阿默普萊斯金融 (AMP) 2009 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the first quarter earnings call of Ameriprise Financial.

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 would now turn the call over to Ms.

Laura Gagnon.

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, our Chief Financial Officer.

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

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

Reconciliations of 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 make on this call maybe forward-looking statements reflecting Managements expectations about future events and operating plans and performance.

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

A sample list of factors and risks that could cause actual results to be materially different from forward-looking statements can be found in today's Earnings Release, our 2008 Annual Report to shareholders and our 2008 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.

Even with the rally in the equity markets in March, the environment remained challenging and volatile during the first quarter.

The S&P 500 was down 40% from a year ago and 12% just for the quarter and macroeconomic data remained weak.

Considering this tough back drop, we're pleased with how the Company performed.

Our earnings of $129 million or $0.58 a share demonstrate the resilience of our franchise, the continued strength of our Balance Sheet and the actions we've taken to prepare the Company for the current environment.

Of course, the weak conditions continue to affect our business.

Owned, managed and administered assets decreased by 21% compared with a year ago as a result of the sharply lower equity markets which impacts our revenue.

At the same time, short-term interest rates remain near zero and credit spreads in certain industries are very wide, which continues to impact our net investment income and Balance Sheet.

Overall our revenues were down by 14% to $1.7 billion compared with the first quarter of last year.

That said, our business fundamentals continue to be solid.

Client and advisory retention are very strong.

We're driving significant gains in experienced advisor recruitment.

Our fixed annuities and certificate businesses are providing the safety clients are seeking.

We've reduced expenses significantly.

We've further strengthened our Balance Sheet and we have increased our excess capital position and continue to maintain large liquidity pool.

So my message for you today is this.

While the environment continues to be very difficult, as we've seen in the quarter, we are riding out the storm.

We've generated reasonable earnings and continue to strengthen our financial foundation.

I believe the Company is well positioned both for the short-term challenges and to take advantage of a recovery.

With that in mind, let me talk about how we're managing for the near term, and then I'll provide some insight into how the businesses are performing.

Our foundation remains stable and strong.

We continue to feel good about our owned asset portfolio, despite the ongoing dislocation in the credit markets.

In fact we had only limited impacts to our investment portfolio and our net unrealized loss position strengthened during the quarter.

We're also continuing to manage our capital conservatively.

Even after our three all cash acquisitions in 2008 we finished the quarter with $1 billion plus in excess capital and we have a liquidity position of $5.8 billion in cash and cash equivalents.

I should note here that all four of the rating agencies that cover us have changed their outlook for Ameriprise to negative which is consistent with the industry wide actions.

At the same time, the agencies all reaffirmed our ratings while many others in the industry have been downgraded.

Because we expect the soft conditions to persist through this year, we further increased our efforts to reduce our cost.

In fact we now expect to achieve approximately $350 million in reengineered saves this year.

We expect to deliver two-thirds of those saves to the bottom line and those bottom line savings will accelerate as we realize the benefits of the actions we've taken over the past several months.

For the quarter, general administrative expenses were down 1% compared to last year.

But keep in mind that the current quarter includes additional expenses associated with our acquisitions.

Excluding those costs general administrative expenses would have been down by 15% compared to a year ago.

I want to be clear that we are being thoughtful about where we cut expenses.

We've been very careful not to affect the level of service we provide our clients and advisors.

Now let me give you some insight into how our business is performing.

The heart of our franchise, the close personal relationships our advisors have with their clients remain strong.

Clients are recognizing the importance of our planning and advice model, now more than ever.

And we think this demand will continue to grow as consumers reflect on the market dislocation and the recession.

In our advisor force, we had three consecutive excellent quarters in experienced advisor recruitment.

Established advisors are increasingly drawn to our choice of platforms because of the strength of our culture, our corporate stability and the extensive support we provide.

In March alone we brought in 95 new experienced Advisors and we brought in approximately 200 in the quarter which is more than we recruited in all of 2008.

You'll notice that our overall advisor number continues to slightly decline.

That's because we've dramatically reduced our recruitment of novice advisors to focus on the compelling opportunity to bring in highly productive experienced advisors.

Now I'll move on to the product areas.

Owned, managed and administered assets declined by 21% compared with the first quarter 2008, driven primarily by the market depreciation.

With regard to flows, we've generated strong fixed annuity and certificate sales, as well as return to net in flows in RAF products and we remain in net in flows in variable annuities.

The strengthen fixed annuities and certificates reflect the important element of our business model and its resilience.

As clients have sought safety and fixed returns we've been able to provide the range of products they need to shift their portfolios.

It's important to note that the fixed annuity book will provide higher margins after the first year of the contracts providing a base for future earnings growth.

Total Asset Management net out flows decreased to $300 million, $0.3 billion or $300 million in the quarter compared to $8.7 billion in the fourth quarter of last year and $5.2 billion a year ago.

In the domestic business, Mutual Fund net out flows improved sequentially and we drove solid net in flows in in institutional Asset Management.

At Threadneedle overall flows include net in flows in both the retail and institutional higher margin businesses offset by out flows in the lower margin Zurich related assets.

