Q2 2023 Ameriprise Financial Inc Earnings Call
Your proposition and brand are very appealing to high net worth investors as well as millennials, who are hungry for advice and seeking guidance from advisors, who truly understand them and their priorities. These are market segments. We're looking to serve more in the future.
And this was also reinforced by the complement of external accolades and recognition we continue to earn the way we work with clients defines ameriprise and I believe our reputation as a competitive advantage during the quarter Ameriprise was named by Kiplinger's readers as the overall winner in the wealth management category.
Earned the highest ratings for each of the four criteria. The trustworthiness of our advisors a quality of financial advice provided the likelihood to recommend the firm to others and we earned the highest rating and overall satisfaction Ameriprise also ranked on Newsweek's magazine 2000.
And we earned top performer recognition and understands me and shares my values from Hearts and wallets.
And speaking of values Ameriprise culture is another very important positive advisers, who have joined us with decades in the business tell us that our company is unique and not like any other they've been part of their impressed by things like a supportive growth culture and their assess ability to senior leadership.
Finally in terms of profitability for wealth management. It was another strong quarter across the board and that includes margin, which reached a new record of 31, 2% moving.
Moving to retirement and protection, we have high quality, well risk managed books and will generate strong consistent earnings up 13% driven by the repositioning of our investment portfolio last year, given the rate climate.
Our free cash flow and return on capital remain excellent.
The team is concentrating on accumulation products that align with our clients' needs in the business and our life business. We're focused on our variable universal life and disability products that are appropriate for this environment protection sales were up nicely, increasing 18% with the majority of sales in higher margin accumulation products and in variable annuity.
He's a structured product continues to attract strong interest combining with our variable annuities without living benefits sales are down from a year ago in part due to the decision to exit guarantees.
Here again, we're using intelligent document processing and robotics to make processes more efficient things like automating our processes and underwriting decisions, we've seen the benefit and the pickup in sales as we discussed we feel good about our product portfolio, both for clients and the business, which consistently delivers good returns.
<unk>.
Moving to asset management as you know, we manage the business prudently like other active managers, we're facing reduced flows in this environment.
The business continues to operate well and generates good fees and we're adjusting for headwinds accordingly in terms of investment performance. We continue to have excellent longer term performance in equities fixed income and asset allocation strategies with over 75% of our funds above the medium for the five year and over 85% for the 10 year period.
Our one year performance has improved across the board. This includes some of our larger franchises, including U K equities, where we're benefiting from our quality positioning and in fixed income given our strength in credit.
In terms of flows I'll start with global retail, where we continued to experience a level of outflows in North America, we remain in net outflows, but we had nice improvement in fixed income in fact, we are better than the industry and taxable bond. Meanwhile, we continue to see outflow pressures in equities largely.
Lee from lower gross sales as redemptions have improved we continue to focus our advisors segmentation strategy to drive good engagement in North America, and EMEA retail flows in both UK and Continental Europe remain under pressure.
However in institutional we were in net inflows excluding legacy insurance partner flows as regarded nice wins in high yield and investment grade credit that more than offset large redemptions and LTI strategies, given the market dislocation now.
Now I'd like to give you a brief update on our EMEA acquisition and executing the integration in Europe .
Wanted you to know that it does take time due to the complexity of the legal entity structures as well as regulatory and employment considerations. We made it through a number of important steps and we have now moved to the next level of consolidation, including the co location of our teams through our existing real estate and the near completion of some of the major tech.
<unk> migration work.
Given the environment, we're taking a very focused look across the business globally to further reduce expenses. This includes identifying and stopping less growth driven activities and also redeploying resources, where we see opportunities to support our margin and.
In summary, we're controlling what we can control and making the necessary changes to adjust in this environment.
Reflecting on the firm overall.
Ameriprise delivered a strong first half of the year and we're well positioned to continue to navigate and grow our <unk>.
Complement of businesses provides nice contributions and synergies with consistently generate good appropriate earnings in total and good cash flow to invest and return to shareholders at attractive levels.
Returned $638 million of earnings to shareholders in the quarter, which represented nearly 80% of our earnings. In addition, as you saw our board approved a new $3 $5 billion share repurchase authorization that reflects the strength of the business.
