阿默普萊斯金融 (AMP) 2005 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Ameriprise Financial third quarter 2005 earnings conference call. (OPERATOR INSTRUCTIONS).

Please note that this conference is being recorded.

I would now like to turn the call over to Ms. Laura Gagnon, Vice President of Investor Relations.

Ms. Gagnon, you may begin.

Welcome to the Ameriprise Financial third quarter earnings call.

With me on the call today are Jim Cracchiolo, Chairman and CEO, and Walter Berman, Chief Financial Officer.

We have approximately 20 minutes of prepared remarks, after which we will open the lines for Q&A.

During the call we will be referring to various non-GAAP financial metrics like adjusted earnings or adjusted premiums.

Management believes that the presentation of these adjusted financial metrics best reflects the underlying performance of the Company's ongoing operations.

These adjusted numbers exclude accounting change, discontinued operations, AMEX Assurance, and non-recurring separation costs as described in our Form 10-Q filed with SEC on August 19, 2005.

The majority of AMEX Assurance profits from July 1, 2005 and forward will be transferred to American Express as per the separation agreement.

The agreement also specifies our intent to sell the legal entity back to American Express within two years.

The presentation of adjusted earnings align with the pro forma financial information contained in that Form 10.

Reconciliations of non-GAAP numbers discussed in this presentation to their respective GAAP numbers can be found in the press release issued earlier today, and available on our website, www.ameriprise.com.

Some of the statements that we make in this discussion may constitute forward-looking statements.

These statements reflect management's expectations about future events and operating plans and performance, and speak only as of today's date.

These forward-looking statements involve a number of risks and uncertainties.

A list of the factors that could cause actual results to be materially different from those expressed or implied by any of these forward-looking statements is detailed under Risk Factors, and elsewhere in our registration statement on Form 10 as amended filed with the SEC.

We undertake an obligation to update publicly or revise these forward-looking statements for any reason.

With that I would like to turn the call over to the Jim Cracchiolo, Chairman and CEO.

Welcome and thank you for joining us.

As you have seen in the earnings release distributed earlier today our third quarter results, adjusted for separation impacts, are strong, reflecting continued success in our strategies to increase financial plan penetration, target mass affluent clients, improve advisor productivity, and introduce new products.

We have succeeded in enhancing our operating performance, while successfully executing one of the largest spinoffs in the financial services industry.

I feel very good about what we have accomplished.

We have completed a substantial number of tasks to separate from American Express.

We rebranded our Company to Ameriprise Financial, and launched our largest advertising campaign ever.

I hope you have seen some of our ads.

We are receiving favorable reports from our clients, advisors and the public indicating the advertising campaign is beginning to have an impact in building awareness for our new name.

We also introduced the RiverSource brand for our products.

I'm extremely proud of all the efforts made by my leadership team and everyone at Ameriprise Financial to execute the spinoff, while continuing to drive results.

Now to the numbers.

On an adjusted basis compared to the third quarter last year, earnings increased 11% to 179 million.

Revenues grew 15% to 1.9 billion.

Earnings per share increased 11% to $0.73 using an equal number of shares in both periods.

We believe these adjusted earnings, which remove transaction related effects, reflect the improvements in the underlying business.

This quarter's results reflect strong underlying trends that bode well for our future.

We believe that the strength in our revenues and the underlying financial performance is directly attributable to our success at asset gathering and increasing advisor productivity.

Owned, managed and administered assets rose 11% to more than 420 billion.

Mutual fund wrap assets were up 49% from a year ago.

Threadneedle assets were up over 12%.

And our variable annuity net flows approached 1 billion, an increase of over 240% from a year ago quarter.

A substantial portion of our asset gathering was driven by continued improvements in our advisor productivity.

Compared to the third quarter last year, branded advisor cash sales, including wrap account net flows, are up over 16%.

Retail managed assets are up 13%, and total gross dealer concessions, the most comprehensive measure of advisor productivity, is up 17%.

We attribute our performance improvements to the successful execution of our strategies, targeting mass affluent clients and increasing financial planning penetration.

Mass affluent clients grew 12% year-over-year, while total clients increased 2%.

Of these new clients coming in a larger percentage are coming in with a plan.

Overall clients with a financial plan increased to 43% from 42%, with approximately 54,500 financial plans sold, an increase of 7% from the year ago period.

Now let me turn to the areas we are focused on improving.

Even though flows are strong in a number of our products, we continue to be challenged by proprietary mutual fund outflows.

To address this improving investment performance continues to be one of our top priorities, and we're making good progress.

Overall our equity funds continued to show improved performance, with 66% of equity funds above the LIPPA median for 12 months performance as compared to September 2005, and no internally managed equity fund in the fourth quartile year to date.

On the fixed income side, we are producing consistent, competitive performance in multiple portfolios.

We focused on improving taxable performance first, and are now beginning to focus on tax-exempt fund performance.

Threadneedle continues to perform well across a wide range of asset classes.

We fully intend to leverage our investment in proprietary asset allocation capabilities to define the RiverSource investment brand and drive improved asset flows.

This will take time but we are focused on client needs and are proactively positioning the business for long-term growth.

For example, we recently transferred portfolio management responsibilities for the under performing New Dimensions Fund to our high performing Boston office.

In addition, while we are showing strong productivity gains in our advisor force, the number of branded advisors have been relatively flat.

This is due primarily to three factors.

We introduced tighter requirements for our new employee advisors, which led to a decline in the number of new hires.