Total Threadneedle net out flows decreased to $322 million compared to net out flows of $6.6 billion a quarter ago.

Investment performance of Threadneedle remained very strong especially in equities where 87% of the funds were above medium over the three years.

In terms of domestic investment performance most of our funds are positioned for an economic recovery so their performance has been strong since the markets began to rebound in March.

Our fixed income teams continue to generate solid performance with 77% of funds above the median for one year, 7% increase over December.

Equity performance continues to be mixed.

We have pockets of strength for example, in our value funds and at [selegmen] but we also have areas of continued weakness.

In the insurance business, cash sales continue to be impacted by clients reluctance to invest cash in long term products.

A trend that we expect to improve as we experience a recovery.

Still life insurance in force was up 2% over a year ago to $192 billion.

The auto and home business continues to perform quite strongly to premiums increased 5% compared to a year ago while total policies increased 6%.

Our combined ratio in that business decreased by 2.2% compared with both the year ago and the sequential quarter.

To summarize, the environment remained very challenging in the first quarter, but we demonstrated the resilience of our business model and the strength of our foundation.

We've reduced expenses and further strengthened our Balance Sheet so that we can weather the economic and market storms.

At the same time we have continued to execute our strategy and invest in the business so that we have leverage necessary to take advantage of improving conditions.

Our diversified business model centered on deep client advisor relationships is intact and performing well given the environment and is under pinned by increasingly strong financial foundation.

Now I'll turn it over to Walter for more detail in the quarter and then we'll take your questions.

Thanks, Jim.

We have posted slides on our website again this quarter.

And these slides will be updated with my talking points after the call.

If you will turn to Slide two, my discussion today will focus on four topics; business metrics, earnings, Balance Sheet strength, and the accounting changes we adopted in the quarter.

In the quarter, activity metrics continued to reflect the market dislocation and lower client activity.

The flows in advisor metrics trends are encouraging.

The first quarter results reflected the volatile markets and headwinds created by those markets.

We achieved a $0.58 reported per share profit and core operating EPS was $0.60 per share.

Finally, the Balance Sheet fundamentals remain strong and we adopted FASB additional guidance relating to fair value and recognition of credit related impairments.

Turning to Page three, for the quarter, all advice and Wealth Management metrics continued to be impacted by external markets.

Clients continued to shift to defensive products, focusing on fixed annuities, universal life, brokerage cash, deposits, and certificate products.

Sales of Mutual Funds, variable annuities, variable universal life and other insurance products are being negatively impacted by the shift.

Mutual fund redemptions are stable and consistent with historical trends.

And in the quarter we experienced both strong core advisor trends and positive retail flows.

Turning to Slide four, this slide shows the details of the favorable advisor and client trends.

Client retention remains at 94%, with an increasing portion of client acquisitions coming from newly appointed experienced advisors.

The advisor retention chart indicates the improved pattern.

Franchisee retention is stable at 93%, despite senior advisors managing their headcount through the market dislocation.

The retention of our most senior and productive advisors remains at all times highs.

Employee retention has increased from 61% in the year ago period to 72%.

This reflects the higher retention of the HR Block Financial advisors.

Even excluding these advisors, our retention increased to 66%.

In the first quarter, branded experience advisor additions were approximately 200, more than we recorded in the full year of 2008.

The pipeline of potential recruits remains strong.

These advisors contribute to profitability much more quickly than novice advisors who come to us with no existing books of business.

On Slide five, you can see the improvements in flows.

Total annuity flows have accelerated over the prior year, driven by substantial fixed annuity net in flows.

first quarter fixed annuity net in flows were $1.5 billion.

As expected, variable annuity net in flows declined to $300 million.

RAP net in flows of $1.3 billion were flat compared with first quarter of 2008, but up substantially from the fourth quarter.

And Asset Management flows are improving.

Threadneedle flows including net in flows from retail of $642 million and substantially lower net out flows from institutions.

River Source flows included diminished retail and net out flows of $1.3 billion and in flows in institutional and trust.

Approximately $2.2 billion of institutional net in flows were related to the strong retail client flows and deposit products and fixed annuities.

Slide six provides context for the external market dislocation in the quarter.

The S&P 500 index declined 12% in the quarter and 40% compared to last year.

The lower asset levels and fees resulting from this decline are estimated to have lowered core earnings by $94 million or $0.42 per share compared to last year.

Also, increased levels of liquidity combined with 190 basis point drop in short-term rates reduced our core earnings for the quarter by $46 million or $0.20 per share compared to last year.

Market conditions also exacerbated the dilution we anticipated from our acquisitions.

In addition to integration charges, the core operating loss is attributed to the acquisitions was $12 million in the quarter.

The same dislocation driving the negative impacts I've just referred to provided us an opportunity to generate a profit of $33 million by repurchasing our hybrid securities.

On Slide seven, I'll provide more detail on specific non-core items in the quarter.

The net impact of non-core items was down substantially.

In the quarter, we recorded $0.01 in net investment gains compared to $0.07 in realized losses last year.