Across the firm we continue to make good investments in our businesses and as always we are sharply focused on execution.
And while we managed expenses very well, we will be looking for additional expense opportunities as we move into 2024 to adjust to the environment.
From a people perspective, our team is highly engaged in fact in the quarter Forbes magazine named Ameriprise, One of America's Best large employers list ranks to 500 U S companies, most highly recommended as a top place to work.
With that I'll turn things over to Walter will provide his perspective in more detail on the quarter and then we'll take your questions.
Thank you.
As Jim said results. This quarter continued to demonstrate the strength of the ameriprise value proposition as adjusted EPS increased 30% to $7 44.
Results reflect wealth management core and cash business momentum as.
As well as continued expense discipline.
In total our wealth management business grew to 68% of the company's earnings.
Up from 56% a year ago.
As a result of a 49% growth.
In wealth management earnings.
Asset management faced headwinds similar to the industry in terms of flows and fixed income market declines.
And retirement and protection solutions delivered good 13% earnings growth, primarily from our decision to reposition the investment portfolio late last year.
Across the firm.
We continued to manage expenses tightly relative to the revenue opportunity.
Within each segment.
While we continue to make investments in the bank and other growth initiatives, particularly in wealth management.
Taking a disciplined approach on discretionary expenses across our businesses.
Excluding mark to market impacts on share based compensation expense.
G&A was up only 4%.
However, G&A in the first half of 2022.
It was unusually low as a result of the pandemic.
Our G&A expenses remain on track with our expectations.
Balance sheet fundamentals remain strong.
Our portfolio is well positioned.
Our hedging remains highly effective.
And we have strong capital and liquidity positions.
This allowed us to returned $638 million of capital to shareholders.
Is the strong return of 79% of our operating earnings.
Let's turn to slide six.
Assets under management and administration ended the quarter at one three trillion up 9% <unk> benefited from strong client flows and.
And equity market appreciation, partially offset by lower fixed income markets.
Revenue growth was strong at 10% from higher interest earnings and cumulative benefit of client net inflows.
With average equity markets up only 2%.
The impact of 6% equity market appreciation in June will.
It will be reflected in our third quarter AWS results given the ability of our wrap business is based on beginning of the month balances.
Pre tax earnings increased 24% from last year.
With meaningful benefit from strong client flows higher interest rates and well managed expenses.
Let's turn to individual segment performance, beginning with wealth management on slide seven.
Wealth management client assets increased 13% to $833 billion driven by strong organic growth in client flows along with higher equity markets.
As you are aware there has been significant volatility since Q1 of 2022.
Which we have navigated well.
Our client in wrap assets have remained consistent with our industry peers over this period.
Our client flows continued to be strong at $9 4 billion.
Up 10% from last year.
Client money has gone into a combination of rap and non advisory accounts as clients continue to be in a defensive posture.
Our flexible model and broad offerings allow advisors and clients to pivot as market and client preferences shift.
While the money stays within the system gives us potential upside going forward.
Revenue per advisor reached 874000 in the quarter up 7% from the prior year from high spread revenue enhanced productivity and business growth.
Turning to slide eight.
I would like to provide an update on client cash levels.
Our client cash balances comprised of cash sweep and certificates.
Have returned to more historic levels at 42 billion.
Which translate to about 5% of total client assets.
The financial benefit from cash remains unchanged. Despite a lower volume of cash as we have seen a significant lift in the interest rate earned at the bank certificate business.
Yields have increased nearly 350 basis points from a year ago.
And picked up 40 basis points sequentially, resulting in very strong interest earnings growth.
I would like to note that we continue to see new money flows into money markets and brokered Cds, albeit at a low level in June which brought our total cash level to $70 billion.
This creates a significant redeployment opportunity as markets normalize from our clients to put money back to work and RAF and other products on our platform.
While there is some seasonality with cash levels, particularly with tax payments in March and April cash remains an important component of the client's asset allocation.
Like others in the industry balances are stabilizing.
Our sweep cash has an average size of $7000 per account.
