow in this industry, not just for Ameriprise, but every broker-dealer, every investment firm, every product company selling their products.

And so all of those things or it's the level of complexity that we say, what's the unintended consequence? So, again, that's why I'm not sitting here overreacting to it. I think it has to get sorted out, it has to be rational, it has to be ability to serve the client. Remember, there's 100 million-plus U.S. retail consumers saving for retirement.

And so, again, as I said, I think Ameriprise is well situated. I think we have a great value proposition. Yes, any change, you always have to look at how you respond to it, but hopefully this will get very rational, because we're probably one of the first firms to say we want to serve clients in the best interest. And we do that today.

So I can't answer your question yet. I wish I could. And I know it's what you're all saying as one of the implications for us, but I would just say if you look at the financial services industry, you look at a retail investment firm like us, and you look at product companies, we are situated as well as anyone..

No, that's good perspective. I appreciate it. Just one last question, just on, Walter, you'd mentioned you're preparing for your annual review of FAS 60 and FAS 97 products and I guess you do that every third quarter. My specific question is long term care, I know you did the claims review.

Can you comment on active life, whether that's a risk of a reserve charge? I think you've been losing a little bit of money, or roughly breakeven, a small loss every quarter on an operating basis.

Should we be looking at that as a potential risk here?.

I think we're looking at – specifically, we want to go to long term care. We're looking at all of the products annuity and other products. And as we evaluate it there are a lot of positive elements within it as we look at different factors. Certainly, one of them as you're aware is the interest rate, which will be part of the evaluation.

We've made no judgments at this stage, certainly where we thought the interest rates would be at this time last year is certainly lower, and we will evaluate all those factors.

But nothing pops out from the standpoint that we are concerned about other than just looking at where the interest rates are at this stage, all the other behavioral aspects, certainly our price increases, other things, we're very confident that's what the actuaries are doing right now..

Okay. Thanks..

Thank you. And our next question comes from Suneet Kamath from UBS. Please go ahead..

Thanks, good morning. I just want to go to Auto & Home for a second.

Just given the consolidation in the property casualty industry as well as your comments about the turnaround maybe taking some time, have you given any more thought to a more, I guess, a sooner exit of that business?.

So, Suneet, as we look at – so let me start with this. I do believe that what we are able to do with the business, because the business is quite strong. We've had the business, evaluated its model. It has one of the best distribution-type platforms. It's one of the lowest-cost providers in the industry, et cetera.

It has one of the highest customer satisfaction. In fact, it was rated second from the big rating company that usually you hear about, but you can't just necessarily talk about. So I would just say there are tremendous attributes we already have. So it's not a problem for us to grow what other people have.

It's more of we had to put in place a bit enhancements on some of the areas that have changed a little bit in the industry. We're tightening a little underwriting, adjusting pricing, a little more sophistication around that.

Getting a little more, what we would call, expedited on some of our claims, adding some resources there, rather than relying on third-party. So there are a number of things that we're doing that are well-known that the industry and we can do. And we have the right resources that we've put in place to get that done.

So we actually feel very good about our ability and that this will add to nice earnings next year and the year after, even more substantially. So I think that would be a positive as you think about it, and also a carrier for the business. Now having said that, we do recognize what's happening in the industry. We do recognize the level of consolidation.

So we'll always think about how to evaluate that, but again, I don't feel like this is something that wouldn't add tremendous value to Ameriprise one way or the other over time..

Suneet, it's Walter. The only thing I just want to clarify is, again, all the initiatives we're talking about are pretty much on track. Certainly, the heavier CAT that we experience that will certainly change the profitability. But the other initiatives and where we think this – and how long it's going to take is pretty much on track..

Your question is good. It's appropriate. We always do think about and evaluate it. So, again, we'll see as the world in the future..

Yeah, I appreciate those comments. But at the end of the day, it's not making any money. I'm spending a disproportionate amount of my time talking to investors about a business that, frankly, I just don't see why it adds value to your company. It just seems like it doesn't fit. And, like I said, there's consolidation in P&C.

I just still scratch my head and try to figure out why it merits the amount of attention that you are spending on it..

So, Suneet, I appreciate your perspective. And, certainly, as we look at – this is not the return, not the way we want. But we do believe the basic underlying is quite strong and we're fixing it. And then, as Jim said, it's not core. We'll evaluate it.

But it's something that we put the resources in, dedicate it and are turning it around and then have to evaluate it (57:10). This is not the way – the sort of returns and characteristics that we would want from one of our businesses..

Or have had in this business..

That's right. This business has actually, many years ago, it actually had returns. We certainly have seen it and it has substantial potential. Your perspective is certainly is valued..

