阿默普萊斯金融 (AMP) 2008 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the first quarter 2008 earnings call.

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

Later, we will conduct a question-and-answer session.

Please note that this conference is being recorded.

(OPERATOR INSTRUCTIONS) I will now turn the call over to Ms.

Laura Gagnon, the Vice President of Investor Relations.

Ms.

Gagnon, you may begin.

Thank you.

Welcome to the Ameriprise Financial first 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'd be happy to take your questions.

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

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

Some of the statements that we may make on the 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 cause actually results to be materially different from forward-looking statements can be found in today's earnings release, our 2007 annual report to shareholders, and our 2007 10-K report.

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

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

Good afternoon, everyone, and thanks for joining us for our first quarter earnings discussion.

I'd like to begin by acknowledging that the markets were very challenging during the quarter, and they did have significant impacts on our results.

We're a market-sensitive company and we derive a large portion of our revenues from fees, so when we experience a 10% decline in the equity market as we did in this quarter, our results suffer.

In addition, as you know, the credit markets were just as challenging.

However, we have always taken a conservative approach to managing risk.

As a result, we had minimal impairments and our asset qualities remain strong.

Our financial foundation is sound.

While our earnings were not as high as we would have liked, we feel good about our business and our ability to grow the Company.

We serve clients in long-term financial planning relationships and our core client retention rate remains very high.

Client activity has slowed along with the markets and clients have moved to higher cash positions.

Our advisors are working closely with their clients and we anticipate that they will reinvest when they see signs of stability.

We remain very focused on executing our strategy and achieving our on average, overtime growth goals.

We've been through tough markets before and we have emerged from them stronger.

So my message today is this.

While a weak market certainly hurt our earnings, we continue to feel good about our overall positioning.

For the quarter, net revenues were up 3% to $2.1 billion.

Earnings per diluted share was $0.82 which was down $0.08 per share, compared to our adjusted per diluted share for the first quarter of 2007.

Our adjusted ROE was 12.2%.

We have included a table in the earnings release to spell out several factors that impacted these results and Walter will take you through some details of this disclosure shortly.

We don't anticipate including this table every quarter, but we wanted to help you understand the market and other impacts given that the environment was so turbulent.

Now, I want to focus on the strength of our financial foundation and our operating performance.

Our balance sheet continues to perform well.

We continue to hold very limited exposure to the most distressed asset classes and we remain comfortable with our overall exposure in the current environment.

In addition to our balance sheet strength, we continue to maintain over $1 billion in excess capital.

Since our spinoff, we returned 90% of our adjusted earnings to shareholders through buybacks and dividends, and in 2007 we returned more than 100% of our adjusted earnings.

Despite that return, we hold more excess capital now than we did a year ago.

In addition, we announced today that our board has approved a new $1.5 billion buyback authorization over the next two years.

That follows a two-year $1 billion authorization announced last March that we have nearly completed.

We are also leveraging the flexibility we created to help us navigate through the market downturn.

We told you last quarter that we're in the process of implementing a program to reduce expenses and that effort is now in place.

While you can see some initial traction from the program in our G&A expenses, the benefit has not been yet fully realized.

It's important to note that these savings are in addition to our normal re-engineering programs.

There's also important to note that while we are managing expenses tightly so we can maintain our margins, we continue to invest prudently in our growth prospects.

We believe our opportunity continues to be compelling and we expect to emerge from this downturn in a good position.

Now, let me review our operating performance for the quarter.

Our basic value proposition is that we serve the mass affluent and affluent in personal financial planning relationships.

Financial planning remains important for our clients during all parts of the market cycle.

Even with the current challenges of financial plan activity remains solid and we continue to achieve good advisor productivity.

Clients assets have decreased slightly compared to a year ago and compared to the sequential quarter.

These declines were the result of market depreciation.

In the advisor force, we're growing the franchising channel at a measured pace and continue to have very strong franchisee advisory attention.