And 65% of the aggregate cash is now an accounts under $100000 and we have seen a very limited movement out of these accounts.
In the quarter, we moved approximately $1 billion from off balance sheet cash onto the bank's balance sheet.
We continue to evaluate the opportunity to bring additional balances onto the bank balance sheet as we move forward.
Lastly, we are continuing to manage our investment portfolio's prudently.
A bank portfolio is AAA rated with the three four year duration.
The overall yield on the portfolio is four 6%.
And rising with the new money yield on investments in the second quarter of 6%.
Our certificate company portfolio is highly liquid.
With over half of the portfolio and cash governments and agencies.
It is double a plus rated on average with a one year duration.
As I noted last quarter, the portfolio yield lag decline crediting rates as new money moved into this business this quarter.
The portfolio yield increased 33 basis points in total.
<unk> company portfolio is now yielding five 5%.
With new purchases in the quarter at that level as well.
On slide nine.
We delivered extremely strong results in wealth management on all fronts.
Profitability increased 49% in the quarter with strong organic growth and the benefit of the higher interest rates.
Pre tax operating margin reached a new high of 31, 2% up 730 basis points year over year and.
And up 60 basis points sequentially.
As I mentioned before the benefit from the June market appreciation of over 6% will be a tailwind for quarter three results given we bill our wrap business based on the beginning of the month balances.
Adjusted operating expenses increased 3% with distribution expenses up 1%.
Reflecting higher asset balances.
Consistent with our expectations.
G&A is up 9% in the quarter.
This is a very low base last year, given the impact of the pandemic and we continue to make investments for growth.
We expect <unk> full year 2023, G&A growth to be in the mid single digits.
Let's turn to asset management on slide 10.
We are managing the business well through a challenging environment that is impacting the industry.
Total AUM increased 3%.
617 billion, primarily from higher equity markets, partially offset by lower fixed income markets.
Asset management like upper active managers was in outflows in the quarter.
Reinvested dividends with $2 billion lowering the current court however, underlying net new sales were fairly consistent to last year.
Like others.
We experienced pressure from global market volatility and the risk of investor sentiment.
Investment performance has been another critical area of focus and we are seeing improvement, including in fixed income strategies overall, five and 10 year performance remains very strong and as Jim said, we had improvement in the one year numbers.
On Slide 11, you can see asset management financial results, reflecting the market environment.
As anticipated earnings declined $262 million as a result of deleveraging.
Net outflows and lower performance fees in the quarter.
Margin was down sequentially to 30%.
Importantly, we continued to manage the areas we can control.
Expenses remain well managed.
Total expenses declined 2% with G&A up only 2%.
And as Jim said, given the environment.
We're taking a very focused look across the business globally to further reduce expenses.
This includes identifying and stopping less growth focus activities.
And redeploy resources, where we can see an opportunity to support our margin, let's turn to slide 12.
Retirement and protection solutions continued to deliver good earnings and free cash flow generation.
Reflecting the high quality of the business in.
In the quarter.
Pre tax adjusted operating earnings was $189 million up 13% from the prior year, primarily as a result of higher investment yields from the portfolio repositioning we executed last year.
However.
Earnings in the current year were unfavorably impacted by $7 million.
From a model update resulting from our system conversion.
And timing of earnings recognition put payout of news, which is expected to normalize.
We continue to view normalized annual earnings of $800 million is a reasonable expectation for this business.
Overall sales declined 10% related to our decision to discontinue sales of variable annuities with living benefit riders a year ago.
However, protection sales improved and remain concentrated in high margin asset accumulation.
Yes.
Which now represents over one third of the total insurance in force.
Now, let's move to the balance sheet on slide 13.
Our balance sheet fundamentals remain strong and our diversified high quality investment portfolio remains well positioned.
In total the average credit rating of the portfolio was double a.
With only 1% of the portfolio and below investment grade Securities.
VA hedge effectiveness remained very strong at 98%.
Our diversified business model benefits from significant and stable free cash flow contributions from all of the business segments.
This supports the consistent and differentiated level of capital returned to shareholders.
During the quarter, we returned $638 million to shareholders and still ended the quarter with $1 3 billion of excess capital.