We recorded $0.05 of acquisition related to integration charges which is on track with our plan.

DAC mean reversion impacted our results by $0.14 per share compared to a negative impact of $0.08 in the prior year period.

Offsetting that loss was a $0.16 per share gain on variable annuities primarily from FAS 157 credit defaults spread widening.

Excluding the $0.02 per share negative impact of these non-core elements, core operating EPS was $0.60 per share compared to $0.99 last year.

Turning to Page nine, in the quarter, our G&A expenses fell 1%.

Excluding the impact of acquisitions, G&A was down 15% from the prior year.

We anticipate that we will generate over $350 million in reengineering saves in 2009 with over two-thirds of that estimated to fall to the bottom line.

The savings represents the reengineering generated by our plans announced in the fourth quarter earnings call, plus additional actions responds to the market decline in the first quarter.

In addition, we expect the full year impact in 2010 to be over $100 million higher than what we realized in 2009.

On Slide nine, you can see that we continue to maintain strong Balance Sheet fundamentals.

First, our free cash liquidity pool remained over $4 billion, even after redeploying over $3.2 million of cash into longer term investments.

Our first debt maturity is November 2010 and we have no reliance on short-term institutional funding.

In addition, we have access to lines of credit at both the holding Company and subsidiary levels.

We maintained a conservative capital position worth more than $1 billion of excess capital and our ratios continue to remain strong.

Our variable annuity hedging also continues to perform within our tolerance levels.

The net change in values of assets and liabilities was significantly impacted by FAS 157 credit default spread widening.

However, the after-tax benefits from variable annuities were mostly offset by the impact of new reversion on DAC.

Finally, we had good investment asset performance and in fact, our net unrealized losses actually decreased in the quarter.

I'll provide more detail on this shortly.

Our Balance Sheet numbers were impacted by our adoption of FAS 115-2 and FAS 124-4.

These new guidelines provide for the credit related portion of other than temporary impairments to be recorded in earnings.

And the non-credit related portion evaluation change to be reported as an unrealized loss in other comprehensive income.

With that adoption, retained earnings will be adjusted to eliminate the impact of the non-credit portion for items previously impaired.

This amount did create an increase in the corresponding unrealized losses and other comprehensive income.

Expected principal losses are discounted using expected interest rates to determine the amount of OTTI recognized through earnings.

We also adopted FSP Number 157-4 which provides additional guidance for fair value determination where markets are less active.

Our star valuation practice were consistent with the FSP so this adoption did not impact our numbers.

On the next slide, you can see how the adoption of the new FSPs impacted our Balance Sheet.

As the chart indicates, pre-adoption, our unrealized losses would have decreased by $224 million.

Post-adoption, our unrealized losses were essentially flat.

There is a corresponding increase in our returned earnings due to the reclassification of non-credit related impairments.

Also in the quarter, we recognized $47 million of pre-tax impairments.

The adoption increased the impairments will be recognized by $15 million.

If you turn to the next slide, number ten, you will see a fair amount of detail on our net unrealized loss position, which is $1.82 billion in total or $1.96 billion excluding government backed securities.

Unrealized losses after-tax as a percent of equity excluding AOCI was 16%, one of the lowest in the industry.

These unrealized losses continue to reflect high discount rate assumptions on valuations and the wide spreads in the corporate sector.

Even when you add unrealized losses, we compare very favorably to our peers.

We believe these marks reflect the underlying strength of our investment portfolio.

Approximately half of the unrealized losses are in the corporate credits based upon continuing overall spread widening.

Our website, on our website you'll find the underlying details relating to each of these categories.

Our goal is to create transparency and allow you to form your own opinion as to the quality of the remaining portfolio.

On Slide 11, you'll see a few key facts about our investments.

I would encourage you to look at the complete disclosures on the web.

This slide is basically unchanged since last quarter because the quality of the portfolio remains high, so I won't go through every line but I'd like to highlight a couple important areas.

CMBS is first.

We are quite comfortable with our CMBS portfolio due to its vintage, its rating profile, almost -- which almost 30% is government backed and the remainder AAA.

One bond, $7 million in cost, is now rated double A.

We have been investing in the market primarily in the 2005 vintages with AAA ratings.

Also, direct commercial mortgages holdings continue to maintain solid loan to value ratios, coverage and performance characteristics.

LTVs have increased sequentially from 53% to 59% due to increases in cap rates.

Five mortgages with a book value of $20 million are classified as Level IV, the equivalent to our watch list.

If you turn to slide seven to conclude, let me cover where we focus from here.

In short, we will focus on what we can control.

We will continue to evaluate trends.

The market remains volatile and challenging but we are beginning to see some signs of underlying improvement in our client activity and flows.

We will continue to focus on maintaining our Balance Sheet strength, to help us weather the markets as well as position us to take advantage of emerging opportunities.

We will continue to rely on reengineering and prudent expense management to mitigate the market impacts on our margins.

And we will focus on capitalizing opportunities that present themselves, including; recruiting experienced advisors amidst other firms turmoil, increasing financial planning penetration as clients need grow, leveraging our existing spread products to meet client needs, redeploying excess liquidity and new cash flows in the attractive yield environment, and redesigning products to improve risk return balance.