In fact, the number moved higher this quarter to 94%.

At the same time, we're improving the profitability of our employee channel by bringing in fewer recruits, instead focusing on candidates who are more likely to succeed.

We expect the decreases in our employee advisor count this low as this program is fully implemented.

We continue to provide improved advisor marketing support and technology tools, as well as the full range of products advisors need to serve their clients.

In fact, during the quarter, we announced a significant addition to our product mix, the new Ameriprise financial debit and credit MasterCards.

We also announced a new rewards and recognition program for our clients which is designed to help advisors deepen relationships with their high-value clients.

As part of our commitment to advisor support, during the first quarter we conducted our largest training program ever, bringing the majority of our advisors to Minneapolis to help them understand and implement the new tools and enhanced capabilities we're providing them.

The program was extremely well-received and we're following the sessions with long-term reinforcement in order to deliver our ultimate goals which are consistently compelling client experience, more productive advisor practices, and growth.

Now, I'll move onto the product areas.

Owned, managed and administered assets declined 5% compared to a year ago and 6% compared to the sequential quarter due to market depreciation, and the continued outflows of low margins Zurich-related assets at the red needle.

We continued to generate strong performance in RAP accounts with assets up 10% over a year ago to $90 billion.

RAP assets were down compared to the sequential quarter as market depreciation more than offset continued relative strength and flows.

Overall, RiverSource funds flows were negative $636 million which we think is primarily the result of clients shying away from the current market volatility and moving to cash.

While our three and five-year investment performance track records remain strong, short-term RiverSource performance has declined for both equities and fixed income.

We have taken a general view that rates will rise as the flight to quality loses favor and inflation pressures increase.

The portfolios in general are positioned to benefit from a narrowing risk premiums and to realize the benefits from the recent fiscal and monetary stimulus actions.

While this has hurt us in the shor-term, we believe it was positively affect our performance over the medium and long-term.

Threadneedle's results for the quarter were highlighted by strong investment performance.

In fact, Threadneedle received two important 2008 Lipper awards for best overall group and best U.K.

equity group.

In terms of flows, the outflows of Zurich assets accounted for the bulk of Threadneedle's outflows.

The variable annuity business generated net inflows of $851 million for the quarter with total variable annuity ending balances of $54 billion.

At the same time, we continue to experience outflows in fixed annuities as a result of the low interest rate environment.

However, we think we have an opportunity in the current market environment to offer clients some appealing fixed annuity products while generating good returns on our capital which should help us slow outflows.

Our insurance businesses produced another solid quarter with life insurance enforcing increasing 6% over a year ago and reaching $189 billion.

Total protection segment premiums increased 5% despite the generally slow growth environment for these products.

Overall, our business metrics were clearly affected by the very weak market conditions in the quarter, but it is also clear that our underlying business remains solid.

We're confident that we have a compelling long-term opportunity.

Our research clearly indicates that our target market, the mass affluent and effluent want personalized financial planning and that's our strategy.

Since our spinoff two and one half years ago, we've been building our brand, strengthening our foundation, and positioning the Company for long-term prosperity.

We're here to serve our clients across market cycles.

We're managing the Company through this economic and market downturn the way we're encouraging our clients to manage their own financial plans.

We're being prudent and we're staying in the course.

We investing in our brand, product development, advisor support, and our client experience.

Why?

Because we have a significant market opportunity and we have demonstrated the effectiveness of our strategy.

We're committed to executing it for the long-term.

So in total, I continue to feel good about our position and our future.

Now, Walter will take you through some more details from the quarter, and after that we'll take your questions.

Thanks, Jim.

As you heard from Jim, it was a difficult quarter driven by the significant decrease in the equity markets, compounded by the continuing liquidity and credit market's dislocation.

While we have instituted the appropriate actions to mitigate the impact, a 10% equity decline cannot be offset within the timeframe of a quarter.