These changes were implemented late last year, and we began to see the effects in the fourth quarter.

Over time we expect these changes will result in higher productivity and higher retention of our advisors.

There have been fewer advisor hires in the past due to uncertainty in the first half of the year regarding our spend.

And third, a small increase in terminations.

On average, those advisors leaving us are substantially less productive than those remaining.

Last, but not least, we still have substantial work to do in executing our separation from American Express.

Everything is on pace today.

That said, I'm confident about our ability to continue to grow revenues over the next few quarters.

Improving profit margins, driven by both growth and revenues, and our focus on reengineering resulted in strong underlying earnings strength as well.

Consolidated expenses totaled 1.7 billion for the quarter, up 17%.

This increase includes 92 million in non-recurring separation costs.

Adjusted expenses were up 13% from a year ago.

These adjusted expenses include $70 million attributable to the settlement of a class-action lawsuit.

This settlement, subject to court approval, relates to the sale of mutual funds that were part of our revenue sharing program, the sale of proprietary mutual funds, and the sale of financial plans and product recommendations contained in financial plans from March 10, 1999 to the settlement date.

This settlement, under which the Company denies any liability, was signed Friday, and includes a onetime payment of 100 million to the class members.

We have established reserves of 30 million in the second quarter, and put up an additional reserve of 70 million in the third quarter.

We settled the litigation to remove the distraction, expense and uncertainty that accompanies it.

Because this settlement achieves a release from a broad range of claims, we can now put litigation on these topics behind us.

Our capital position as we came out of the spinoff took into account a settlement of this size.

We received 1.1 billion in capital on September 28, leaving us with low leverage, solid ratings, and a strong position from which to start our journey.

Now I would like to turn it over to Walter Berman, our CFO, to provide additional commentary on our financials.

I would like to strike by providing some color on consolidated margins.

Our reported consolidated contribution margins and pretax income margins have shown continued declines.

We have indicated that we expect some continued pressure on contribution margins, and we have seen that.

However, we have also indicated we plan to offset those impacts by improving our pretax margins through reengineering.

From management's standpoint, normalizing for items we have disclosed in the third quarter, while our contribution margins post normalization has decreased marginally, we have successfully improved our normalized pretax margins by almost 200 basis points since the third quarter of 2004.

We will continue to focus on reengineering and expansion in our margins going forward.

Turning to the segment highlights.

For asset accumulation and income the reported numbers are -- adjusted numbers are approximately the same.

However, a number of items disclosed in the press release did impact this segment.

Asset accumulation and income revenues grew 16% over the prior year period, while contribution margins decreased from 55.9% to 57.6%.

This increase in margin is primarily driven by strong net flows in our variable annuity business and Threadneedle funds, as well as market appreciation.

The Asset Accumulation and Income Segment's pretax income growth of 9 million, or 7%, includes the 70 million in expense for legal settlement and a $14 million benefit from our annual DAC review.

The segment's pretax return on average allocated equity was 17.6% for the twelve-month period ending September 30, 2005.

The Protection segment was significantly impacted by AMEX Assurance, part of the spinoff transaction.

As such, we will focus on adjusted financial performance drivers.

Adjusted revenues were up 12%.

This growth was primarily driven by growth in our auto and home insurance business, with policy counts up 13% in the quarter over last year's quarter.

Adjusted pretax income for this segment was up 39 million, or 41%, reflecting a $53 million benefit related to our annual deferred acquisition course review, compared to a 16 million benefit in 2004.

The 2005 quarter includes a $13 million expense related to increased maintenance reserves for long-term care.

Contribution margin in this segment declined to 38.9% from 48.1% in the third quarter of last year.

On an adjusted basis contribution margin declined 500 points, primarily related to the continued rapid growth of our property casualty activity, which has lower contribution margin.

During the quarter we disclosed five items of interest in our release, which I would like to spend a few minutes discussing.

First, the most significant of these items is the 70 million expense related to the legal settlement Jim talked about.

The 70 million of reserves established in the third quarter, plus the 30 million established in the second quarter, fully covered the settlement amount of $100 million.

The second item is a $57 million benefit for our annual deferred acquisition cost review.

The third quarter is our normal time of year for reviewing deferred acquisition cost assumptions.

During the review we performed a detailed analysis of underlying trends of our products and compared them to current assumptions.

As actual experience differs from our existing assumptions, we revised our assumptions.

The revision can result in either a benefit or detriment to our deferred acquisition cost expense.

In the third quarter of 2005 these actions resulted in a net benefit.

The bulk of the benefit relates to two items.

The largest benefit, 33 million, resulted from customers holding on to their products longer than we anticipated.

A similar amount of benefit, 32 million, resulted from lower mortality than expected.

It is important to recognize that the DAC assumptions are evaluated on a product by product basis.

Our methodologies are consistent over time and consistent with GAAP principles.

The remaining items were a $13 million pretax expense we established in the course of our actuarial review, relating to the inclusion of explicit maintenance reserves for our long-term share insurance products.

A $13 million tax expense relating to the finalization of prior period returns, which drove our effective tax rate in the quarter up to 32%.

And finally, a $4 million of after-tax realized investment losses, primarily for shortening the investment portfolio backing certificates relating to the transfer of international deposits originated from American Express Bank.

Finally, I would like to spend the remaining time talking about our balance sheet.

During the third quarter we continued to maintain a conservative approach to managing our balance sheet.

Our debt to cap dropped to 15.2% from the 1.1 billion capital contribution from American Express.

This is well within the ranges of our targeted debt to capital ratio of 15 to 20%.

At the end of the third quarter our cash balances were 2.6 billion, reflecting both our initial conservative position and the cash we received from American Express only two days prior to the end of the quarter.

Our fixed-income investments -- our fixed-income quality remains high, reflecting our decision that credit spreads remain insufficient to compensate for all the additional risks.

Therefore the low investment grade bonds remain at the 7% fixed-income portfolio rate.

We have given up some current yield, but we have to.

To date we have avoided many of the market's recent negative impacts.

We have no exposure to Delphi, Delta, Northwest or Trump Atlantic City.

In addition, we have been conservative positions in our mortgage and structured portfolios over the past couple of years by shifting towards commercial MBSs, lowering duration and convexity, while minimizing the income and capital gains impacts of this repositioning.

Finally, we are continuing to implement a return on equity and capital management improvement strategy.

During the quarter our reported return on equity for continuing operations was 9.8% for the 12 months ended September 30, 2005.

It should be noted that the additional 1.1 billion in capital we received from American Express two days prior to the end of the quarter had a 20% weighting impact on our average equity calculation.

The after-tax cost in the period included in the numerator was $109 million.

And (indiscernible) AMEX Assurance of $80 million after-tax also included for the first nine months of the measurement period.

While there are a number of subjective ways to adjust for the impact of this separation cost and our changing capital structure, in our view they all result in returns on equity below our targeted 12 to 15%.

Our underlying result for the quarter show solid improvement as our strategies drive revenue and adjusted earnings growth.

We believe these strategies will also drive return on equity improvement over time.

In addition, we set our capital management and capital optimization strategies to drive return on equity expansion towards our average over time goal of 12 to 15%.

One of the drivers is shifting the business mix from capital intense to less capital intense products.

For example, variable annuity sales are up 64% versus fixed annuity sales being down 46% in the quarter.

Coupled with implementation of balance sheet optimization programs, we should be positioned to achieve our stated on average over time objectives in a reasonable time frame.

The effective use of capital includes when appropriate, and if authorized by the Board, the redeployment of capital to pay dividends, fund organic growth, fund acquisitions, or to buy back shares.

Please note that we are not precluded from buying back stock.

It is acceptable within the terms of the separation agreement.

As we move forward, we are solidly committed to retain our AA minus level financial strength rating.

Importantly, we are committed to remain conservative as we maneuver through the transition and separation from American Express over the next few years.

We are committed to the effective use of capital and deploying it in its most appropriate way.

In closing, I'm very proud of the way this Company has continued to drive our underlying performance while preparing for and executing on a number of fronts related to our separation from American Express.

The fact that we can continue to grow revenues, attract mass flow (ph) in clients, deepen financial planning penetration, enhanced advisor productivity, and separate from American Express all in eight months, speaks volumes about the dedication and capabilities of this organization.

Looking forward, we will continue to focus on driving the key metrics that produce shareholder value.

Our pipeline of marketing, product and service related initiatives is physically strong today, and will enhance our value proposition for customers and advisors.

Thanks for listening, and I would like to open it up for questions.

(OPERATOR INSTRUCTIONS).

Nigel Dally from Morgan Stanley.

The first question is on guidance.

There is a lot of noise in this morning's report.

I am hoping you can help us cut through the noise and discuss what you believe is a good runrate of earnings as you look to the fourth quarter and 2006?

As we discussed, we don't give guidance from that standpoint.

A normalizing runrate should be based upon the pro forma earnings as depicted in the Form 10.

That is the best way.

And this as you know excludes the non-reoccurring separation cost, earnings from AEIDC which are treated as a discontinued ops, and American -- AMEX Assurance.

That is probably the best way Of looking at it from that standpoint.

If we just say -- aside from the adjustments which you have already given us in the press release and which you discussed in your prepared remarks, there's no other adjustments that we should make on top of that that bring you to what you consider a good runrate?

I think the press release reflects the view of the items as we have listed them.

xxxxx The second question is on asset accumulation.

The 26% growth in management (indiscernible) seems particularly strong running ahead of the growth that you had in assets under management.

Can you provide us some additional color on what drove this growth?

And was there any one time items that influenced that line as well?

In the asset management area we had strong growth in the Threadneedle productline and from that standpoint it was just -- and the market of course -- was a key contributor.

But we had strong growth in Threadneedle and in our wrap product.

The last question just on variable annuity, if you can also just discuss the percentage of your sales that included a living benefit rider, and what you are doing to hedge the risk associated with those riders?

Obviously, we have launched that rider in the advisor channel, and it has been in the third-party channel for a while.

I don't have the exact percentage, and I'm not sure if we disclose that.

But we do have programs that hedge the living benefit.

And its percentage is increasing as the product is being launched.

John Nadel from Fox-Pitt Kelton.

I just have a couple of quick questions for you.

One is more top down.

Right after your spinoff the Board approved new option and restricted stock unit grants.

And I know that there is some requirement to talk about some of the key metrics, and that that will be filed I guess sometime within the next let's say 60 to 90 days.

But I was wondering, Jim, if you would be willing to talk about some of the key financial metrics that management is being asked to hit to achieve the high-end of long-term incentive comp targets.

Our business objectives are tied to the stated on average and over time financial targets that we have published.

We are clearly focused on increasing our metrics from a client and customer perspective.

We are clearly focused on revenue growth and earnings improvement, as well as the improvement in our ROEs to hit stated objectives on average over time.

So those are the things that our Board will be looking at and tracking against for our compensation.

Any specificity with respect to the timing of moving towards that 12 to 15% range?

As we have said, we think that we clearly have the strategies in place.

We're focused on both the revenue improvements as well as improving our margins through reengineering, and capital optimization, most appropriately, as Walter has just outlined, and we think we will be there in a reasonable amount of time.

And then I guess two other questions maybe for Walter.

One is do you have your statutory earnings and risk-based capital ratio as of the end of September?

No, we do not.

Not at this time.

And then could you talk about the spread on your fixed annuity business?

I think this is something that a lot of folks have been asking about, and we haven't really seen any specific data yet.

The spread on the fixed annuity business remains fairly low.

The increase in the rate has occurred at the short end of the curve.

From our standpoint, this cycle is -- we are competitive.

And the price of the new business are our targeted to achieve our targeted spread.

That is -- basically we are in the 2% range on that basis, if you look at it.

And that is where we have been performing.

The overall portfolio?

When you think about your spread, is it -- you said low.

Is it significantly under 200 basis points?

Is it --?

No, actually is above.

It is above?

Yes.

Just one last question is on wrap accounts forces the branded -- I guess RiverSource Mutual Fund.

Could you give a sense for -- it seems like the wrap accounts are certainly the driver of growth on the retail side today.

And could you give us a sense for the margin to Ameriprise -- the differential in the margin there?

What your payouts are on the wrap account versus mutual funds?

I think we can all make the assumption that the sale of a branded mutual fund is certainly a higher margin activity for Ameriprise, but could you give a sense for the differential there?

What I could say overall is that we obtain appropriate margins on the wrap business -- our advisors, as many in the industry has moved to a fee-based rather than a pure commission on sale.

And with that in mind, it is a very strong growing business.

We have one of the leading wrap programs in the industry.

From a rate perspective, of course if you manage the assets entirely, you had all of the management fees.

But in this case we get a share of now a much larger pool of assets.

And so what we only have retained on rate for sale of proprietary, we now get a share of the total pool, which includes all the nonproprietary mutual funds assets within the wrap.

From our perspective we like this business.

And it is one that is appropriate for our advisors with their clients.

And therefore we feel it could add to our revenue and therefore margins over time, even though it has a lower rate than just the prop sale of a mutual fund.

Ron Bobner (ph) from Capital Returns.

Most of my questions were answered, but I had one.

I'm wondering is there a financial supplement to supplement this release or -- because there's no balance sheet in here.

Is it somewhere else?

There is one.

It is on the website and it has also been filed in the 8-K attached to the press release.

And then one last question on the litigation settlement.

Obviously the 100 million and the expense of 70, that is just Ameriprise -- that is not AMEX.

Is that the entire settlement or is that just Ameriprise's share basically?

That is the entire settlement that Ameriprise has expensed.

And as we said, that was contemplated through the capital infusion from American Express.

You're not commenting whether AMEX had additional dollars --?

No, there are no additional dollars from AMEX or AMEX will be charged with.

Joan Zief from Goldman Sachs.

I just have a few questions.

The first question is could you just talk about the mechanics of the pro forma adjustment?

Even though that business was very profitable, when you took the pro forma adjustment this quarter, there really wasn't any impact to earnings.

Is that going to be the way this works going forward, or was there any sort of large seeding commission that took place in this quarter with the transaction that we should be aware of?

You are referring to AMEX Assurance?

Yes, the AMEX Assurance, that pro forma adjustment.

Yes, the pro forma adjustment reflect that in the current quarter it is under a reinsurance seating arrangement.

And it really does -- it reflects marginal profitability, whereas in the prior three quarters due to the nature of the treatment of the historical -- and since we own the entity, we're reflecting full profitability, even though it never in our segment reporting when we were part of American Express.

So it will be with us for the next three quarters.

(multiple speakers) So let's just be very clear.

AMEX Assurance, if you go back to the segment reporting under American Express, was never part of the American Express Financial advisors segment.

It was always recorded the income in the TRS segment.

Because of the separation, we have to now show that since it is a legal entity as part of Ameriprise, within the pro forma numbers as income in the prior three quarters.

This last quarter, since it is under a reinsurance agreement, we have no -- actually minimal income from that segment reported.

Again those income numbers are reported within the TRS segment.

There wasn't any -- there's nothing unusual -- this is the way the pro forma adjustments will look going forward?

Yes.

Yes, that's correct.

The second thing I wanted to ask about was -- talking a little bit more about the performance of your funds.

And we know there within the statistical supplements, while there was -- you held pretty steady on your one year performance.

That the three-year performance eroded a bit.

I was wondering what you're saying there?

What you're saying on the fixed-income side, and how we should think about progress going forward?

You're correct.

In the quarter our large cap equity fund and large cap value fund fell below the mediam on a three-year basis as an above the average quarter rolled off.

The three-year number, while the most recent quarter, was slightly below the median.

The large cap equity fund is in the 36 percentile since it was launched on March 28, 2002.

And our Boston team continues to perform at a very high-level.

Overall our equity funds continue to show improved performance with 66% of equity funds above the median as of September 2005.

In the fixed-income area, we had poor performance in two funds, our short duration U.S. government and our intermediate tax-exempt, which moved them from above to below out of 16 total.

Both of these funds had four quarters versus competitors.

Our first area of emphasis was a taxable bond fund.

The short duration U.S. government competes in a very competitive part of the market, where mere basic basis points can make or break a quarter.

In the most recent quarter the fund was 15 basis points below the median fund returned, and ended up in the 86 percentile against its peers.

So that gives you a recap of the quarter and also the effect it had on the three-year for the equity.

Do you know when the worst of the historic quarters roll off?

Just like you said, you had one quarter of historic numbers that were very good rolling off, which just kind of hurts the performance on a rolling basis.

Is there -- are there any particular years which had the worst performance, so that we can tell when that is going to roll off and ratchet up the three-year performance?

As you know, that is all done on a rolling basis across multiple funds, so we have not calculated that, that I can share with you at this point in time.

But we are saying that our three-year rolling performance is quite good, and has shown nice improvement.

And as we said the last year, 66% of our funds in the equity are above the median.

We do have one of our underperforming funds, as I mentioned, the New Dimensions, that we are just now recently made changes and moved it to a high performing Boston team.

And so I think we're in good shape.

And we will continue to be very focused on ensuring that that performance hits the hurdle rates that we need.

My next question just had to do with the litigation as expense.

I know that you put up this reserve.

That settlement is basically behind you.

What would you guess though -- you had given us historically the litigation expenses that have ranged 25 million, 30 million, 35 million.

Do you think that is the normal runrate going forward?

We feel that we reserve appropriately for litigation or regulatory legal expenses.

We feel that we are appropriately reserve today.

And we at this point in time can't further comment on that, other than to say that we feel that our reserves are appropriately for what we have been dealing with effectively today.

But you would admit that the cost of compliance and legal issues is probably higher on a runrate basis today than it was say a year ago?

I would say that over the last two years compliance and legal expenses across the industry are higher than they were a few years ago, and we have been consistent with that.

And I guess my last question is just a discussion.

I know you what you have been saying about the timing of your ROE improvement.

You are looking for something to be reasonable.

And I guess I just -- could you maybe help sort of box reasonable?

Is reasonable ten years?

Is reasonable five years?

Do you have any expectations on what reasonable is to get to your target?

And would you expect, even if you're not going to give us a target for when you hit that 12 to 15%, should we be anticipating that the ROE is going to be improving somewhat an an ongoing sequential basis?

We're targeting for improvements in our ROE on average over time.

Reasonable would be less than five years.

So I will put that as the outer boundary on reasonable.

But we are very focused to generate -- we know that it does not occur in one quarter or one year, so it is a gradual improvement.

And when we're talking about the 12 to 15, we are talking about operating from that standpoint, and excluding the spin impact.

Andrew Kligerman from UBS.

I've got a couple of questions.

The first one -- a lot of people have questioned your DAC asset, and the timing -- the amortization of that DAC asset.

Here you have actually decided that you have been too conservative.

And you released some -- not released, you voted down.

The question to you is what was it -- what were the calculations that you did?

Why can we be confident that you did this adequately?

And then I have a follow-up.

It is two things.

From the standpoint we use a consistent methodology that is followed -- this is review by our actuaries, analyzing the performance characteristics that we have seen and the performance characteristics that we have anticipated.

This is part of a comprehensive review that we do.

And from that standpoint, it is -- we're quite confident that that activity reflects the anticipated performance both from the lapse rates, mortality and other almonds that we've seen.

It is something that we just don't haphazardly come up with a number.

It is something that is within the capabilities that we have built up, and is reviewed both internally by our actuaries, the controllers group, and obviously gets review from a standpoint of our outside accountants.

The numbers they are to reflect the performance.

And as our network -- we have demonstrated the patterns of persistency with our product is improving, and is better than industriy's, so you just can't use ratios to do it.

You have to actually analyze the actual performance aspect.

A two part follow-up on that.

Do you think that it is better than industry just because you've got financial advisors that kind of have stickier assets?

And then secondly, do you have a sense of what the other like companies are doing?

And do you feel like you're using the same type methodology?

I think the methodology -- to answer the question, yes, it is from an industry standard standpoint.

And I do believe as we evaluated this as relating to plans and advice capability, it provides == characteristic that provide a stickier capability, yes.

Now just shifting over to the asset flows, I see you had roughly net negative flows in institutional in the U.S. of about 1.8 billion.

And then the rest -- in the release it indicated that the San Diego office closing might have been responsible for the big part of that.

Could you provide some color around how much institutional money was managed out of that office, and whether you think there will be further significant outflows relating to those assets?

We don't disclose the total funds, but we did, in the move of the San Diego, did lose an institutional account that we had.

We understood that would be the case.

We also, as part of that, made a proactive decision to close some of our hedge funds, so that we would refocus our resources in other areas.

Those were the two main reasons for the flows.

These were all done based on the decision that we made proactively to focus on both performance as well as use our capabilities for things that we thought would be better for both our clients and the Company.

Do you worry that there may be further significant outflows, or do you think that maybe the big part of that might be behind?

I think that that was a major shift, and I don't see that continuing to occur at that level.

I think it is contained.

And then relating to the New Dimension fund itself, going to Boston, is that now -- I think I read a released a few weeks ago the indicated it would be merged into a different fund.

So does record go away?

We're looking at -- that is subject to Board approval -- Mutual Fund Board approval -- to merge that fund into the new fund.

And it would be the new fund's record that will continue.

Finally, on this litigation expense.

I am not sure from reading it exactly what it was.

I don't know if you can clarify a little more what exactly went wrong there.

And two, do you think it is something going forward that you would want to see zeros going -- not that you wouldn't want to see zeros going for it.

But we can expect that maybe some of this noise would taper off?

Because as I analyze your financials from 2004 through today, it looks like you constantly have these regulatory costs weighing down on your earnings.

Do you think going forward, and I don't want a runrate or anything, but do you think -- is that you're realistic hope?

I don't want to pin you on anything, but would it be your hope that maybe going forward you're not going to see big regulatory charges?

And again I am not pining you to it, but is that something you would like to see or could expect?

I think -- I want to be clear.

This is a class-action settlement.

It reaches a comprehensive settlement regarding the consolidated securities action lawsuit filed against the Company, its former parent and affiliate in October 2004.

So the suit does cover the sale of mutual funds as part of a revenue sharing program, the sale of proprietary mutual funds, the sale of products within plans.

And it goes back to cover the period from March 10, 1999 to the settlement date.

So even though we fully deny these allegations, we did make the determination as we were becoming public, etc., to settle this litigation so that we can move forward as a newly independent Company, unencumbered by the the distraction, the expense and the uncertainty.

Now regarding all of the various inquiries from a regulatory perspective, we have been working very closely with the regulators to move forward against their inquiries and resolve those appropriately.

We feel that we are appropriately reserved for those situations.

And at this point in time we are comfortable with the progress that we have been making overall, both from a compliance, as well as from a regulatory perspective for our Company.

Laura Kaster from Sandler O'Neill.

Real quickly, Just in looking at your number of advisors, your branded advisors declined on a sequential quarter basis.

How should we think about that going forward?

Do you have a target of growth on an annualized or quarterly basis?

We, in the past, have been focused on what I would call a slow growth of our advisor force.

And over the recent periods we have been much more focused on improving our advisor productivity.

So we've introduced tighter requirements for new advisors coming on board, as well as their production levels.

And we have been very focused on transforming our new advisor program so that we can really bring in advisors that we feel over time will produce at higher levels and have higher retention rates, which will be a cost reduction for us, because the cost of bring in many people and having a high turnover affects our total expense base, and therefore our return on this investment.

In regard to this year, we have had a lot of uncertainty because of the spend, both from a combination of competitors saying, will this really be a public company, will American Express seel it rather than spin it off?

In addition to that, for a period we didn't even have a name in the marketplace.

And so now that we have been really focused on coming to be a public Company, we are starting to re-energize our various channels.

But we had a layoff on some even experienced recruits at that period.

And we slowed down some of the acquisition we were doing, only because there's a lot of unanswered questions they felt in the marketplace.

So I think now that we are come out as a strong public Company, our brand in the marketplace, our people are very focused again on -- focused on growing our advisor force at a very measured rate, but more importantly, also focused on improving productivity.

And I think you saw in the quarter nice productivity improvements across our advisor base, both in our P1 employee channel as well as in our advanced franchise channel.

Now I see that your Securities America advisors went up a little bit more than I would have thought.

Can you give me some additional color on that?

Yes, they have been actively recruiting in the marketplace under their value proposition.

And so they were not really affected by the spinoff, because they operated as Securities America, so they were not impacted by any of the changes that we had a deal with through the spin.

And then as far as your reengineering efforts, your cost containment this quarter exceeded my expectations somewhat.

Did you give a dollar amount that we could expect via reengineering efforts?

We don't really forecast, but as we mentioned that over the last four years we accounted for approximately 20% of American Express is reengineering, and they achieved over that period.

They were doing $1 billion a year.

So while we don't forecast on that, we certainly have continuous programs.

And then we have to make the determination of what gets invested, and then what gets driven through our margins.

So the programs are active.

They are a part of the way we operate the Company, and we will continue to do that.

Is there any other outstanding litigation going on that we should be aware of?

Can you just give us an an update on that, or does this pretty much settle it?

Yes, the class-action settles what we have outlined in the Form 10 for these particular suits.

And from that perspective, we feel that this was the largest of the things that we had to deal with.

And we felt that this settlement appropriately moves that beyond, and so that we can move forward now as an independent Company.

Thomas Gallagher from Credit Suisse First Boston.

A couple of questions.

First one is.

I know you have opened architecture on the front side.

Can you comment on whether or not there any plans to open the architecture for annuity or insurance products for your advisors?

We feel first of all that we have a very broad lineup.

We have a very good lineup of our annuity products, as well as our insurance products.

They are very much geared to the needs of our client base.

And under all of those products, because they are asset accumulation type vehicles, is an open architecture for all the investments.

And therefore they have -- our advisors have the diversity to put it in whichever finds they think most appropriate for their clients to have a diversified portfolio.

The insurance wrap we feel that we offer with the benefits are particularly geared appropriately to what our advisors want and need for their clients.

And we feel that that is appropriate at this point in time.

Next question.

Just a follow-up.

I just wanted to make sure I understood it correctly.

Your current fixed annuity entire block of business is earning more than 200 basis points on a gross spread standpoint.

That's correct.

Has that number moved around a lot as of late?

Because I know the commentary I've heard from you, at least prior to the spin, was that things have been under pressure.

So can you just comment on where that has been moving, and maybe how you see that trending?

It has been in the range of the 2% that we spoke about from that standpoint.

And really I think the thing that has been under pressure more has been the certificates business as the short-term rates have increased, not the annuities which are pegged off the ten year rate.

So therefore on that basis, it has pretty much stayed within a range.

And the certificates business, part of the investment losses you have seen in the quarter is start to take down that book as we have added a discontinued part of our operations, moving 6 billion of that book to American Express.

And therefore that will be give us the ability to free up that capital as that book winds down over the next six months.

On the certificate side, can you just give us an idea of where those spreads are?

And you mentioned those have been under pressure approximately where (multiple speakers) spreads?

I think -- I don't know if we actually -- it is in 150 basis point range.

Because if you take a look at the short rates increasing over 120 basis points over a year-over-year basis, and really not getting a lot of lift on the long end, so I think we're just typical what everybody else has played in that situation.

And then just a few other questions.

One is I noticed the other operating expenses in the Protection segment were pretty substantially lower.

Can we assume that that is a normal runrate, or is there anything unusual going on there?

It is AMEX Assurance actually from that standpoint.

And we don't really forecast on it, but I think --.

I guess even just flipping out the pro forma adjustments related to that, it seems to be low.

But I guess my main question would be we shouldn't expect anything unusual in this quarter as it relates to kind of trend rate of earnings?

We're not anticipating, no.

Two more questions.

One is just back on the DAC amortization for a minute.

I guess if I look at the way you amortize, and then I look at some peer companies, and I also adjust for the lapse ratio, I would have you amortizing in a much slower rate.

Now I guess -- and then that would leave only one other variable and that would be gross profitability.

And I guess you hit on one of those things by commenting that you have seen better than expected mortality.

I don't know if you have done that kind of pure analysis, but just when I adjust for the lapse ratio, your amortization speed would only be around half of others that disclose that type of data.

So would that imply your gross profitability is that much higher?

I think, as you mentioned, the mortality elements of it.

But the other really gets around to the fact that from the standpoint that the lapse rates are certainly less than our competition.

But the real issues here -- when you're looking at the mix of business it is very difficult to do this on overall ratio, an overall comparison basis because there are so many other variables that go into is it relates to the type of product, the life of the products, and the elements within it as it approaches surrender and other aspects of that.

When we do this it is done in a comprehensive detailed way, looking at each product component.

And, yes, we do check on the macro ratios of this.

But the key focus is on driving the absolute elements When we analyze those variables, and that is what does under a tremendous amount of scrutiny and review and consistency of analysis.

So we feel quite comfortable in our ability to make the adjustments based upon performance that we see.

Just to follow-up on that.

Should we assume there's going to be change in future amortization, based on the adjustments that were made this quarter?

In other words, should we assume the DAC amortization is going to slow a little bit more, or should it be on par with how you had been amortizing it over the last few quarters?

We do this on an annual basis in September.

And unless there is some -- circumstances dramatically change there's really no adjustments as we work through (multiple speakers).

In terms of the future amortization pattern?

Not material.

And then last question is really just related to your cash flow.

I just want to make sure I understand all the components here.

The business that was reinsured, the AMEX Assurance, was that at all included in any of the entities, either IVS Life?

I believe it is in a property casualty subsidiary, but I just want to make sure legal entity I am tracking all the right ones that you still have a claim to in terms of cash flow.

You still have IVS Life, the brokerage business and asset management, all those cash flow streams.

Yes.

And when I look at adding all those up, you had more than 400 million, at least it is dividend capacity at IVS Life.

And would I make any adjustment for the AMEX Assurance on that or no?

No, AMEX Assurance should not impact that at all.

If you think about -- on a future cash flow, is it reasonable to think that you could get more than 400 million out of IVS Life, 100 million out of the brokerage, and 100 million from your asset management business on kind of a sustainable basis?

Or maybe any other measures you can talk about in terms of annual cash flow?

Obviously, it drives the stat aspect of this.

But from that standpoint we certainly look at (indiscernible).

I'm not going to comment on numbers.

We have adequate cash flow capability coming out of the subs from that standpoint.

And as you saw, the amount of cash at the parent was sitting today is ever $2.6 billion.

We feel that the liquidity in cash elements of theis on the cash generating capabilities are more than adequate from those all the entities that you mentioned.

Eric Berg from Lehman Brothers.

First of all with respect to what the Company "really" earned in the quarter, would it be right to say -- it seems to me there would be seven adjustments, the five that you mentioned, namely the legal, the DAC, the long-term care, the tax item, and the investment loss, those five, plus two more, AMEX Assurance and separation costs.

Is that how you think of the real earnings, those seven adjustments that I referenced?

You mentioned -- those are factors certainly as we discussed.

Two of the ones as we mentioned, going from an adjustment standpoint, are the AMEX Assurance and the separation costs.

LTC is not been an adjusted amount.

And AIDC us a discontinued op situation, which you didn't mention.

But you did mention -- I think in your prepared remarks you mentioned five special items, the legal, the DAC, the long-term care, the tax item and the investment loss.

We mentioned those as special items, yes.

Some high-level questions.

Your investment performance has been improving for some time.

I would say a good five quarters it looks like.

And yet there really hasn't been any improvement in the retail mutual fund cash flow.

Why not, and when do you think -- if things have been getting better, why from a performance point of view, and it certainly seems like that is the case, why isn't the cash flow picture improving?

We had moved the last few years to a complete open architecture.

And we have just really hit our three-year track records for some of the major areas that we put into change, like our Boston team, as an example.

You just actually saw us over the last number of months been reported in the league tables for a number of our funds as well.

And so we think that over time both the performance, as well as the diversity, of our products will start to hit with our advisor base.

But in addition to that, we will be looking as we move forward to utilizing some of our funds to distribute beyond our own advisor base.

But our advisors over time have shifted to selling a multiple group of families and funds.

And so we have always had a large base of assets and a proprietary and now that is coming to equalize.

So we do know that we will be in a period of outflows as that equalizes.

And now with our performance coming up, we hope that that will mediate and move to more of a positive tilt over the period.

One of the biggest areas that we have been in outflows is one of our -- used to be one of our top performing funds, our New Dimension, which over the last year or so, two years, have been underperforming.

And that's where we have made the recent changes to help improve that performance as well.

We are looking to continue to make the changes necessary.

We are in a completely open architecture, and so we think as performance in some of our funds come on, that will help to balance out the flows.

But we have been dealing in the outflow situation that we have made clear to people.

Saul Martinez from Bear Stearns.

I also have a couple of questions.

First of all, your variable annuity count values grew 23% year-over-year, but your revenue growth from that business was only 11%.

I was wondering if you could comment on the discrepancy?

Are you seeing any pressure on fees there?

No, we don't.

It is then subject, as we look at the prof, non prof mix that is within it -- and on that base -- but basically no.

You would estimate that it has to do with the distribution between prof and nonprof products?

That's an element.

Secondly, given the large size of your mortgage-backed portfolio, I was wondering if you had any prepayment fee income that went through your investment yields in the quarter?

And if so, how does that compare with what a normal quarter might be?

It was not material.

And obviously in prior quarters it has had some (indiscernible), but it is really a nonmaterial number.

And then just lastly, Walter, you mentioned capital management being part of the the ROE expansion story at a very high-level.

When might we expect more details about how you view your excess capital position?

And when can we expect more details about what that capital management strategy might entail?

As we mentioned, we are engaged in several reengineering projects.

And you will start seeing that evolving as we progress into 2006.

We already have -- as Jim has mentioned, this is a continuous process and we have plans already in place.

And you will start seeing some of the implications and discussing it as we move through 2006.

We also said we just actually are having our first Board meetings tomorrow.

So as we continue to move now as a new public Company, the Board of the Company will be looking at our capital strategies and reviewing what they think would be appropriate as we move forward.

Heather Hunch (ph) from Citigroup.

In your Form 10 you state that you only hedge equity market changes for your variable annuity (indiscernible) benefits, but you don't hedged your CMDDs or your GMIDs unless the news (indiscernible).

It seems like that would put you in a difficult position.

Could you comment on what your readiness is for the new (indiscernible).

We actually feel that with the programs that we will be looking at, and have the capability of doing, that we will be in good position.

Plus they're not very large with us, and as we have stated.

And on that basis we will evaluate the programs, but we feel that it will not be a material impact.

Have you had conversations with the ratings agencies about this?

We constantly have conversations with the ratings agencies.

And they are comfortable with your program?

I think you have to talk to the rating agencies.

Obviously, we reviewed the situation with them.

And they understand our position as it relates to other companies.

And we are -- certainly as I indicated, we're not -- have major exposure in that activity.

Tamara Kravec from Banc of America Securities.

Most of my questions have been answered.

I have one small question.

In the asset accumulation segment under sales by product you have an other category that looks to be significantly below what previous levels were.

And I just was curious what was in that category?

Let me take a look.

It came out to be about 1.6 billion.

I think it is mostly limited partnerships, and we have actually slowed the writing of that right now.

You expect that trend to continue?

Because that seems to have really driven your sales number down in that segment?

At this point we're looking at alternative sources, and from that standpoint so I can't say it is a trend at this stage.

So it was not a surprise to you that that number was --?

No, it was not.

I guess that's it.

My question really had been on advisor retention and incentives.

And actually the other question I do have is on separation costs.

And just looking at what you have incurred so far, and what you have mapped out in your previous filings for what you expect to spend over the next couple of years, would you say that you're on track and your estimates are still where you would like them to be, or do you anticipate potentially being under that number or over that number?

We believe at this stage, which is early (indiscernible) that we see no reason that the numbers that were established -- those seem to be appropriate.

Jeff Hopson from A.G. Edwards.

Two questions.

First, do you think that the worst of any financial advisor turnover is behind you?

And then two, I believe you're going to get some proceeds on the AMEX Assurance deal.

Can you give us any magnitude of what that price will be?

In regards to our advisor base, we are very focused on retaining our advisors.

We know that we have experienced a little incremental attrition over the last quarter or two than it was a year ago.

But our retention rates are still very high.

This is an area that we are going to be very focused on over the next quarter or two as well.

And we feel that we are focused on a continuing to invest in our advisors and the value proposition.

And now as a public Company, we are investing heavily in the our new brand to put it in the marketplace.

And that is being favorably received by our advisors.

In regard to your next question, I will have Walter --.

On the AMEX Assurance, it will be predicated on an ongoing basis, which will really not be a material number.

Not material?

No, it will not.

We are now approximately 10 minutes past our scheduled ending time.

I do want to let everybody know that Mary Baranaski ph and I would are here in Minneapolis today.

And we can be reached at my phone number, which is 612-671-2080.

Thank you all for joining us today.

Ladies and gentlemen, this concludes today's teleconference.

Thank you for participating.

You may now disconnect.