With that, I'd like to open it for questions, Operator?

Thank you.

(Operator Instructions).

Our first question comes from John Nadel with Sterne Agee.

Please go ahead.

It's close enough.

Good evening, everybody.

A couple quick questions.

Maybe one high level one, thinking about the FASB changes and then maybe a couple quick ones on the annuity line if I could.

On FASB, did you shift anything from level one or two to level three and market any differently as a result of the changes from FAS 157?

No.

Good.

A question on the annuity segment.

Maybe a little bit detailed here.

So I'm looking at the slide in your supplement that walks through all of the disclosed items and I'm looking at the annuity line and the amortization of deferred acquisition costs.

And if I make the adjustments for the couple of items there, it looks -- and adjust that versus your reported number, it looks like DAC amortization in the quarter, what you would have us think or what you would refer to us as a normal DAC number ex those items was $38 million.

And I can't remember a quarter where your DAC amortization was that low.

Is there some way that maybe you can give us a little bit more detail about how to think about that?

Is that just a function of your shift to a reversion to the mean or is there something else there?

No, it is lower but it relates to the lower gross profit of lower surrenders.

So it corresponds to that.

Okay.

And then just thinking similarly around the benefits line in the annuities segment, again if we look at the negative benefits number on a reported basis and then adjust for those one-time items we get to a normalized level of benefits of about $65 million pre-tax.

Similarly that seems relatively low.

Well, the benefits again, that you're getting the impact of the FAS 157 coming through.

Yes, I know, Walter I'm adjusting for those one-time items from the disclosed items page.

So if I take your reported number --

John, this is Laura.

I'm getting actually a higher benefits number and different DAC amortization number so why do I -- we can take it up after the call I can reconcile it with you.

Okay, all right that's fine.

Last item would be just to think about your definition of core earnings.

I know you're guiding us to think about $0.60 but there's a benefit in there from the early retirement of the debt.

Is there some reason why we should think about that as ongoing?

And then secondly, on that, can you just talk to us about what your normal tax rate was in the quarter?

Even if I adjust for the 35% statutory rate on the one-timers, it looks like the tax rate in the quarter was extremely low.

Yes, the tax rate has been low and it's been low for quite some time, as we do effective tax planning, and --

Maybe you can help us with how to think about that going forward then?

Well, as I think we have given previous advice, obviously with the market situation as the PTI comes down you'll have a lower effective tax rate.

So our previous guidance has been in the lower 20's and I think now that gets adjusted down for the lowest PTI.

And again, depending on where markets go, so it will drop into the teens.

Now, as it relates to the hybrid, if I think you said retiring hybrid, I guess the way I look at it and obviously each person will have to form their own judgment, conditions that created basically the drop in our core earnings which we relate to equity markets and the spread, earning 20 basis points versus 200 basis points.

And certainly the need to maintain large liquidity pool created the opportunity to generate and purchase our debt at $0.50 on the dollar.

So is it going to be reoccurring?

I think it's the same dislocation that's causing both.

Okay.

I understand what you're saying.

So if the equity markets return to a normal level, that sort of thing, we don't necessarily have a debt gain but we have, you know, the ability to earn better from just a core perspective?

Got it.

Yes.

Okay, thanks.

Thank you.

Our next question comes from Colin Devine with Citigroup.

Please go ahead.

Good evening.

I'd like to come back to the annuity line because it seems to me, Walter, in trying to just work through the numbers, obviously for Advice and Wealth Management and Asset Management, tough quarter but certainly expected given the markets.

But what is, when you talk about the FAS 157 adjustment, did you use a much higher discount rate this quarter to value the VA liability and that's why we've got this gain?

Because I thought you did that in the third quarter and then you took that off in the fourth quarter and are we back to using wider discount rate?

Because if we just want to total up benefits and DAC, your run rate is $160 million to $180 million a quarter.

It's pretty steady between the two.

This looks to be about a fairly significant swing off that, so if you can just help me through this?

Well, I think if you take a look, the spreads did widen.

And obviously were guided by the correlations that it creates between the insurance and the holding companies as we use comps to do that so it's really not too much leeway on that.

And obviously there was a substantial widening.

I believe it went as high as 325 up from I think 225.

Now, that creates a fairly big gross factor when you adjust on the liability, but you finish through the DAC'ing of that it gets down to an appreciably small number and that's about 70 some odd million dollars.

And that is then when you take into consideration the normal mean reversion and the debt benefits it pretty much neutralizes through.

But if we put this together, isn't the bottom line here the swing is about $80 million off any kind of run rate.

I mean I'm just confused as to why you used the lower discount rate in the fourth quarter but now it's come back up again in the fourth which seems to have been what's driven this big swing in the expense line?

Unless I misinterpreted what you're saying.

I'm not sure, the discount, are you talking about the discount rate on the FAS 157?

How you're valuing your living benefit liabilities.

Is that what's driving the swing in this benefit line?

The benefit line is being impacted, yes, by the 157 default spot, yes.