In my remarks, I am going to address the asset impairment, equity and credit market impacts within our results, the positive impact of our tax planning, insight into the implementation of our expense plan to improve margins, and finally, an overview of the quality of our balance sheet liquidity and strong capital position.

We are also providing supplemental information in our earnings release to give insight into understanding the market driven underperformance in the quarter.

So let's begin with the asset impairment.

In the first quarter, we booked a write-down due to the difficult credit environment.

We had $24 million in pretax net investment losses, primarily due to other-than-temporary impairment, impairments of three AA-rated all-day mortgage-backed securities which impacts the EPS by $0.07.

This compared to a $0.02 EPS benefit from net realized gains last year for a net swing of $0.09.

Remember that this impairment is materially lower than the industry has experienced and represents a small fraction of our overall balance sheet.

As we discussed in prior quarters, while we are subject to mark-to-market volatility, the quality of our portfolio still remains sound and has held up quite well.

We continue to analyze and monitor it, and are comfortable with our exposures which I'll cover in more detail shortly.

Next, when we issued our 2007 10-K, we outlined our company's sensitivity to equity market movements.

This disclosure reflected a hypothetical 10% change in the S&P 500 that happens at one point in time and which remains the same for a one-year period.

Pretty unlikely.

If this were to happen, we would forecast a $141-million pretax impact to earnings for that one-year period.

The reality is what happened in the first quarter of 2008 is almost as dramatic as our hypothetical case.

In the quarter, we experienced a 5% year-over-year decrease in the average S&P 500 with a 10% decrease within the quarter.

The [Footsey] 100 dropped 8% year-over-year and 12% within the quarter.

This real world scenario generates approximately $130 million in negative full-year PTI earnings impact versus the $141 million in our 10-K.

Now, because of the front loading of the impact from DAC amortization, we incurred almost $50 million in negative impact just within the first quarter compared to $32 million if you use a simple average.

In addition, not reflected in the 10-K estimate for full-year impact, the $140 million was the market exposure of an additional $0.09 associated with equity marketed impacts to our seed money and owned head performance, the negative impact of our variable annuity hedge program, and the year-over-year impact of yield declines on our $4 billion short-term liquidity pool.

To summarize, the first quarter was impacted by $0.07 in after-tax net realized investment losses, $0.14 related to declines in management fees and the impact of DAC amortization, and $0.09 related to market impacts on short-term investments, seed and owned hedge fund investments, and the net effect of our variable annuity hedge program.

The amount of this impact is $0.30 in the quarter.

Going forward, assuming a steady equity market, we would expect to recognize the remaining $80 million of the full year, $130 million equity market impact, as well as approximately $45 million from lower short-term interest rates.

So under this scenario for the balance of the year, the pretax earnings impact would be a negative $125 million, not accounting for any proactive actions to improve margins on our part.

Now, as if the markets weren't enough, during the quarter we adopted FAS 157 which had a positive $6-million impact.

Beginning in the first quarter of 2008, we are required to use a credit spread in discounting our VA rider liabilities.

Given the current widespreads, this new methodology could significantly increase the volatility of this liability valuation.

Now, let's turn to taxes.

On the positive side in the quarter, we generated a reduction in ongoing tax liability of $0.16, associated with exceptional tax adjustments relating to the release of tax reserves.

While this significantly lowered our effective tax rate in the quarter, we expect our effective tax rate for the balance of 2008 and the full-year 2009 will be in the 24% to 26% range.

With regard to expense management, we initiated additional expense management programs to supplement our plan re-engineering programs.

These programs, however, contemplate a continuation of ongoing investment in growth and infrastructure while reducing certain G&A expenses in light of market conditions.

Our G&A expense is under last year and down substantially sequentially.

Going forward, we expect to be very focused on managing expenses to bolster margins during this challenging period.

This leads me to my final point of our consistent balance sheet strength.

As I said, we continue to have a very high-quality portfolio that has performed exceptionally well under these market stresses.

We have no significant portfolio allocation change since we've walked you through the details last quarter.