And $2 1 billion of holding company available liquidity.
We remain committed to continuing to return capital to shareholders and announced a new $3 5 billion share repurchase authorization through September 32025.
That will take your questions.
Thank you.
We will now begin the question and answer session.
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The first question is from Alex Blaustein with Goldman Sachs. Your line is open.
Hey, good morning, everybody. Thanks for the question, maybe we could start with a question on AWS.
I wanted to hone in on kind of the interplay between net new asset growth, Jim that you talked about and cash to your point lots of capital obviously sitting on the sidelines in money market funds to treasuries.
As fed funds peaks.
Likely that some of that cash is going to make its way into investment products. So what are your expectations for <unk> net new asset growth into the second half, particularly with an advisory and then at the same time do you think any of that relocation of cash could put incremental pressure on the $30 billion.
Brokerage sweep balances, which I think were down about 10% sequentially.
Or are they pretty kind of trophy sort of at the operational levels. At this point so as part of that maybe just an update on kind of where that $30 billion in July as well.
Okay, So Alex I think.
To have very good client flows quarter to quarter.
This quarter they were up 10% from last year, but remember the second quarter, you always have some adjustment because of tax payments. So if you look at even where we had some of the cash starting in the second quarter, a significant amount was due to those tax payments coming out in April .
And that also then hits your client net flows on a consistent basis like the cash having said that I would say, we continue to see that client flow activity being good client engagement is good.
But to the point you just referenced that we mentioned.
Oh, a consistent level has gone more into cash as a whole Damian closer to current yields right. Now. This market has maintained itself a bit better than people expected I think there was a surprise.
The market has climbed so much now it's starting to broaden a bit rather than just based on a few stocks and so if that does continue and theres a settlement and a sense of even fixed income yields feeling like they're not going to continue to rise at this point.
There might be a shift back as we're beginning to see into fixed income products other than cash for a longer duration as well as in equities.
And so now where does that money come from our belief is that we've never held this amount the cash balances before right and so 70 billion is up to like 9% of our total assets here.
And some of that will come back from those positional cash areas.
Gliding the sweep per se.
We all hold a certain level of cash in those accounts because of usage just like a checking account and certain things like that so we're not thinking that a large amount or Michigan amount will come back in fact, we see the cash sorting slowing as we go into this down through the beginning of the third quarter here.
And so my belief is that will come more from positional cash.
And because of the size of the balances were maintaining now I cant I don't have a perfect crystal ball, but when money comes back and then more is actually held in a sweep for transactional activity that occurs so that's really how we're thinking.
Got you that's helpful any update on where that 30 days in July just just tactically.
Well in July yes, we saw it.
It has slowed the way we anticipated.
We're just observing out, but we feel comfortable with.
Slowing that we're seeing.
Okay, Great and then my second question just around the asset management dynamics that you described.
Obviously, it sounds like Youre adjusting.
The expense base to the sort of headwinds we're seeing across the industry.
Maybe put a little more granularity about kind of what that means what are your expectations for G&A growth within the asset management business for the second half and it sounds like that will continue into 2024, and I guess bigger picture flows a challenge thats been the story for some time, but the markets to your point earlier operates so the revenue base could actually grow despite the flow challenges.
How does that inform this quarter kind of G&A relocation dynamics, <unk> sort of flat to down even in that scenario.
Or the outboard market will just naturally puts some pressure on the cost base.
So what we're really focused on is and I think if you looked at the second quarter G&A was actually down 2%, but because of the share price appreciation and the plans et cetera.
It ended up up 2%, but the underlying was actually down and we expect that to continue and we're taking a much more concerted effort now that we've gone through some of the major integration activities that we have to do in Europe .
Even though that's not complete now we can take a more holistic view of our global expense base, which we are across all areas and we think there is some good opportunity for us to really target.
Our reduction in expenses as we move forward into 2024, and that's really our focus.
Great Super helpful. Thanks, guys.
The next question is from Brennan Hawken with UBS. Your line is open.
Good morning, Thanks for taking my questions.
I'd like to start.
The pending comerica.
So could.
Could we get an update there or the asset still around $18 billion or has that changed due to market.