Then am I mistaken --

Also, the total net expense change in the annuity segment, it's down $13 million pre-tax.

Hold on.

Maybe you can walk me through then what happened in the third quarter versus the fourth versus the first here and why this extreme volatility that's -- because this is what's moving the whole earnings for the Company up and down.

You want me to go back and reconcile the third and fourth and on this call?

Well what I thought you'd done in the third was used a higher discount rate and you'd reversed that decision in the fourth.

And now it looks like you've used the higher discount rate here in the first.

Is that mistaken?

And if it is then I've got it wrong.

But that's what I thought happened in the fourth which is why we saw the expense line come back up.

Colin, this is Laura.

So what we reversed in the fourth quarter was actually the DAC.

We said that the FAS 157 conceptually will reverse itself.

The spreads continue to widen so whatever the market does we have to carry into our valuation.

But we don't have to assume they are going to stay there for our gross profits forecast.

So that's one of the reasons why when you look at this impact the variable annuity benefit impact in the C-pages you're seeing a much higher percentage of DAC offset because we do not expect it to stay.

We don't have a lot of options around the impact the spreads have on how we value our liabilities.

We have to employ the guidelines under FAS 157 and the fact was that financial spreads widened in the quarter.

Okay.

So what you're saying that if we see spreads come in, we're going to see this negative $129 million expense, there's a really good chance that whole thing is going reverse out?

Yes, it will reverse --.

I am trying to get a sense -- what are the economics here as to what's exactly going on with this block?

Because I don't think this represents the economics.

I'm not debating the accounting with you.

Well, I don't make the rules on the 157 and obviously--

No I'm trying to get the economics, Walter.

And the economics are being reflected by the fact that so to your point, as it will narrow, what you would then get is a reversal of the DAC going the other way.

And it will mitigate it coming back as it goes through.

And that's what we're trying to manage through.

And the given on the economics candidly as we talked about, Colin to me 157 is an interesting philosophy as it relates to setting up credit default swap for your own paper.

But what you're saying here then is in terms of what helped earnings this quarter for the Company was the wider spreads -- debt spreads here on the VA line and then also your ability to buy in the debt at a steep discount, so those two things helped?

And your argument is that market being down [pushed] it the other way?

No.

Tell you what.

Collin, let me say what I think it is and then see if we're in agreement or not.

There is no question we got a benefit.

As I said from the credit spreads widening, okay?

And that was reflected in the living benefits.

Offsetting that was really the DAC reversion and the debt benefits which basically negate down so the benefits to the bottom line was not significant when you take into consideration of both elements.

As it relates to the element as I explained before, yes there is a benefit on the hybrid.

But we're also carrying $0.62 worth of deterioration which is the same dislocation that is causing me the capability of buying my hybrid in is causing me to carry huge liquidity pools at very low rates and actually suffering the impacts of the market .

So yes, I am taking advantage of the other side of it.

And we have the capital structure to do

Okay.

And then the final different topic, do you have any update, Jim, in terms of the Federal Government programs and the Ameriprise's position on what might be available since we have a few new ones since the fourth quarter call?

Well, regarding the T.A.R.P.

itself, we have heard nothing from the government.

As you know, we replied when the government said they wanted healthy companies to apply and we did that looking for continued ways to invest in our Company, potentially with the use of those funds.

As you know, and we've just stated again our capital position remains strong.

Our investment portfolio is of high quality and so if those programs present opportunities we would be interested, otherwise we think that we're in good shape.

Regarding some of the other particular programs you're looking at from an investment perspective depending on what are the sort of guidelines and the sort of attachments to those things including for our own clients to invest in some of those activities if we've managed some of the money in those programs.

So those are the things we're exploring from an opportunity perspective but again, we're trying to analyze what sort of stipulations the government has on those various programs as well, because we feel that we're in good shape and we want to be able to control our destiny.

And are you still, then you are still asking for T.A.R.P.

funds as we stand here today?

We put in an application last year when the government said they wanted all good companies to apply.

We have not heard anything.

We have not done anything and I'm not saying at this point in time it's still our viewpoint that we will take the funds.

And you've not withdrawn it though?

You've not withdrawn the application?

No, not at this point in time because I think everything is sort of a wait and see on things.

And so we didn't have to make any decisions on it.

Okay, thank you.

Our next question comes from Andrew Kligerman with UBS.

Please go ahead.

Good evening.

Let me start with some of the easier ones and then work to the DAC question and hopefully we can get that real easily.

One, on the excess capital, Jim and Walter, you state more than a billion.

Could you give a little clarity around 1) what your RBC ratio was at the end of the quarter and how you get to that billion plus number?

The RBC ratio at the end of the quarter was a bit over 500.

Yes, at the 798 S&P.

And again, you know this is estimates very rough, so it's in that range.

When I calculate that now I get a lot more than just greater than a billion, I'd probably get more than a billion two, maybe even more than a billion three, just back of the envelope.

Am I out of the ballpark?

We said a billion plus, it's a conservative number.

As you know from our past we've always not given an actual number out, but I would say it's a conservative number.

Okay, then just shifting to the statistical supplement, Page ten of 49, the Management and financial advice piece, just kind of keep dribbling down.

They were $367 million in the first quarter of 2008, they fell to $292 million in the fourth quarter of 2008 and now you're at about $268 million.

Can you give a little color on where you think that kind of bottoming point is, what might drive it up, just a little more color around that one?

Well, I think as we said to you in the past, when you have very volatile markets, the client really pulls back.

They sort of sit on the sidelines a little bit.

We seen money coming as we said some of the flows picked up in the first quarter a little bit.

Some money were redeployed back into equity markets but a lot more was going into more fixed type spread products.

And so I think what you're seeing is really slow client activity as well as the depreciating markets on the assets under Management that they generate fee revenue from in their App accounts.

So if we see the markets improve, those fees will come back very quickly because the assets are still there.

If on the chance that the markets do settle, or there's a direction to the markets, that people feel a little more comfortable with, we think a lot more money will go back to work.

So I would just say that I think the fourth quarter, first quarter looks like some of the low point look like activity improved a bit in March.

It really dropped off and as you would imagine in January, and February, as it did in December.

So I think some of that started to come back a little bit but until there's a better direction to the market or at least what the client and the advisor feel there's some floor under it, I think that we have slow activity.

Once that occurs I think that will start to pick up.

More activity right now is going into the spread products.

That has picked up and continues to come in that way.

Got it.

Okay.

Now I'm going to take my shot at the DAC question and hopefully keep it really tight here.

Before the quarter, my team and I we were looking at Page 76 of the 10-K.

And it provided a hypothetical DAC impact, if the equity markets declined roughly 10% which maybe we were in that ballpark in the quarter.

And the sense was that you would see a $160 million DAC and DSIC amortization hit as a result of that.

And so then when we went to, and most of it would happen in the quarter when we discussed that with Management, so then when we went to the reconciliation page, there was only a $46 million negative hit.

So part one of it is why the differential there from the guidance around DAC?

I would think that would be fairly straightforward.

That's the part one and the part two is this variable annuity rider issue that I think Colin was getting into.

And in that same hypothetical, a 10% drop in the market, you would see a $58 million negative hit.

Now, you mentioned the affect of spreads widening.

That was written in the release it's what you've just touched on and the benefit was I think for this reconciliation page, $54 million.

So the question on the spread widening is where?

Could you give a little color on exactly or isolate out where that widening is to be observed?

The widening in the market is being observed?

Yes, I mean, I didn't see such a widening from point to point.

Okay, well that one is easy because basically what we do is we have, we use comps and basically look at insurance comps that have basically holding companies and insurance Companies and you look at the differentials.

And during those differentials on that basis, they widen and they widen substantially.

Yes, you basically look at holding Company and the insurance operating Company, you look at the spread differentials and then we basically extrapolate on that basis.

We don't issue basically out of our Insurance Company and that's the way we create the spread situation.

And that is done based on the series of comps that we look at.

And those comps widen in the quarter as you would imagine and then that becomes the basis on which we do the calculation.

Got it.

Maybe later on I could take a look --

Yes, I think we could take you off line and take you through that.

Yes, that would be great.

One thing I would like to point out Andrew is that the numbers you're referring to in the 10-K are annual numbers.

Yes, but when we discussed it with Management the indication was that maybe 90% of the number would flow through to the quarter.

That was the feedback unless I misinterpreted it.

But I got the sense that 90% of the numbers we see here should flow through into the quarter.

I thought that was pretty clear, but we could follow-up if you want.

Yes, I think you were to the point that this is just the equity decline and not the other factors you were talking about.

Right.

But so the DAC number has well involved other variables including that credit spread widening, is that right?

No.

DAC it's straight on DAC.

Like I said, in the quarter we basically evaluated what dropped in the marketplace, the drop took place in the quarter and we basically are spreading the near term rates and spreading that drop over the next five years which we use for our mean reversion.

Right, okay.

So there were a number of other factors outside of that basic 10% hypothetical then.

Yes.

And like I said, we could talk it off line and reconcile it and try and get you back to the numbers.

Okay.

Great.

Thanks a lot.

Thanks, Andrew.

Our next question comes from Suneet Kamath with Sanford Bernstein.

Please go ahead.

Thanks and good evening.

Maybe we can focus on the operating businesses a little bit.

A question about the 200 experienced advisors that you recruited in the quarter.

Can you give us a sense where they're coming from?

Just describe maybe the companies that they left.

And then in other words were they sort of the large warehouses or more regional firms?

And then any sense of how their productivity would compare to the advisors that you have?

Are they sort of the employee advisor type or franchisee advisor?

Just some general thoughts on that.

And then separately, I think you'd talked a little bit about this but I'm not so sure that I have a clean sense.

Just you talked about activity picking up in March relative to February and January, but can you give us a sense of how things have trended so far?

I know it's still only a couple of weeks but in April, I mean other companies that have reported first quarter results have talked a little bit about things maybe improving a little bit more in April, are you seeing that yet or are your clients still pretty much on the sidelines?

Thanks.

Well, I think first is on the recruiting end.

It's coming from all the major houses, Merrill, UBS, Wachovia, Banc of America.

So I think just the talent is coming in from a number of different places and we see the pipeline continue to be there.

The productivity really is consistent with our overall productivity that we have in the house.

It ranges in the type of advisors from a few hundred to -- but mainly we're probably talking in the 300 to 500 range is where we're attracting people that fit with the type of franchise and the type of offers we're making.

Based on also the type of business they want to do which is more planning advice based, fee based business.

And so we think that we're attracting a segment that really is appropriate for us.

Regarding activity, I think we're seeing it a bit consistent with what we saw in March and a bit of a pick up, but again it's not where we were back to old levels by any stretch of the imagination.

Because as you know, a lot of our business is not transaction business, it's fee based business.

And therefore, a lot is based on the asset levels there and so people deploy money more to it over time.

We don't get big increases in immediate.

Where we're seeing more transactions is as I said more in the fixed product right now.

As we saw the variable annuities on the equity side has slowed down but it's really growing in fixed.

We did move good in flows back into the rap products in the first quarter but again those aren't type of in flows compared to what we used to have in the past.

So I think on one end it's a positive and on the other end we're not saying that it's off to the races at this point in time.

Great.

Just one very quick follow-up.

In your answer to my question, you mentioned 300 to 500 something and I don't know what that something is.

Can you just --

In production, overall production.

So looking at trailing 12 month production levels.

Got it.

Thanks.

Thank you.

Our next question comes from Thomas Gallagher with Credit Suisse.

Please go ahead.

Hi, a few questions.

First just not to beat a dead horse here but back on the annuity segment.

Excluding the FAS 157 adjustment, can you talk a little bit about how your hedge asset performed relative to the change in the variable annuity liability?

Because obviously, based on the magnitude of the 157 it's a little bit difficult to figure that out.

Yes, actually, considering the volatility that took place, because obviously if you just look at the two end points it doesn't look like the liabilities moved as much as they did.

Within that element actually the hedges performed within our tolerances which are in the 95% range.

But again, if you have to take all of the points between the beginning point and the end point the hedges actually worked recently effectively.

It's certainly a big swing that took place, but we were comfortable with it.

Okay, so no big deviation, is that fair to say?

That is fair to say.

And also -- just a follow-up question on that.

One thing we've been hearing from our derivatives desk is the supply of long dated hedges is effectively gone right now.

So just curious, how do you think about managing the risk on what's effectively a long term option you're giving to the client when the ability to hedge it on the other side appears to be, if not gone, very difficult right now?

Well that we've heard that also and working with our risk Management people, we are not experienced, we are still getting the basic ability to cover our hedging.

And remember the volumes are down and things of that nature on the variable annuities substantially down so it's easier.

And at this time we've slowed down the hedging, but we are still continuing to get hedges where we adjust our book and manage them.

And we continue to be very focused.

We also made sure with the lower volumes activity, the change in pricing but we're also will be changing our product set over the next few months as well.

So in the interim period we feel we could manage for the level of activity we have as well as the hedges that we already have on the books.

Okay, and then last question is just on your excess capital.

I know you'd talked about having more than a billion.

I presume that does not include the $500 million of hold Co.

cash and if that's true can you just talk about what are your annual cash flow needs at the holding Company?

Is it substantially less than 500 million?

Can you just remind us?

Yes, it is substantially less than the $500 million.

Obviously, we have a good dividend flow coming in from all of the subs and our debt services in the 150 range.

And so on that basis, it is substantially below the 500 that we have and we're constantly replenishing it through dividends.

And I didn't get to the first portion of your question about the 500.

Can you repeat that?

Yes, I guess the only question is should we consider then some portion of the $500 million as excess?

Yes.

Absolutely.

When we go through our calculation the excess, actually the majority of our excess capital is outside the Insurance Company action.

The majority is outside the Insurance Company?

That's correct.

Well then I guess I'm having trouble reconciling that because you're talking about a 500% risk-based capital in the insurance subsidiary which would imply effectively all of your excess capital is there.

So you're saying you have a billion dollars in addition to that?

No, I said the majority.

I said we use factor base on that.

And when we analyze on a factor base situation, there is excess in the Insurance Company, but not to the level that you would calculate using a cash flow tested basis.

So we strictly use a factor base which creates a lower capital requirement at a lower excess position at the insurance.

And we have our excess capital position at the holding Company and we also have it at the other subsidiaries.

Okay, so just to make sure I'm clear.

So the 500 RBC plus suggests you need to maintain something close to 500, just because you're saying --

No, no, remember that gets into cash flow testing base.

We are looking on a factor base.

And on a factor base we have excess but it is not at the level that when you do your calculation.

We translated through on factor base.

Yes, I would just say this.

We're not reconciling to a billion dollars.

There is more than a billion dollars in capital.

There is excess in the life Company.

There's excess at the holding Company, and we also have money in the other subs.

Okay.

That's clear.

Thanks.

I'd like to interrupt just with a response on the 10-K disclosures.

I think this might help everybody in interpreting this number going forward.

In our 10-K disclosures, we do not increase our near term equity rate assumptions.