Despite historical dislocations in the fixed income markets, we remain comfortable with all our exposures, including commercial real estate -- excuse me -- commercial real estate mortgages, residential mortgages and asset-backed securities.

We've updated our website with all the relevant information.

Now, I would like to spend some time talking about at all day and subprime mortgages.

The amount in this category are $1.1 billion and $247 million respectively.

There have been material changes in the pricing of various components of these portfolios in the quarter which we believe is primarily driven by liquidity and technical market issues and not fundamental credit deterioration.

For these securities, we have an internal risk assessment process.

This risk evaluation considers various factors including loan quality, structural protection, collateral enhancement, seasoning, geographic concentrations, and our assessment of current and future trend lines.

In the first quarter, we recorded other-than-temporary impairments of our securities in the highest risk category.

As mentioned previously, those were at three AA-rated, Alt-A bonds.

The remaining book value is approximately $13 million.

Our internal watch list, the next level down, consists primarily of AAA securities backed by alt-A collateral with a book value of $135 million and a market value $90 million.

We did not take impairments in the first quarter, based upon our assessment of the integrity of the underlying cash flows and the current market conditions.

The remaining alt-A and subprimed-backed securities are primarily AAA-rated securities with strong underlying cash flow integrity.

These securities have a sound level of credit enhancement versus the collateral risks which provides ample cushion even in the event that housing market conditions worsen from today's level.

We remain comfortable with the investment portfolio and will continue to closely monitor securities we hold.

We have more than adequate liquidity to hold those securities to maturity.

In fact, in terms of our liquidity position, we maintain substantial liquidity with close to $4 billion in cash and cash equivalence on hand, up 60% from a year ago and essentially where we were last quarter.

Our capital position remains strong.

Jim mentioned we have increased our excess capital position even while we have repurchased our common stock.

Our debt to capital ratio is 21%, 17% excluding nonrecourse debt and with equity credit for our hybrids.

In closing, I'd like reiterate that while we have built a diversified business, we remain sensitive to equity markets.

It was a tough quarter for us, dealing with a 10% drop in the equity markets.

That said, I am comfortable with our risk management, our decision framer, and our ability to manage through difficult environments.

The strength of our balance sheet and capital positions provides us with a unique positioning and flexibility to weather the volatility of the market.

We will continue to be prudent in our approach to growing the business over the long-term while diligently controlling our expense base and exposures.

Thank you.

Okay.

We're open for questions.

Thank you.

We will now begin the question-and-answer session.

(OPERATOR INSTRUCTIONS) Our first question comes from Suneet Kamath from Sanford Bernstein.

Please go ahead.

Great.

Thank you.

Two questions please.

First, in terms of the market sensitivity if I just look at your earnings release, I think it's page two, you talk about$0.23 per share impact in the markets and then $0.09 per share expected to continue if markets remain at current levels.

So where is that mark-to-market?

In other words, is that as of last week or as of the end of the first quarter?

When you say current levels what specific level are you referring to?

Then the second question is just on --- well maybe I'll just throw this out there --- on the excess capital.

You've mentioned twice in your comments that the excess capital is higher than what it was recently after buying back stock, but you're still using this commentary of over a billion dollars, so I'm just trying to understand what that means.

Is that just the excess risk based capital?

Does it include debt capacity?

When you say the excess capital has gotten better, but you're kind of phrasing it the same way.

Why aren't you saying that it's actually higher than a billion, billion and a half, or whatever it actually is.

Thanks.

To answer your question, that was as of 3/31 that we did that calculation.

As relates to the excess capital, we are not counting debt capacity within that.

Obviously, the increase in the -- in our capital position relates to the capital generation we have and the capital that's required to managing the business.

Which as we've indicated, is less as we are growing our lower capital intense activities.

When we deduct the amount that we've been using to repurchase the shares, it is growing.

Yes, we are still using in excess of a billion dollars, but it has nothing to do with our debt capacity.