Appreciated, right. Thanks..

Okay. Thanks. And then just a couple of quick others. On the JHS Capital Advisors, I'm just curious if – can you give us some background in terms of how that deal came about? Is that something that you approached them? Or did they come to you? Just want to get some sense in terms of how that deal came about..

Actually, we have the capability – or we've been looking at many different ways of evaluating the environment, and certainly we have a group of people that look at and assess. And it was a combination, I think. And we assessed both their – in fact, they had an employee base and franchise base. And conversations evolved.

And it was really we do look, and we basically reached out to them..

Okay. And then just a follow-up on Yaron's question.

I mean, I know we're not talking about DOL on specific terms, but would it be unreasonable to think that if the DOL proposal sort of passes as it's currently drafted that there could be further consolidation in Advice & Wealth Management?.

Yeah, well, listen, I think one of the things that we're finding out there is advisors, even that have moved to a level of independence, et cetera, are recognizing that today's environment is a bit more difficult to do business in, and that they're looking for a firm that would give them the support for a range of things, including having good strong compliance in place.

So I mean, we're attracting independents back into our franchisee channel for those reasons. So it's not far to say if expenses and people don't have the right scale or appropriateness to respond to changes that that will cause some further level of consolidation.

I would say, again, we've made a lot of investments in our company in technology, in marketing, in compliance, in training, in development support. So, again, I think we're well-situated, if that continues to come about..

All right, thanks..

Thank you. And our last question comes from Erik Bass from Citigroup. Please go ahead..

Hi, thank you. Just wanted to come back to capital management.

I was hoping you could update us a little bit on how you are thinking about your excess capital, as it has now been around $2.5 billion for an extended period? I guess, is there a level you intend to keep as either a buffer or as dry powder for M&A? And, if not, what are the factors, other than just your stock price, influencing how quickly you would return that to shareholders?.

Yeah, okay. It's Walter. The level of capital has been at $2.5 billion, again, as we do – and certainly we generate a substantial amount of capital and then we've been, certainly, using it to return to shareholders. We certainly don't lock and load at $2.5 billion. And it is opportunistic.

And, as I indicated, we will certainly start returning more to and we'd evaluate. We have the ability and we're constantly assessing both the environment and the opportunities out there as we evaluate to basically inorganically or organically and return to shareholders. So, I would say that we will start now, as we talked about.

It's not our objective to keep $2.5 billion that we will – you should see us deploying that capital. But we do generate a lot and we anticipate still continue to generate a lot as the mix shift and other things take place in the way we manage the required capital..

And, again, we – if you look over the last number of years, we've been returning more than 100% of our earnings, and that's because we have been able, as Walter said, through the mix shift, through freeing up capital in certain lines and better risk management again (01:01:17) and changing some of our investment portfolio, et cetera.

So, I think we've been generating more, even though we've been returning it, which is a good thing..

Certainly, a good problem to have.

I guess, is there a level of capital you want to keep for inorganic opportunities, if they do arise?.

Yeah, we always said that we would maintain a level of flexibility. Again, it depends, if there's a strong opportunistic reason that we should buy back a lot more because of the stock – we think the value is way low or something, that's one thing. But on the other side, we always said that we wanted to maintain some flexibility.

But that doesn't have to be $2.5 billion for some additional acquisitions or things that come along that may fit in nicely that we can easily duct in and get some good shareholder return.

I think the nature of it was that, over the last number of years, we've just been able to free up a lot of capital, even though we've been returning it, and that's why it's been roughly about $2.5 billion..

Got it, thanks.

And just one quick question, just on the tax rate, if you could talk about what drove the lower tax rate this quarter? And I guess, Walter, do you think of the 26% rate being sustainable beyond 2015? Or how should we think about taxes going forward?.

I would – It's strictly 2015. And, certainly, as we go through the year, we evaluate all of the moving parts, as it relates to the business mix, other factors that go in, our tax planning, and the tax rate is – again, quarters, they always deviate a little, but the 26%, we're reasonably comfortable is the achievable number for 2016.

And then we will evaluate going forward. That's about as far as I would look at this stage..

Got it. But we should think of it gradually increasing over time, I would assume, as your mix shifts more towards businesses with 35% tax rate..

Well, the marginal tax rate, yeah. And, again, with the – it is the 35%, but certainly we do a lot of tax planning with the mix of business we have. So, right now the 26% is there, and then we just evaluate on the marginal as it changes, and then whatever tax planning we do..

Okay. Thank you..

And thank you. This concludes our Q&A session. And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect..