阿默普萊斯金融 (AMP) 2007 Q3 法說會逐字稿

At this time, all participants are in a listen-only mode.

Later, we will conduct a question and answer session.

Please note that this conference is being recorded.

I will now turn the call over to Miss Laura Gagnon.

Miss Gagnon, please go ahead.

Thank you, and 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.

After their remarks, we would be happy to take your questions.

During the call, you will hear references to various non-GAAP financial measures, like adjusted earnings, which we believe provide insight into the underlying performance of the company's operations.

Reconcilitations of non-GAAP number to the respective GAAP numbers can be found in today's materials available on our website.

Some of the statements that we make on this call may be forward-looking statements, reflecting management's expectations about future events, and operating plans and performance.

These forward-looking statements speak only as of today's date, and involve a number of risks and uncertainties.

A sample list of factors and risks that could call actual results to be materially different from forward-looking statements can be found in today's earnings release, our 2006 annual report to shareholders, and our 2006 10-K report.

We undertake no obligation to update publicly or revise these forward-looking statements.

With that, I'd like e to turn the call over to Jim.

Thanks for joining us this afternoon.

I would like to start off by saying that the company performed well in the third quarter, despite the turbulence in the credit and equity markets.

As you're well aware, it was a challenging summer for the financial services industry.

But our operating results continue to demonstrate the strength and diversity of our business.

I feel very good about the position we're in and the momentum we're generating.

In short we have the right strategy and we're executing it well.

For the quarter, revenues grew 11% to $2.2 billion, adjusted earnings per diluted share was up 5%.

And adjusted ROE for the trailing 12 months increased to 12.4%.

We continue to focus on the mass affluent and affluent market and this group of clients has grown significantly, up 11% over last year.

This clearly demonstrates that our client acquisition strategy is working, which is centered on our commitment to serving clients through financial planning relationships.

Our planning clients bring us more assets and they stay with us longer.

We're the market leader in financial planning, and we intend to build on this position.

In regards to advisor productivity, despite the market volatility and the historically slower summer months, our grow trend continued with GDC up 14% over a year ago.

Our productivity gains are the result of our advisors' focus on acquiring more affluent and mass affluent clients and deepening existing relationships.

It also reflects improved advisor support and technology tools, and our innovative and broad product offering.

Our advisors continue to be very satisfied with the company -- the progress we are making and the support we're giving them.

In fact, our franchisee advisor retension rate remains very strong at 93%, and as you know, this is is the most seasoned and productive part of our advisor force.

We've been re-engineering the employee advisor force for several quarters, and it's the primary driver of our lower total advisor count.

By being more selective in our hiring, we are driving greater profitability and focusing on advisors who are more likely to succeed.

As a result, we expect the overall advisor number will continue to decline slightly in the near term.

We also continue to roll out enhanced technology for advisors to drive further productivity improvements.

Or new system will consolidate and link the information advisors need, and will soon introduce new financial planning tools that will make the process far less time consuming.

The new technology makes advisors more efficient and gives them more time to grow relationships resulting in further productivity gains.

Along with the success of our advisor business, our overall product flows continue to be strong.

Let me start with the very significant turn around in RiverSource fund flows.

For the second consecutive quarter, net flows were positive.

We had net in-flows of 400 million, compared to net out-flows of 600 million last year.

In fact, for the first time in many years our net flows are positive for the year-to-date period.

We reached this milestone sooner than we had expected because of strong investment performance, our new innovative goal-based solutions, and improved wholesaling.

With regard to investment performance, our longer-term track records continue to improve with three-year equity and fixed income performance both showing good trends.

We also continue to build-out out product offerings.

In fact, just last week we introduced three new mutual funds that give investors access to alternative investment strategies including 130-30 and 120-20 strategy funds.

Threadneedle's investment performance has also come back quite strongly.

They continue to experience asset outflows, but much that is driven by outflows, a low margin Zurich in institution assets partially offset by in-flows and higher margin retail and alternative products.

We are investing in Threadneedle, including its announced acquisition of (inaudible), a capital management during the quarter, and we feel good about the prospects for this business.

We're also extremely pleased with the performance of our RAP business, which had $2.6 billion of net in-flows in the quarter.

We now have $93 billion in total RAP assets, which is up 33% from a year ago.

One of the real new successes we've had within RAP is active portfolios, the discretionary mutual fund program we launched in February, which already has generated over $2.2 billion in sales.

We're also seeing good flows in variable annuities, despite challenging market conditions in the quarter, we realize net in-flows are $1.3 billion in annuity, variable accounts in the quarter.

At the same time,like many other annuity providers we continue to manage out-flows and fixed annuities.

We expect these outflows to continue over the near term.

Our insurance businesses also continue to perform quite well despite a slow growth environment.

Life insurance in force grew by 8% compared to last year, while auto and home business generated a 8% increase in premiums.

Overall, cash sales returns and margins are solid.

We continue to focus on growing these businesses, because it will always represent the need with our clients.

So I think you can see that our revenue streams and asset flows are strong.

We're also very focused on tightly managing our expenses and expanding our margins.

Though efforts are paying off for the quarter, our controllable expenses were essentially flat compared with last year.

We intend to continue to capitalize on our proven re-engineering strengths to help fund our investment agenda and drive greater profitability.

Now, I'd like to briefly give you some insight into our balance sheet.

As we told you from time of our spend we main strain a strong and conservative balance sheet.

In fact, we were able to avoid the credit issues many other companies faced during the quarter.

As we shared in detail on last quarter's call, we have very little exposure to the subprime market and to the broader residential real estate market, and as a result, we have not had to write down the value of assets.

The markets did impact both our revenue and expansions through impacts from our hedging program.

Walter will cover this, but I want to emphasize that our overall hedging program performed well throughout this very volatile quarter.

Along the way, we identified opportunities to further enhance our hedging program.

But overall, I am pleased with our balance sheet performance, and with our risk management program.

So in total, the business performed quite well in the quarter, and for the year-to-date.

I feel good about the foundation we put in place.

We are in a terrific position to grow and to navigate changing market conditions.

Our balance sheet strength, excess capital position, and expense management focus along with our fee-based financial planning driven model gives us the ability to succeed across market cycles.

We have strong operating momentum on our side, and I feel good about our business.

Now, Walter will take you through some of the more detail from the quarter and after that, we will take your questions.

Thanks, Jim.

As you heard from Jim, our business continues to perform well, even with the ongoing market volatility we've been experiencing.

We believe this is because of our consistent approach to and the diversity of our business.

Now, to add some additional color to what you've heard from Jim, I'm going to spend time on three key areas -- our overall financial performance, a review of items we disclosed during the quarter and their associated impacts, and the continued strength of a balance sheet.

The items we disclose in the third quarter, as well as in the third quarter last year, are detailed in the C-pages of the supplement.

Overall, these items did contribute to an increase in both revenues and expenses and I will detail them for you in a moment.

So beginning with our overall performance, revenues grew 11%.

However, when you exclude disclosed items, revenues grew 7%.

More importantly, we really drove revenue growth with -- where -- where the strong business increases we saw in our fee-based businesses and solid flows into our core product such as RAPs, proprietary funds, and variable annuities.

These increases more than offset the impact of fixed annuity outflows.

As Jim indicated in the quarter, our expenses were well managed.

Controllable expenses were basically flat to last year.

This strong expense management reflects our focus on re-engineering and continuing investment in the business.

Consolidated expenses before separation costs increased 15%.

Excluding disclosed items, expenses grew 6%.

This includes a 22% increase in field compensation.

This is higher than our GDC growth rate of 14% due primarily to a lower percentage of these course being deferred as we continue to shift away from insurance and annuity product sales.

Adjusted earnings grew 3% to $237 million.

However, embedded in these results are disclosable -- disclosed items that increased adjusted earnings by 5 million this year, compared to a $38 million benefit last year.

I believe our adjusted earnings of $.99 per share reflect the underlying economic reality of the business, but I also want to discuss the material items in more detail.

The four main items were -- the negative impact of our third quarter DAC unlocking, the impact of the quarter's volatility on our variable annuity benefits, the decrease in loan loss reserves from our commercial mortgages, and a lower effective tax rate.

First, as I mentioned, our DAC unlocking analysis resulted in a $30 million negative impact in the quarter compared to a $25 million pre-tax benefit in the same quarter of 2006.

That's a swing of $55 million in pre-tax earnings.

As you know, there are many assumptions that get reviewed and reassessed during our annual third quarter detailed DAC review.

In the quarter, most of the impact is the result of changes in our persistency assumptions.

We are seeing higher exit rates on older books of fixed and variable annuities as clients are electing to reposition assets from these older annuities after the surrender charge -- after the surrender charge periods.

A strong portion of these assets are rolling into variable annuities with living benefit guarantees, as well as other Ameriprise products, not leaving the company.

With -- within our variable universal life business, the difference between actual surrender rates and those we had been assuming are small.

The small change in persistency assumptions that are now negatively impacting earnings were a positive impact last year.

Our current DAC valuation assumptions are fully informed by the experienced trends we have observed in the businesses and our best estimates of where those trends will lead.

We do not believe any of assumption changes, or resulting increases in DAC amortization reflects any fundamental problems or deterioration in our business.

Let's move to the second disclosed item -- the effective tax rate on adjusted earnings in the quarter was 14.4%.

The lower rate is based upon our conclusion that Threadneedle's continued growth and good performance will enable it to pay ongoing dividends.

As a result, we change certain Threadneedle entities from non-remitter to remitter status.

This change generated a $21million benefit in the quarter as a result of the cumulative effect.

Going forward, there will continue to be dividends which will result in an ongoing benefit.

However, these benefits will be at a lower level than we achieved this quarter.

Our effective tax rate on adjuster earnings was 25.2% last year, and will be approximately 23% this year.

Our tax department is continually looking for ways to improve our tax efficiency.

Tax -- taxes are a major expense for us.

For 2008, we expect our effective tax rate will be in the 26 to 27% range.

The third disclosed item is the impact of market volatility.

As you are aware, long-term volatility increased substantially in the quarter.

The net impact after hedging, DAC and tax, was a negative 21 million due to the mark to market of our variable annuity guarantees GMWB and GMAB.

Approximately 14 million of that impact was related to GMWB, which accounted for 86% of our exposures with account values of $12 billion.

As you are aware, we have a hedge strategy using elongated static hedges.

This 12 basis-point impact is well within our tolerance levels and we believe compares favorably in the industry.

In addition, during the quarter, we modified our hedges to improve effectiveness and reduce course using plain vanilla derivatives.

The remainder of the impact, approximately $7 million, was driven by GMAB, about 14% of our exposure, but one-third of the impact.

Unfortunately, we only had delta hedges in place when the volatility spa -- spiked and we are in the process of rolling out a new three-Greek approach.

We currently have 50% of our GMB exposure hedged under the new program, and will implement the balance over the remaining months.

For all of our VA hedging, we will continue to enhance our models and approach and are pleased with the progress we've been -- we've made to date.

The last disclosed item to discuss is a $23 million benefit from lowering loan loss provisions on our commercial mortgage portfolio.

While we review our loss provisions quarterly, we conducted a more detail annual assessment that we completed in the third quarter.

In addition to loan payment history, we analyzed the financial and operating statements for each individual property, including rent rolls, cash positions, and cash flows.

We also do a fiscal inspection to assess the collateral value on all significant properties.

Based on this review, we determined our allowance for loan losses was more than adequate.

Therefore, we reduced it to the appropriate level.

This positive was offset by losses in trading securities including seed money, resulting in other net investment income in our supplement reporting a $1 million loss.

Now, let me turn to our capital position and shareholder repurchase program.

In the third quarter, we re-deployed 171 million in share repurchases, buying over 2.9 million shares.

Year-to-date, we repurchased over 11.1 million shares for $665 million.

Our remaining authorization as of September 30th was $701 million.

Our pace of share repurchase continues to remain prudent and we continue to maintain excess capital of over $1 billion.

Our balance sheet remains strong, and our asset quality is high.

That positioning served us well during the quarter.

Consistent with what I shared last quarter, our exposure to subprime continues to be limited to under $260 million of residential mortgage-backed securities.

These securities are high quality, predominantly triple-A rated bonds, backed by seasoned traditional first lien subprime collateral, that include both floating rate and short duration, fixed securities.

And as of last week, we're trading at 98% of book.

Similarly, with respect to all day, we are also comfortable with our exposure.

We own $1.1 billion with the vast majority rated triple-A.

None of our structures are levered, the majority of our triple-A bonds are super senior, meaning they have more collateral support or credit enhancement than required to get a triple-A rating.

These securities are seasoned as well.

As of last week, this portfolio was also trading at 97.5% of book.

In addition, our high-yield bond portfolio of $1.7 billion, or 4.8% of total investment is at that top end of the credit spectrum.

As a result of solid credit positioning, we have taken no impairments in the quarter other than $300,000 that we are required to consolidate under FIN 46.

We have no rating downgrades of subprime or all-day related securities.

In fact, we have had very little market value impact with our overall unrealized losses on the FAS 115 declining in the quarter.

We are very pleased with how -- with how our portfolio has performed, and the benefits of a comparatively conservative risk profile.

In addition, we continue to retain a very strong liquidity position with cash and short-term investments of $4 billion.

We implemented plan dividends from subsidiaries as part of a broader philosophy to retain only required capital to subsidiary level.

In addition to normal dividend flows, we took a $550 million dividend from RiverSource Life.

And in the fourth quarter, we've already taken $172 million from our auto and home subsidiary, reflecting both excess capital and the proceeds from the sales of AmEx Insurance to American Express.

So in conclusion, I continue to feel good about the platform we've built, and the strong position we're in reflected by our performance during the quarter.

Now Jim, I'll take any question -- Now, Jim and I will take any questions you have.

Okay, we're open for questions.

Thank you.

We will now begin the question and answer session.

(OPERATOR INSTRUCTIONS) Our first question comes from (inaudible) from Stanford Bernstein.

Please go ahead.

Thanks.

One quick one, and then one a little bit more strategic.

First, Walter, did you say that if you net out all the one-time -- or excuse me, the disclosed items as you call them, it would -- they kind of added to $5 million after tax to the quarter's results?

Is that what you had said earlier?

That's the first point, and then Jim, can you just give us an update on the third-party sales of mutual funds?

I think you had mentioned a couple of quarters ago that you had the wholesalers in place and you were giving them some time to gain tractions.

We're closing in now on the end of the year.

I just want to get a sense of if that has kicked in yet or are you still expecting that to be more of an '08 issue?

Thanks.

Yes, it's in schedule C, for 2007, it adds 5 million, and 2006, it added 38.

And it's in the schedule C.

Okay?

And in regards to the second question, we are starting to see some fund in-flows in our funds for third-party distribution of our mutual funds.

Again, I think it's small and growing, but we're getting some positive signs that our products are now hitting the shelves, and we have some wholesalers on the ground, and that will further develop as the teams get all set within their distribution networks.

Our next question comes from Eric Berg with Lehman, please go ahead.

Thanks very much.

My one question has to do with the special item you reported, the disclosed item, you reported with respect to your variable annuity business.

If I -- Walter, if I heard you correctly , you were saying that there was changing in assumptions with respect to persistency and variable annuity.

And yet when I look on page C 1 where you detail your third-quarter 2007 disclosed items -- I think it's showing that the largest portion of this change in the DAC amortization schedule took part in the protection segment.

Variable annuity results are recorded in your AA&I segment, so I'm trying to reconcile your comments that most of the -- or a good chunk of the DAC unlocking related to variable annuities when it appears to have been in the protection segment.

Thank

Eric, what I was -- My statement was about persistency across the product line, while we did have a persistency in the variable annuities in an older block that was offset and we did have a small persistency change in the variable universal life.

Thank you.

Our next question comes from Tom Gallagher, from Credit Suisse.

Please go ahead.

Hi.

Just wanted to focus on your comments about the variable annuity hedge.

You lost me a little bit there.

If you can can just maybe go back through that.

The part of it I understood was you, I guess, added to the size of the hedge when market volatility spiked.

You were using a Delta hedge and you expanded it to a more robust program and that resulted in incremental costs.

But can you try and take a crack at that again?

Yes, sure.

Let me break into what's -- On the GMWB, we had our hedges in place, and it was the full, elongated static hedges, and those performed within our tolerance.

As I indicated on the GMAB, we were -- we had Delta hedges on those.

We were in the process of putting three Greek hedges on those when the volatility spike hit.

And that resulted in a $7 million hit on it, and that's about 14% of the total portfolio.

That's 2 billion out of a 14 billion account value.

And now we have implemented the program, we have 50% of the program already hedged.

So that's what happened.

Is that clearer?

That is, yes.

Thank you.

You're welcome.

And also, I guess just back on the DAC question for a minute.

The comment about higher exit rates, or higher surrenders, I guess, if I look at the disclosure in your life insurance -- for your life insurance business, it looks like your lapse rates are actually getting better, at least based on the lapse rate statistic of 5.7% for the quarter versus 6.1% a year ago.

Is there some specific block within it or something like that, or can you just, I guess, square that?

Basically, the assumption was across -- it was across the block.

It was a small movement across the block.

It wasn't any specific to this.

Just a small movement.

And this is Laura, I would like to point out the DAC unlocking exercise is looking at our old assumptions versus our new assumptions, based and informed on all the trends that we've seen, but it doesn't necessarily reflect the actual change in trends that you'll have seen from last quarter to this quarter.

It's a very long-term assumption that's built in to the DAC.

Yes, because you basically want to make sure you have the trend line, and that's why it goes over that limit.

Okay so I shouldn't just be looking at the current period lapse rate necessarily?

Absolutely not.

And then --

It's a factor, but it goes over -- you have to get the trend line.

Okay, thank.

And then just one other quick one on the tax rate.

The benefit you are describing is a $21 million benefit.

If I just apply, I guess, a normalized tax rate of 26 to the pre-tax revenue, I get closer to a $30 million benefit versus the 14.4% tax rate.

Am I not using the right kind of normalized tax rate?

Or -- can you help me think about that?

Yes, you should get to 21, because it is a $21 million benefit offer on the -- I can't really pick up on your math on that, but I can have Laura come back and take you through that, because the calculation is on 14.4, and generating a $21million benefit to give us the -- Now, you're using which rate to get that?

I'm using 26 as a normalized tax rate.

And I'm applying that to pre-tax income of 277.

No, that -- If you wouldn't mind, I'll have Laura, we'll get back to you and take you through the calculations because there's more moving parts than that.

Our next question comes from Colin Devine from Citi.

Please go ahead.

Good evening.

Walter, I was wondering if you can just could walk us through the changes to your variable DAC annuity assumptions, again.

The $55 million swing as you pointed out year-over-year, I guess, just caught me by surprise, given what we've seen the (inaudible) strength in the markets.

I would have thought that over the past year market performance had been in line with your pricing assumptions.

The lapse rates on older fixed annuity and variable annuity blocks within the industry is nothing new.

So what really changed from your end?

And then also, tied to that with the new hedge program or expanded hedge program, I suppose if you like, that you're putting in -- how is that going to impact profitability and will that also make you have to go back and relocate your DAC assumptions.

If you are talking about in the -- on the UL, Colin?

Well, you referred to the variable annuity block of $55 million swing, unless I misunderstood you, year-over-year.

Well, what we were referring to, -- that was the total swing.

That was -- if you look in 2006, it was $25 million positive, and if you look in 2007, there's a 30.

But on variable annuities.

What I believe you said -- [ talking over one another ]

It's on DAC relating to our -- all our product lines.

A large part of that swing had to do with the VUL products and the insurance as well, so it's not just on the variable annuities.

So, you're having accelerated lapses on your VUL block, are you saying?

I'm confused with this because you are talking about stuff being replaced and staying in the system.

Is it UL policies that are being replaced and staying with Ameriprise?

Is it VAs that are being replaced?

What has happened -- let me take it piece by piece and we'll go through it.

What is happening, if you look at the VUL, there's been a small change in persistency from the last -- when we last did this in 2006, the trend line has been minor change in persistency, which resulted in basically the impact to the universal lock -- increase in DAC unlocking.

Okay?

That has been a change that we've evaluated based upon the way we look at the trend lines that have come in, and yes, there has been a small change in persisting PAM on the joint variable universal life, of life block.

In the variable annuity block, there was an older block that had an impact and there was also our -- I think in the line with the industry, fixed annuities is also having persistency.

So from that standpoint, the net of the fix and the variable actually went to the older block, like I said, in the variable annuities was offset by improvements in basic fees.

And so the net effect of the variable annuity was a positive, and it was a negative in the fixed annuities, which basically offset it.

So the variable universal life, small change generated the $30 million.

Okay, so just to be clear.

We add a positive unlocking actually on the variable annuity block.

Yes.

But added to earnings the biggest DAC negative earnings impact came on the UL piece -- VUL piece, and you also wrote down some DAC on fixed annuity piece?

Yes.

And Colin, we give you the DAC by segment in the C-pages.

Right, I just want to be clear as to on the variable annuity piece because I -- my impression was that's where the hit had come, and it -- that seemed to be in contrast to industry experience, so thank you for clarifying that.

And then we, what you didn't get to yet was the impact of this new and expanded hedge program.

What is that going to do to -- will it have any impact on variable annuity profitability, and would that also make you rethink your DAC as well in the VA block?

No, the answer to the question is no.

Actually, the hedge is for a variable GMWB, and GMW life product are actually performing different tolerance, and giving us the appropriate risk return targets that we' have assessed.

So the answer is no, we are just enhancing it.

So, the extra cost of this enhancing it won't impact earnings?

No, it will not, if anything, it puts us within the tolerance wee thought it would be, and like I indicated it was the GMAB, which was basically from our standpoint, we're in the midst of putting the full hedge program in, and that's when the volatility hit.

That's where we took one-third of the impact.

It should basically allow us to -- especially as we go to the plain vanilla, reduce our cost -- of transaction costs associated with that as we move away from more customized hedging.

-- Okay.

Thank you.

You're welcome

Our next question comes from John Hall from Wachovia.

Please go ahead.

Great, I have a quick numbers question and then a broader one.

Were there any legal or regulatory costs of note that popped up in the quarter?

Not of any appreciable nature, no.

Okay, great.

And Walter, you talked about excess capital, the pace of repurchase being prudent.

You've got a billion dollars of excess capital, you've got all this cash that you pulled up to the holding capital -- the holding company now.

Real low leverage, I just wonder why the pace of repurchase is what it is?

Well, I think we're actually on -- it is prudent, but if you know me, I'm prudent.

And from that standpoint, we are on track, and we've been actually talking as I mentioned in my talk points.

We did 171,000,665 through year-to-date, and I think we're on track.

I have 700 million left through another year and a half, so I think we've actually redeploying the capital in an effective way and I think we're evaluating the landscape.

Certainly as we see the volatility take place, we take a pause, we look, but we feel quite comfortable with the positioning of the way we strengthen the balance sheet, and liquidity post, but again, we just -- we are cognizant of our environments.

And we also want to maintain a strong capital position both as (inaudible) of the environments and also if certain opportunities may arise.

You want to clarify what the certain opportunities are?

There might be an opportunity for particular firm that might be a good fit with Ameriprise strategically, so we want to have some options available so that we would be able to execute if an opportunity came along.

Great.

Thank you.

Our next question comes from Andrew Kligerman from UBS.

Please go ahead.

Great.

Good evening.

First, just a clarification on that loan provision adjustment, Walter.

I just -- I missed the number you were seeing on the call.

Was that the $23 million that's provided on the other page?

Yes, Andrew.

Okay, great.

And then with respect to some flows, maybe you could give a little color around the Threadneedle 3.1 million net out-flows and, I think you said .1 million on mutual fund net out-flows at Threadneedle as well.

I think I heard Zurich is a large piece of it, but make you could give a little color around those two pieces.

This is Jim.

What I would say is that Threadneedle continues to experience what we've seen in the last few quarters, a large part of those outflows are in the Zurich assets which are low-fee assets, and they continued in the books as they have some closed books there, and we have stuff that's in out-flows in some of the institutional business where we had recently underperformed, particularly in the UK market.

Now, performance is coming back.

And we are really optimistic that that will start to turn around there, but they are receiving good in-flows in some of their alternative product and some higher margin retail products.

So from a revenue perspective, it's still net positive even after the out-flows on a net basis if we look at it from a fee basis, but we feel that their -- their performance has strengthened this year, and their track records are still quite strong, and we think that will start to turn around over time.

Zurich assets will continue to be in out-flows, but as I said previously, they are lower fee assets and that's consistent with Zurich's decisions on their various books.

Got it.

And then just shifting over to the RAP net flows, very solid $2 billion up from 1.2 last year.

I mean, how big can that get, do you think, in the next 2, 3 years?

Well, this is a continued shift that's occurring both in the industry, our advisors and with our clients.We are actually quite excited that not only is the core program growing, but as we introduced this new discretionary RAP program, that is seeing some really good asset flows and a lot of the management of those assets are also from our Cambridge group.

So, we're quite excited that we are putting in new solution sets in this fee-based business that will continue the increase in the flows and over the last year, our total assets in RAP have increased by 33%, so we feel good about the continuation of the growth of that business.

And the last item, variable annuities, sales were about 2.5 billion versus 2.4, so you had a lot of steam in that area for a while.

Could you talk about why it's kind of flattening, and where you think you're going in terms of variable annuities sales?

Yes, first, the net in-flows are quite strong compared to what you might see in the industry on a net basis.

When we first introduced some of the new products, particularly in our channel, you are always going to get some initial extra wind.

Some of the activity recently has moved to even some of the new products we put in the marketplace, like our active portfolios, so we are still seeing good flows, but I think it has sort of come off a little bit both in the inside and outside channel -- and -- but we still consider that we will get good flows in, but I think it's come off its high mark.

Thanks a lot.

Our next question comes from Andrew Brill from Goldman Sachs.

Please go ahead.

Thanks.

Can you just give us a sense of how much you plan to repatriate from Threadneedle in the quarters ahead.

And, I guess, just secondly what the expected use of those proceeds are going to be?

Okay, what we do -- we

The specific question was how much did we repatriate?

I think you mentioned you plan to repatriate from Threadneedle in the quarters ahead, and my question was how much do you plan to repatriate?

Yes, his questions is how much are we planning to repatriate going forward --

The way we do that is we basically take, like we do in all of businesses, is understand the required amount of capital that is needed, and then our strategy is based upon looking at that required amount, looking at that total capital generation, the capital they have, and if they are planning on any acquisition or non-organic growth aspect, we then establish a target range to repatriate that back to the parent, but we do that pretty much with all the subs now using our economic capital or required capital (inaudible) capital C model.

So, that will be a continual flow coming back.

And what's the reasonable number to think about in terms of Threadneedle?

I can actually -- We basically repatriated in this, this quarter, about 30 million pounds.

I guess just a second question a follow-up to a prior question, but just in terms of seeing some of the new hedges in place on the living benefit front, given the recent rise in volatility, are you seeing any material change in the costs on putting on some of those new hedges?

Actually, we've seen it with introducing the newer -- using less customized hedges we substantially reduced our cost even with the increased volatility.

Thank you.

Our next question comes from Sam Hoffman from ADAR.

Please go ahead.

Hi.

Can you comment on general business conditions for your business in terms of how much it might have hurt you in the quarter, If at all, and also how much it might help you going forward?

How much what will hurt us or help us?

General business conditions.

Meaning in the consumer market?

Uh-huh.

Well, we -- we saw as you would imagine, the greater market volatility would always affect a client's interest to invest.

Having said that we didn't see much of that during the quarter.

We have more of a seasonality effect.

That volatility came in and was short duration, so to speak.

I think if the markets continue to be pressed for a longer period of time that we'll have an effect on the retail consumer and investor.

Having said that, one of the things we do like about our model, and that we are actually deploying even more fully is our advisors to actually through their finance planning have the more consistent methods for client investment and management in a diversified fashion.

So I think if the markets slow and go down actually, it will always have an effect.

Having said that, we didn't see much of that effect yet in an impact to our clients.

Okay.

Because you mentioned seasonality, and if you look at the year-over-year, your distribution fees grew very significantly.

I think about 20%, but sequentially, they are down significantly, so --

Yes.

That's the seasonality.

Okay.

And my other question is on page 9 of the supplement, the benefit plans and loss in settlements expenses were 150 million in the asset accumulation segment, and that number is -- it's much higher than it's been historically, and I was wondering how we should project that going forward, whether they are offsetting items elsewhere in the income statement, and kind of what we should think about that number.

Sam, this is Laura.

I think if you go farther back in the supplement to the C-pages, the C-1 page, it gives you the detail of where the VA writer, the volatility impact of the VA writers.

So the big negative was in the benefits line.

You'll see it impacted the DAC and the net investment income, but all of those line items are detailed on that page.

And it should be back to the number I talked about.

Okay.

And just following up on the other questions, would you say that, what was described as an one-time item in the quarter, is that an item that we should expect to continue going forward this variable annuity writer, hedge impact, if volatility remains as high as it's been.

I think , listen I -- forecasting becomes interesting.

It was the change, I think, that was the factor from that standpoint.

Clearly let me say I think we have gone a long way, by putting the hedging on to the GMAB, so that certainly should insulate us, and we do believe that we've actually made some tweaks to our model, both from as I indicated on a core standpoint, but also in effect standpoint that I think we will be performing at levels within our tolerance.

Again, markets as you've seen can jump, but I think we feel we are well positioned, and we're certainly well positioned as appears against our

And one more question, corporate expenses, the other expense was again a bit high this quarter relative to history, and so maybe you could just comment on that a bit.

It was 44 million in the quarter.

Actually, I think it's in line, and I think it is affecting just the interest cost and we just didn't see anything unusual into the quarter.

And in total, other is relatively flat?

Sorry.

I'm looking at the other -- I see, in the corporate, the last two quarters, it's been significantly higher than previous history.

Actually, if you go back, it's 36 versus the 44, and again, it's -- There are, it's pretty much in our range, so we didn't see -- We had to dip in the -- certainly in the second quarter, which we spoke about, but if you go back through it, it's in the 31, 36 range and it's 44, so, I'll's take a look, but I don't think there's any unusual factors in there.

I recall that on the last quarter conference call, we indicated we thought it would be about an average between the first quarter, which was low, and the second quarter, which was high, and I think that's about where we came out.

Okay, thank you.

But, again, Laura will take a look.

Okay, our next question comes from Jeff Schuman from KBW.

Please go ahead.

Good evening, a couple items.

First of all, we are coming up on the fourth quarter, and I'm wondering how hedge fund performance looks and whether we should think about significant year-over-year change, incentive fees there, and then I'll follow up with a couple other things.

On the hedge funds right now, we went to the end of year and the reason we wait for the end of the year is we want to actually see the realization of it.

They are tracking in reasonable ranges, that is all I can say at this stage.

We just don't forecast on that number.

Okay.

And in terms of the holding company, liquidity, you talked about the 550 dividend, and 172.

What is sort of the grand total holding company liquidity position at this point?

I do not have -- at the parent level, I believe we are sitting, I'll have Laura check, but we're over a billion dollars.

Over a billion, okay.

And post the subsidiary dividends, what kind of RBC are you targeting in the insurance subs at this point?

Right now -- Laura do you have that?

It's still five, I think.

It's over five right now, even with the dividend.

And sort of what, what can you -- what's your tolerance, I guess on the downside?

The tolerance, obviously I think, in various stages depends -- I guess you have B-car, you have RBC, you have different factors, but certainly in exception to moody a 350 range is what they have said.

But again, it has a multitude of factors that come in, and on the B-car factors, it's in the 150, 160 range, so again we review through a multiple of factors, but we certainly, at this level, feel we are certainly above that.

And in terms of how the RBC is moving -- Last year, you essentially released a lot of required capital as the fixed annuities ran off, fixed annuities continue to run off this year so that, is that still also a pretty big factor in how you're able to dividend, or --

That is certainly a factor.

Okay, thanks a lot.

You're welcome.

Our next question come from Eric Berg from Lehman.

Please go ahead.

Thanks very much, if I could hit one more time, the issue of profitably on variable annuities.

I still don't, I just don't understand how it could happen on the GMAB that you're adding these other hedges, I guess would be Vega and Rowe for volatility in interest rates respectively, and it's not somehow it's not affecting profitability.

I heard your point about moving within intolerances -- maybe you could elaborate on what that means.

But how do you set up a hedging program and nothing happens to profitability?

I just don't understand why how that could be free.

I think what Walter just mentioned -- was that because we're moving to more plain vanilla hedges on some of the GMW that we have cost savings even though we are adding some additional hedges on the GWAB.

Thank you.

So -- Yes.

I certainly follow what Jim said.

Were you going to add something is, Walter?

No, just wanted to make sure you were clear.

Very clear.

Thank you.

All clear now, thank you.

You're welcome.

Our next question comes from Vinit Sethi from Greenlight Capital.

Please go ahead.

Hi, guys actually it's Vinit Sethi.

Three questions.

One is can you comment in aggregate on your current excess capital position.

Second, can you explain again why the field comp was up 22% as compared to 14% growth in the GDC in the quarter.

And third, can you address one more time whether, based upon what you know today about market volatility, whether the catch-up in the quarter represents an expense that you would recur or not recur in the current quarter, based on, if nothing else, changes from today as with respect to market volatility.

All right.

Go ahead.

Okay.

Just repeat the first one?

Your current -- your estimate at least on the, in terms of a range on the current excess capital position.

Excess capital position, basically remains in excess of a billion dollars with paying, certainly buying back the shares and with the capital needed to support the business.

It remains over a billion dollars.

On the feel field comp, what you have is really the fact that it is 22 versus the 14 is the fact since there is lower insurance in annuity as a proportion there's less deferred and that creates that situation.

Because less is being deferred to DAC, okay?

Is that clear?

More is being kind of paid out currently?

That's correct.

Yes.

More is being reflected in a period charge, let me put it that way.

(Inaudible) expense?

Yes, but now you also do get offsets because less in the revenue size also being taken up DAC, so it's not just one side of the equation.

The specific answer to your question is more is coming through on the period chart.

Right, and how much is the DAC offset to get it to the apples to apples?

We -- We just don't break that out.

All right?

Okay.

We haven't.

Market volatility.

The market volatility.

We actually believe we are well positioned now, and if markets stay where we are right now as I indicated by switching over to the hedge program, we've actually neutralized a lot of the impact from a cost standpoint of the volatility by lowering our transaction cost.

So we actually feel we are in good position.

So -- Okay.

So, just one more -- turning back, in terms of the income statement related to the growth in the field comp, are you showing margin leverage or operating leverage on the underlying business?

Actually we feel on a pre-tax -- pre-tax margin when we've adjusted what all we have disclosed, we feel that we are -- we've actually versus last year, we've actually improved (inaudible) on margin, and we're certainly evaluating and track that because you are getting a shift.

Right, but is there at all a lag impact between the field -- between incurring the field comp expense and then getting the benefit of the business that was generated that kind of created the compensation?

Since we're not deferring eventually you don't amortize?

Is that we are you're going?

Right.

Eventually, yes, to some degree.

Yes.

Okay.

Got it.

Thank you.

Our next question comes from Sam Hoffman with ADAR.

Please go ahead.

Yes, I just had the same question on field comp, so you just answered it.

Thank you.

Okay.

And our next question comes from Tom Gallagher with Credit Suisse.

Please go ahead

Hi, yes, just one question on the contribution margin in AA&I.

I know the reported number was 47.9.

Can you talk about what kind of that normalized number was, because I know there were some one-timers in there.

It's -- the normalized number is pretty much tracked -- you are talking about contribution, right?

Exactly.

Pretty much track, it's 53.

53%.

Okay.

So it's running at 53.

Yes, and to give you -- I'll give you a number for the second quarter of '07, 53.8 for the compare to third quarter '06, 52.8, and of -- for the third quarter, '06, 53.

So, it's in track in that range, and then, of course, you get the mix shifts.

Right,.

And the question I had is as we see the employee advisors base decline, I presume that's a positive from an expense leverage standpoint.

Where do you think we might see that contribution margin go to, assuming you're anticipating a continual decline in what I would view to be an expense drag?

Well, we are re-engineering it and what we are doing is we are improving recruitment aspects, and actually from that standpoint, it will, over time obviously if successful, will increase.

So, but you could have a lot more effective and higher retention and an improved P-1 situation, so we haven't forecasted it that way.

But certainly it, is -- we are getting the expense benefit as we re-engineer that.

And we are very much focused on the overall pre-tax margin, and want to control our expenses tightly even though we want to focus on growing the fee-based revenue business, so that's what we are taking into account.

We are going to experience some mixed shifts, we are going to experience some changes because of product flow, what is DAC and what's not DAC, but we are looking for overall PTI improvement, based on how we're managing the business.

Okay, thanks.

Okay.

(OPERATOR INSTRUCTIONS) Okay, at this time we have no further questions.

Well, I will be in my office all evening.

Thank you once again for calling.

My number is (612)671-2080.

And I also hope to see you at our financial community meeting coming up in November.

Thank you, everyone, for the participation on the call, and as Laura said, hopefully, if there's any -- anything that you need, please let us know.

Thank you very much.

Have a great day.

Good-bye.

Thank you ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may all disconnect.