Okay.

Again, the 3/31/08 is where you marked it so the 4% market increase then is not in that number?

That is correct.

Okay.

Thank you.

You're quite welcome.

Our next question comes from Andrew Kligerman from UBS.

Please go ahead.

Hey, good evening.

A couple of questions.

I guess the first one to start off, I was very interested in your general and admin year-over-year reduction of 5% or $32 million.

Walter, you just said that you were going to, quote, decrease certain G&A in light of the market conditions, unquote.

Could you give us a little more clarity around exactly what you're able to decrease and what your plans are for that line item for the balance of the year.

Can you keep it constant?

Sure.

Then I'll follow-up with a question.

Sure.

What we have been doing, as Jim has indicated, we certainly have our regular re-engineering program and certainly looking at the market conditions.

The things that we are looking at is the amount of advertising expenditures that really in evaluating the effectiveness in these markets.

Certainly, we are prioritizing now some of our investment spend.

Even though we're continuing to invest in the activity, we are prioritizing that and also looking at certain number of expenditures as relates to staffing and noncore customer-facing activities.

Walter, can you keep this expense level at sort of a flattish level from here out for the year on a quarterly basis?

Is that the idea or is that possible?

Yes, that's the idea.

Great.

Now shifting over just real quickly on the property casualty business, the loss ratio at nearly 80% combined at 96.6%, pretty elevated relative to prior quarters.

The thoughts on the rise in that number and your feeling about the outlook over the balance of the year.

Right now -- while it has elevated, we certainly feel we have been able to maintain our -- certainly our rates and our -- what -- and our performance on the basic claims has been good.

We anticipate that we'll be able to stay within our ranges during the year.

Ranges meaning like a --

As we --

Like a loss ratio?

So, in other words, what range do you think you can keep the loss ratio inside?

Is there some number you could tell us?

Andrew, this is Laura.

I don't think there's anything unusual going on in the first quarter, except for maybe a small amount of storm.

I think you can assume that where we're at today would continue, barring any unusual events.

Okay.

Then just lastly, on the performance, I thought it was kind of an interesting comment that --- I guess, Jim, you were sort of talking -- it sounded to me like your RiverSource division is taking -- or has taken a very bullish stance on the market.

That's hurt the one-year performance and it sounds like they're maintaining that stance.

I don't know, I mean, are you concerned about this?

What are your thoughts on the outlook for performance?

Why would you expect it to turn around?

If the markets remain weak, we could be in a very difficult situation with their performance.

So what gives you confidence in this group?

Yes.

I think we're monitoring the situation closely.

Of course our positioning and our view, and economist view is that there are be inflationary pressures as we move further into the year.

The economy would pick up a bit based upon the stimulus packages, and so our portfolios have been set.

Now, that has negatively affected us in the first quarter, but that that was the reason.

and so we wanted to explain that.

But they feel that they're monitoring the situation closely, making some adjustments to the portfolio, but still feel that that's their positioning at this point.

All right.

Thanks a lot.

Thank you.

Our next question comes from Tom Gallagher from Credit Suisse.

Please go ahead.

Hi.

Let's see, just two earnings questions.

Let me just start with asset management.

Segment reported $18 million of earnings.

I know you highlighted some of the tax to the market.

I guess the first was seed investments hurt you by $10 million and then management fees were down $10 million.

If we kind of go down that path, it would imply, if we assumed the seed investments came back, that normalized earnings were closer to (inaudible) million.

Walter, is $28 million realistically a normal number?

Or are there any other big unusuals pushing that number down?

Because from last quarter,obviously, a pretty big swing.

I think if you go to the table, I think actually we have taken it from the $18 million to $38 million.

Then of course, we are making investment outside distribution this year which is substantially higher than last year.

Which we think is -- and we continue to make that -- we think it's a prudent investment.

Tom, this is Laura.

I'd just also like to remind you that in the fourth quarter, we record our hedge fund performance fees for Threadneedle which would have some of the sequential impact.

Yes.

Walter, I was just only adding back ten, because presumably the depressed management fees, assuming the market remains where it is, would be sustained.

Yes.

If that is the case, you are correct in that assumption.

But we were talking before the market, since we did this 3/31.

It was already up four.

Understood.

But if we try and look at a variance in analysis of earning more than $100 million in 4Q to let's call it $38 million this quarter, does that imply that the combination of performance fees plus seed investments, if you looked at just from 4Q to 1Q added over $70 million to earnings?

Was the number that substantial in 4Q?

I think there's two things taking place.

One, as Laura mentioned, obviously in 4Q we have the hedge fund.

The other thing is, look at the market drop between the fourth Q, and that is fairly substantial and it will affect us.

But it is a factor of the management fees are subject to the market impacts.

Okay.

The other question I have was on the annuity business.

There were several add-backs there.

One of the largest ones was DAC and DSIC.

It looks like the add-back there was $25 million.

At least that was described as being depressed due to the market being weak.

Now, if I look at the actual amortization of DAC for the quarter, it was actually -- the amortization rate was actually down in 1Q versus 4Q from about $80 million to $79 million.

i just want to get a sense for when you look out prospectively, is that amortization really going to drop by that much?

Because, actually, the DAC balance went up in the quarter.

You actually wrote -- it actually got written up a little bit due to, I guess --

Yes.

Tom there's actually three things going on and the way to think about this.

One is just the normal amortization of DAC.

The other is the aspect where we're reforecasting gross profits as impacted by the market which results in higher DAC amortization --- excuse me, in the period where you have the point-to-point market change.

Then the third, is the DAC offset from the VA rider liability.

So if you take -- we disclosed in the supplement the change in the hedge asset, the difference between that and the change in the VA rider liabilities, about 50% of that difference is generally offset in DAC.

That's the positive you're seeing offset the negative this quarter.

You have to look at all three components to really understand those movements.

Yes.

As relates to DAC main version, that is impacted from the January 1 to January 31 which is a 10% impact which you get that effect in this quarter.

If the rates stay this way, there should be minimal impact in the balance of the year.

I just -- just to simplify it.

When I think about this going forward, is it fair to say if the market does its normal up to 2% per quarter, let's say, prospectively, that you'd only be amortizing the 79 minus 25, so you'd get closer to like 54?

Well, let me say it my way.

If the market went up, you would obviously then have the reverse of the mean reverse negative we took.

It was based among percentage coming back.

Okay.

Tom, I'll be happy to walk you through some more details.

I'll follow up.

Thanks.

That is strictly subject to the market movement.

If the market improved, you would obviously have the reverse effect.

Okay.

Thanks.

You're welcome.

(OPERATOR INSTRUCTIONS) Our next question comes from Jeff Schuman from KBW.

Please go ahead.

Good afternoon.

I wanted to come back to the issue of the VA rider hedge impact.

If I'm looking on page ten of the press release, I see a VA rider hedge impact of negative $7 million, but that is apparently negative -- that's the net of the positive impact of implementing FAS 157.

If I go to page 19 of the supplement, it looks like in the variable annuity business, a cumulative effect of accounting change associated with FAS 157, was $36 million to the positive.

Would I be right in assuming that the VA rider hedge impact was $43 million gross?

Then net of the 36 is how we get to $7 million?

Is that correct?

No.

Jeff, if you go to page 18 of the supplement.

Yes.

I can walk you through this here now, but we give you the change in the hedge and the change in the mark-to-market for the liability.

FAS 157, basically an implementation from January1 to March 31, changed how you value those liabilities.

That impact is embedded in that change in liability for the derivatives.

Okay.

Okay?

I guess just maybe it's cutting to the point.

What was the VA rider hedge impact in the quarter, excluding this implementation of FAS 157?

You're asking us really to back out the change in how we value the liability and how it would have looked if we valued it under the old methodology?

Well, maybe I'm not understanding.

But to your point as we put down on our schedule, the VA rider hedge impact was a minus seven and that included -- that's inclusive of the six.

I'm not sure where the six comes from.

It's on the foot --

It's in the footnote.

Just take a look at the footnote where it says the DAC impact.

Included in there is the 157 impact which is a six positive and included in -- if you take a look at the pretax on the VA rider impact, it says it's seven inclusive of the six benefit.

Okay.

I'll have to follow-up later because I'm still seeing the 36 impact --

13.

On page 19.

Okay.

In other words, the VA rider hedge impact was not terribly out of balance of what you've had in recent quarters.

That is correct, and actually which reaffirms the way we evaluate was actually pretty spot on.

Okay.

Next question, you do have this substantial $4 billion exposure to short-term investments that seems to be costing you a bit given where rates are.

Is there any possibility now of lengthening that portfolio and offsetting some of that impact?

Yes.

As we said before, the answer is yes.

What we -- basic premise on that is we feel now we can be compensated for taking the risk and prudently now reinvesting that out.

Not all of it obviously, but certainly a portion of it.

That effort is underway currently?

That is correct.

Okay.

Then lastly just to be clear, it sounded like employee advisor retention was good and yet the number of advisors dropped, I think by a few hundred sequentially.

Is that all just due to lower recruiting?

Is that the idea?

Yes.

It's really the franchisee actually, is net-positive and the retention even there has gone up higher.

It's really in the new advisor, the novice recruitment where we have continued to scale back.

So the numbers that you're seeing is because we significant reduced the number of new hires there.

Okay.

Great.

Thank you.

(OPERATOR INSTRUCTIONS) Our next question comes from Eric Berg from Lehman Brothers.

Please go ahead.

Thanks very much.

I was hoping question could go back to page ten of the release where we're talking about the market impact in the quarter.

If you could identify the specific line items that in turn comprise the $0.09 a share that you think will carry on depressing earnings if the market stays at current levels, at least if I read the narrative of the news release correctly.

Yes.

That's basically --- this is Laura, Eric.

That's basically the two components, the lower asset levels on the management fees.

$0.06 a share?

And the investment -- excuse me -- the lower interest rate on the cash and short-term investments.

Would that be the first line item in each of the two set of panels of data captioned market impact, the $0.06 a share and the the $0.03 a share?

That's correct.

Then Walter, I just want to make sure I understood.

In the sort of body of your prepared remarks, you were talking about, and perhaps this was relating to Suneet's comments questions earlier on in our conversation, you were talking about the ongoing impact of the market and you were citing certain dollar figures.

Can you go over again the thought that you were trying to get across and the numbers that you used to communicate that?

Do you know what I'm talking about here?

Yes, Eric, I do.

What I was characterizing from that standpoint was that it was two components.

If you're talking about one, what we talked about in the 10-K.

What I was saying in the 10-K, we specifically went over that we would have an event and it would be a 10% drop.

That would drive $141-million PTI impact from day one for one year after.

Okay?

Yes.

What actually happened in the quarter was we had a combination of pretty close to that with the S&P at 5% on a year-over-year.

But as we indicate, the DAC is driven by the change in the quarter which is 10%.

Then the footsey had an 8% average and a 12% in the quarter impact which pretty much modeled that impact which brought -- instead of $141 million that's in the 10-K, it brought it to around $130 million.

In the first quarter, as you can see, taking a look on page ten and looking at the $49 million of the -- where it says market impacts, items estimated in 10-K, we incurred $49 million of the $130 million.

That was the point.

So we -- because of the DAC front-loading that we took the majority of the impact there.

Whereas, if you will just divide the 130 by 4, again I'm not saying you would, you would come to 32 or a difference of $17 million.

Is that clear?

Yes, it is.

Thank you.

Thanks, Eric.

Our next question comes from Tamara Kravec from Bank of America.

Please go ahead.

Thank you.

I have a couple of questions.

First, I guess just a broader question about your hedging programs.

Just in terms of what we have seen in the first quarter, how do you think those are holding up?

Would you make any changes?

Is there anything you're seeing in your programs in light of having this test in the first quarter.

My second question is on VA sales and what you're seeing there more broadly.

Your sales were above $2 billion which seems pretty good.

Your surrenders actually improved which is interesting.

I'm curious what you're seeing in terms of consumer activity, both on sales and withdrawals more broadly.

On the hedge program, we actually implemented a new model in the first quarter and we are actually quite pleased with its performance.

We are expanding its scope as relates to --- other than indices up, then the S&P which gave us broader coverage.

We are quite comfortable with its performance in the quarter, even despite the volatility and obviously, we'll continue to perfect it.

But we feel very good with the current performance characteristics.

On the VA sales, sales have slowed from where we were a year ago based on, again, the equity markets and people's appetite at one level.

But they're holding pretty, pretty good overall for us on a net basis as we highlighted in the quarter.

Are you -- I guess, are you getting a general sense that despite the equity market volatility that you can sell into this market and consumers are not as apt to withdraw because of fees or surrenders or?

No, we're not seeing people withdraw at this point in time.

As I said, I think the sales level has slowed a bit from where we were a year ago because of the equity markets in the last two quarters, but we do feel that that will come back again as markets either stabilize or improve.

But overall, we think that the level of sales activity is still good for this market.

Okay.

Then on the hedge fund and seed loss that you had, how should we think about that in terms of the $0.09 recurring?

I guess what's really driving that and why would that not continue for the remaining quarters in a flat to down market?

Two events.

One is, we've actually brought down the amount of hedge and seed money we have.

That would mitigate the exposure.

We've refocused our hedge programs on it and so if we think we have actually mitigated a reasonable portion of it.

Okay.

Just lastly, on the investment portfolio, as you're looking at your portfolio and just more broadly in terms of the credit markets, are you seeing anything spreading into CMBS even the slightest bit?

Because I guess the alt-A, if they're AAA, they're probably prime, right?

Are you seeing your balance sheet just much more resilient to what we're seeing more broadly in the market?

Basically, yes.

We feel our portfolio continues to perform the way we -- the underlying evaluations have been established.

While it's all under pressure as we talked about it from the standpoint of the markets which we feel are mostly liquidity driven, the credit quality of it remains.

Okay.

Are you taking advantage --- so you have excess capital, you have the ability, it seems, to take advantage of some of the dislocation.

Is there anything that you were thinking about in terms of your strategy and your portfolio to move into some of these classes?

Yes.

We are looking selectively again.

Aa we say, we are being rewarded for --- we're looking at short-term corporate.

We are looking at some of the alt -A.

We are looking at --- and very selectively again, where there's enough collateral enhancement there that we feel comfortable with.

We're again, matching it --- we're matching it to our liability characteristic, so we have a complete valuation that's been performed and now we're executing against it.

Okay.

Thank you.

You're welcome.

We have a follow-up question from Suneet Kamath from Sanford Berstein.

Please go ahead.

Thanks.

Just a --- I'm sorry to dwell on this, but again on page ten, where you talk about the impact of the FA markets.

When you say the $0.09 ongoing, and you say $0.03 of that is related to short-term interest rate, is that the same issue that I believe you responded to, maybe it was Jeff Schuman's question about thinking about the short-term portfolio?

And perhaps investing that a little bit longer now that you are being compensated for taking on risk?

Or is that a completely separate thing?

No.

That is the same.

Obviously, this was taken as of this point in time so if -- that's the rate play.

If we invest more, that would then reduce that exposure.

Because you will pick up the higher spread

Right.

Then you obviously said that you are in fact, investing.

Yes, we are.

Okay.

All right.

Thanks.

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Thank you.

Thank you, everyone, and goodbye.

Thank you, ladies and gentlemen.

This concludes the first quarter 2008 earnings call.

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