<unk> or otherwise and.
Is this a base of assets similar to other bank deals that we've seen where there is more of a bias to brokerage.
Then advisory and and our cash allocations kind of similar to what you have in AWS.
So as Walter as it relates to Comerica is totally on track and.
Activity levels, and certainly the assets that we announced it.
When were you.
Concentrate.
Arrangement is on track also and its characterization, yes cash is a component, but it is within the ranges.
The transaction, so we feel very comfortable with it and we're targeting for the fourth quarter.
Okay, So hasnt hasnt really changed from where.
Got it.
Perfect. Okay. Thank you.
And then have you as we start to.
See the sort of fluid environment and the forward look for rates and with the potential for for lower rates as we move into 2024, maybe it was hoping for an update on the maturity profile of the Cds within the certificate company and how are you thinking about managing those those balances.
And maybe either.
Pulling back on rate or leaning in depending on the outlook and the idea that it's.
Some of those rates and that funding would be locked in and potentially declining rate environment.
So.
You mentioned is difficult I would probably focus more on the bank because the bank is really where we have now the advantage of investing in having duration as you've seen.
Our yield right now is $4 six we certainly see that increasing.
We have maturities and other things so we feel quite comfortable that as the environment I don't know where its going to go up I don't know if its going to go down stay the same but we are well positioned to have that stability of earnings there and that.
The yield that we see it as a bank, which is the majority of where we've gone out.
For investing will prevail as we look over the near term. So we're very good position from that standpoint.
Yeah, no I totally appreciate that and I hear you I was more.
Thinking about managing on the cost side of it.
On the specific aside as we would say we sort of matches sort of like based on the yield that we provide for those things. So we sort of look to sort of keep.
Keep a certain spread on that based on when they.
Money coming in where we look at it when it's matured.
As I indicated increased because obviously, where our investments are catching up with the rate and it's short durations one year. So from that standpoint, we will adjust it both from the rate decline to quantity.
Right and certainly our investments, but we feel very comparable to spreads there as it is in corporate.
And this spread is durable.
Both declining environments as well as rising.
Yes.
We'll maintain a certain degree of spread but obviously just as if rates go up and down right.
Great. Thank you for taking my questions.
The next question is from Erik bass with Autonomous Research Your line is open.
Hi, Thank you for asset management do you still think at 31% to 35% margin is the right target to think about near term and given the expense actions you've talked about as well as the benefit from rising markets. Do you think you could get back to that level in the second half of this year.
Yes, I can't listen I can't predict the third quarter per se, but we're not changing that targeted rate and we definitely believe that we can be within that targeted rate I can't tell you about.
A quarter, but I would probably say, yes, we feel comfortable with that as we go through the second half but into 'twenty four.
Perfect and then can you update us on the plans to launch a brokerage CD product than any other bank products for the second half of the year and what your expectations are for the type of assets that that was going to attract.
Yes, so we did a soft launch a brokered CD in the second quarter and Thats starting to take hold here. We also put out a base savings product again, thats beginning to take hold and we have plans for the.
Third at the end of the third quarter to actually put some incentives type activity there to bring in new cash from outside the firm.
And also our preferred type of savings product in the fourth quarter.
So we're sort of getting in how they are positioned on the platform and then how we sort of roll that out from soft launches et cetera, but yes, we will have a set of those type of savings products. As we go through the rest of the year into next year that we will then target to bring in more cash externally.
Thank you and then how would you sort of tier the margin expectation on that relative to the other cash products or certificates.
So what I would say first of all you got to separate this week, which is a different animal.
Various savings products, but I'll, let Walter.
The margin as we have certainly reserve count.
At the search and the margin in bank is similar.
From.
It's a little higher but with the margin is good and then we're competitive on each one of the products as we look at the CD and obviously.
The rates there are certainly.
Being driven by regional banks and others, but we will remain competitive but the margins there are lower.
As you would expect.
Got it thank ranges right.
Yes. Thank you.
The next question is from so you need to cameras with Jefferies. Your line is open.
Thanks, Good morning.
Just going back to the bank for a second.
So our understanding is that you will have I think $1 $4 billion of assets sort of maturing enrolling into new assets in the second half and then a similar amount in the first half of next year. So would it be possible to get sort of the current yields on those assets. Just so we can kind of think through.
When that reinvestment occurs how much upside you guys would have.
Yes, I would.
Right. It will probably you saw where it is today.
Six range with that were getting in the range of five high fives low <unk>. So that should go up I can't tell you where rates are going to be but if rates stay where they are actually move around 50 basis points 40 to 50 basis points by the end of the year.
So you are seeing an incremental 40 to 50 basis point, you'll get to around 5%.
Okay, and then I guess I just.
Clark, that's if rates stay the way they are today, okay and spreads.
Yes got it Okay, and then I guess you are talking about this now $70 billion of cash number and I think last quarter that was maybe 60 billion.
Obviously, there is a portion of that that you guys have kind of in that $42 billion range. So as we think about that incremental $28 billion.
I know some of that's in other company's products, but whats a reasonable expectation in terms of how much of those assets do you guys think you could ultimately.
Have in your own products.
So I think what I would say.
I think a.
Good amount.
But not just into our own savings type products, but more importantly into the rock types of business again.
You reckon left before the setup here.
Area, where people got a little more concern we had roughly.
Charity of our client flows going into wrap and so on.
I believe right now we're at a sort of a low point of the amount of cash being deployed into wrap.
And I do believe part of that went to positional cash.
And that positional cash will start to come in and remember I think the investments in fixed income is much lower than it's been in a long time because of the yields going up on the duration and people not wanting to get whipsawed.
So that money will come back in.
And that does go into wrap accounts as well because it's more of a balanced portfolio that they utilize.
Got it and then if I could just sneak one more in Jim I thought your comment about high net worth and millennial opportunities sounded like it was new.
That opportunity is something that you can attack sort of organically or are there capabilities that you would need to acquire in order to.
To capitalize on that growth opportunity.
No so need.
We're ready for instance, we're already bringing in high network clients nicely, but we have not made that a more concerted effort.
And the franchise, yet, but now we are putting more deploying around that.
And we do have most of the capabilities if not all of them I mean, there's always some bells and whistles, we add but we have added to our platinum product platform alternative platform et cetera.
We have now and the advice part of what we have actually worked very well for high network clients and what we found is when we did our <unk>.
Research that we are considered up there for high network clients or prospects similar to any of the private houses out there that cater to the or the major wire houses that cater to them. So we don't have an advantage there and as one that we are building up the focus of.
Our advisors to really understand and see that they can targeted more and then on the millennial side, we've made a lot of investors and investments in our digital capabilities and the engagement way of doing that that.
We will also be really starting to focus more on for bringing in younger clients either through some of the younger advisers, we bring but more even direct and some of our things because we have remote channel set up to work with clients that way and so I feel very good.
Those opportunities, giving us further expansion efforts.
Got it okay. Thank you.
The next question is from Steven <unk> with Wolfe Research Your line is open.
Hey, good morning, guys.
Michael <unk> on for Stephen.
I just wanted to circle back to.
The rate sensitivity picture here I guess, given given the shape of the curve.
If you could provide some updated color on your rate sensitivity can you help us size the impact to your earnings from rate cuts on a static balance sheet and how do you expect your deposit betas to defer on the way down versus the way up given your certificates.
Hey, Jan low cost sweep deposits funding the bank. Thank you.
So.
Again.
From the standpoint on rates going down we do have since we are now having a substantial amounts in the bank that would give us insulation from that standpoint for the portions that would be subject to short term.
Fed funds reductions.
That on that basis, you can imagine it's a straight calculation in February .
Percentage going down.
So.
It's factored into our analysis and we've seen the cycle going up and going down, but the mathematics are on.
On that basis, we have 67 billion sitting in.
<unk> balance on our balance sheet, you can do the calculation on the <unk> on a 1% change.
As it relates to the search the search really do adjust its a matter like on the way up we lose until it catches up in a way down we will gain.
We will have the investments there and we certainly have the liquidity to cover it. So therefore it is it's a positive to us on the search side, when it's going down because of the investments and just like we've had to catch up situation now when it's been going up.
Yeah.
Got it.
And then I didn't want to flip onto expenses here I guess.
How should we be thinking about long term G&A growth for the firm given some of the reduction efforts you're undertaking a more fully funded bank and our progress on BMO.
As you can help us think about the growth between the wealth segment and the firm as a whole that would be great. Thank you.
So I would let me start and welcomed complement so overall for the firm when we talk about G&A per se I would say, it's relatively it's going to be relatively flat.
You got merit and create all of the things that are part of that but it will be relatively flat overall based on what we're looking to do.
If you think about where there may be a little more versus a little less maybe a little more in the AWS because of the growth of that business and maybe <unk>.
A bit less on the asset management side, meaning that there will be.
Expense reductions.
But overall, if I look at that across the firm, including all the various groups. It will be relatively flat absorbing the inflationary expenses that occur while we continue to make good investments in the business.
The next question is from Tom Gallagher with Evercore ISI. Your line is open.
Good morning.
First question is why didn't ameriprise withdraw its application early this month to convert to a state chartered industrial bank and the National Trust Bank.
Have there been any changes in regulation or rules related to your current structure or any can you give some perspective on that.
I think as a matter of certainly a situation as you look at the FDIC a board and what they felt about with the regional bank situation would.
They really want to now expand into a state and we just felt that probability was.
Not there and we're quite comfortable with the SSB at this stage.
Through at Rabbit.
And it was they were working on Decisioning, it and we just felt that.
Based on the client circumstance.
Still have the again the capabilities so it doesn't really.
Affect us, but that's the story with a regional bank and the help of situations. The environment. We felt was not there.
And Walter do you expect there to be any changes on on capital, where you might have to hold more or.
Is that less certain just any any perspective on that from.
From our standpoint, as part of our steady state planning certainty.
The differential no if anything it probably would have a tick up on the state situations.
We certainly understood that but no.
Short answer to question is no we do not because of this situation with the state or with FSC. We have we do not anticipate other than.
The fed is evaluating right based on the situations that we've seen.
And we would be just like anybody else, what's the size of our balance sheet impacted for that level.
Gotcha.
Next question just.
Can you comment on any any update on risk transfer on the Rps side is that still.
It sounded like you went through a more thorough process you emerge from it saying.
You didn't you didn't like the pricing yet youre seeing a lot of competitors in the life insurance space.
Do further risk transfer deals so that that trend continues into pretty good pricing actually on some of the recent deal. So curious if thats changed at all your perspective, whether the competitor pricing or where do you stand on overall risk transfer.
I think.
Where we stand with holding certainly we feel very comparable with what we have and so look at it and and yes certainly.
<unk> situations.
As we've always said.
We've looked at many of the south.
The past has been the distressed as we've seen some changes there and certainly.
We are not all not going outbound with sort of inbounds coming in we evaluated.
But we're very comfortable where we are right now.
But would you say would you say nothing's really changed on your view that there is still too wide of a bid ask spread relative to what you think the value of your book is versus the type of pricing. That's out there certainly we've seen changes shifting with the books that are going but again, we don't do a detailed analysis.
<unk> will evaluate the facts and circumstances as it relates to us.
Yes, I mean, we haven't gone through an in depth of what's recently occurred and what may happen in the market.
Think from our perspective right now.
We have a very solid business. There we have a very low risk profile for that business as Walter said, it's going to continue to generate roughly $200 million of pizza.
<unk> quarter $800 million for a year most of that is free cash flow for us.
So.
That's how we think about it but if there are opportunities that arise we will always have to entertain them.
Okay. Thanks.
The next question is from Craig Siegenthaler with Bank of America. Your line is open.
Thanks, Good morning, everyone.
Next quarter Youre going to have your annual insurance liability and locking exercise last year resulted in a large negative adjustment with the bear market a factor on the variable annuity book this.
This year markets for alkali interest rates are up a lot. So my question is should we get a reversal in the online from last year, just given the bull market that we're in and also could there be a release in the long term care block just given that interest rates are a lot higher.
Yes, the interest rates with that but listen there is balanced between the equity markets and the equity.
Interest market so.
On that standpoint or are looking at are available kept that's why we came out of oil ratio looking at because youre looking at it from an <unk> standpoint and from our standpoint.
That's why we have determined it is not the driver of it. So the element is statutory and from that standpoint. So we feel comfortable the market is that the interest rates certainly we.
You've seen our positioning and our excess capital has not changed.
Sequentially so.
Right now we are navigating the situation and we feel very comfortable with it so.
As rate environment change, we have the ability to certainly absorb and adjust for it and yes, if we get benefits we will evaluate.
Certainly our positioning.
Thanks Walter.
Follow up and I think I know I know your answer here, but I, just kind of want to hear it anyway.
You stop some fixed annuities, you're ensuring your book ticket carriage club Atlantic, where we've launched the all to acquire these books pretty aggressively and now interest rates are back to healthy levels of ROE on these portfolios are higher and the product isn't that complicated its really just credit quality. He matched duration. So don't have a competitive advantage we have.
Our large distribution channel in wealth.
And you seem pretty happy their decision, but John higher interest rates versus the last 15 plus years change the calculus on the fixed annuity business.
Okay.
Well listen.
Fixed annuities is certainly has certainly gotten back in favor from that standpoint, and we will evaluate it but it also has implications from balance sheet standpoint, and surrender out of surrender and certainly portfolio, we feel very comfortable with like you said with the reinsurance situation in there, but we are constantly evaluating what will.
Go back into manufacturing not in right now I think we're comfortable where we are but certainly yes, there are advantages to it.
And it ebbs and flows we do know that right.
Rates go up and down you have implications from liquidity and other standpoints with that portfolio.
That's why we basically felt very comfortable reinsurance.
But thank you currently we continue.
This group continues to evaluate and make recommendation on it and as we look at it but we.
Sure.
I can say right now.
Good.
Thanks.
The next question is from Ryan Krueger with <unk>. Your line is open.
Hi, Thanks, good morning.
You mentioned, the 50, 40% to 50 basis points.
Yield uplift.
Bank would.
Would you expect much if any higher.
Deposit costs, our interest costs along with that.
Dominantly dropped to the bottom line.
That that factor that was.
I was giving you actually the asset earning rate on that going.
And.
That was that was the questions that was what I was referring to.
Or is that we would that the cost of funds for the bank as we look at the situation, where it sources, which is probably coming out of this weekend.
Okay and then.
You've seen the certificate balanced.
This year I think you're rolling out more more products within the bank.
At some point should we expect some of the certificate balances to roll off.
The banking.
It was there is there much of a margin difference between the two.
If you look at it from that standpoint, the March bound on certificates.
And the bank should be comparable.
And yes, we have built up and we.
As Jim indicated we launched our bank's certificate projects that we will certainly have that offering to people, but right now we're not anticipating VIX ships coming in but we certainly are giving them the capability within the short product.
Okay.
Okay. Thank you.
The next question is from Jeff Schmidt with William Blair. Your line is open.
Hi, Thanks, I have another question on brokerage sweep rates.
Appear to be pretty flat from last quarter, and a deposit beta Steve Jeff look the industry. Just wondering if there is potential for you to increase your sweep rate if the fed.
Keeps raising interest rates or our competitive level such that you may you may not need to raise it much anymore.
Yes.
We have a very robust.
<unk> system that goes on to ensure we offer competitive rates and we are now evaluating the team is now evaluating yes. So you will see as we look at the competitive environment and landscape that we will evaluate them.
Deposit beta and increase rates accordingly to ensure that we offer our clients competitive rates.
That's a very focused program yet.
Yeah, Okay, and then just on capital return I think it's running at 80% of operating earnings in the first half I know in the past you've sort of targeted 90% or at least for the full year. I mean should we expect it to move up to that or is there any reason it sort of running below that long term target.
Well right now we established for this year, we said all along our target for this year is going to be 80%. Obviously, you can go up and down in the quarter from that standpoint, we're still comfortable with that right now staying with that guidance.
Okay. Thank you.
We have no further questions at this time and this concludes today's conference. Thank you for participating you may now disconnect.
Okay.
Yeah.
Yeah.