So you're looking at a 10% drop over the full five years and not only do we not assume a [Inaudible - audio difficulties] but also that the equity markets stay flat for the next 12 months.

So it's extremely conservative.

Next question, Operator?

Our next question comes from Sam Hoffman with Lincoln Square.

Please go ahead.

Hi.

Can you comment on your strategy to improve your investment performance in your equity Mutual Funds?

Yes.

First of all, we have seen some nice improvements, as we said first of all Threadneedle is performing very well, very strong and that's consistent.

Our fixed income products have improved nicely and is actually performing quite well.

We have improvement in some of our value area.

The tech area has been strong, some of the value in growth is still good.

We are still weak in a few of our core products.

And we're focused on that right now in making adjustments to our portfolios and looking at also the positions for the longer term.

So people are working at it but it's not where we want it to be right now.

And we'll continue to look at how we can improve that and continue to look at some opportunities to compliment what we have in place.

Okay, second question is can give a bit more color on the recruitment of experienced advisors in terms of how their contract is structured and whether they become profitable in their first year or how that all kind of plays out?

Well, the experience recruits, we only put a portion of their package up front of activity has to occur.

They have to bring over assets and the productivity has to hit certain levels to get their greater amount of incentives.

We have arranged this so that we have a very good return on investment here, b but it doesn't necessarily give you a return in the first year because people are transitioning over, they're bringing their book, then they have to get under way in activity.

So we have not, we've clearly not set this up so that it is set that we have to earn money in the first year on it, but we compared to particularly novice recruitment et cetera it gives us much better returns.

And so by just shifting our resources and committment to this area, we'll actually improve our return tremendously from where we used to be with novice recruitment and development, particularly in a market like this.

So we think it's a win-win for us.

And we did set this up so that it's not all up front where we would put much at risk.

We think that what we put at risk versus what the transition and what the advisor would need to do is very balanced.

Okay, and one final question.

Just to get back to the annuity segment, if equity markets remain flat for the foreseeable future, what impact would that have on earnings from variable annuities?

It remains flat from this point on?

Is that what your question is?

Yes, I mean for a few years let's say, what will be the impact on earnings from variable annuities?

I can't give you the exact number.

It would have a negative impact obviously because the assumptions are predicated on the normal growth of the markets.

It would hit us through the DAC being reversed.

That would assume that markets to grow because you're tied to the equity markets so if they didn't grow we would have to take another DAC mean reversion hit.

Right and so when you go through your initial period, obviously one thing when you get to the long term rate which is assuming 9% growth on equity markets.

Actually and plus less dividends, so it would have a big impact.

But there's no way you can help us in terms of kind of tying it to what's happened in the last few quarters?

Well the impact you saw in the fourth quarter was substantial and in this quarter it certainly was impacted.

Again, we're amortizing the decrease that took place in the quarter over five years until we get to our long term rate which is the nine.

So but again, as we indicated, we got an offset as it relates to the credit default swaps widening out, so the net impact was actually --

I mean if you're talking this year, we assume that this year wouldn't be a strong market, it would be flat.

But or relatively weak in that sense, but we didn't necessarily assume that for the next five years, the markets would be flat.

Yes.

Because what we assume this would be a slower recovery in this year and then as it moved away from the bottoming again, you would have a spike which we've seen in prior patterns.

And that's what it was predicated on.

Okay.

It's just hard for us to calculate but we'll do our best.

Thank you.

Yes it is.

It's hard for us to calculate.

The Actuaries work on this all the time.

But I'm not trying to be cute.

It would have a devastating impact because really it depends on market increases and we're adjusting our models now to reflect that's when you get different aspects of the business performing in those situations.

But in variable annuities it does depend on the markets appreciating.

And that's what the assumptions of estimated gross profits are based upon.

Operator we have time for one more question.

Okay.

Our next question comes from Eric Berg from Barclays Capital.

Please go ahead.

Thanks very much.

I have a couple, just two I'll keep it to two to give people a chance to get home in this evening hour here and I'll finish up with Laura separately.

So I see that the number of branded Financial Advisors have increased by roughly 5% year-over-year to 10,550 from 10,000.

But how do we see maybe it's because I don't have your slides in front of me just your news release and statistical supplements, can we see in your financial supplement how the quality of your sales force has improved?

Because this number, this talks to me only the numbers of people.

The net sales actually went down, no surprise there reflecting markets.

Can we see in the supplement how the quality of these people has improved?

That's my first question.

I would say Eric, I don't know how you would see that and first of all you got a number of variables being that you're in very weak markets compared to a year ago.

And as you know, the fourth quarter and first quarter were weakest and I think you'll find that across the industry.

Second of all, if people are just coming on board now they aren't even producing yet.

They are just joining the firm.

So at the end of the day, they're bringing over their assets, their [a cabining] and etc., you aren't going to see productivity particularly across sales force of 10,000 from 200 people joining.

So I think you got to factor that all in.

But what I would say is the way to think about it is this.

In the past we brought on novices and novices had no book.

It would take them months and even years to get their book that mature to a level of assets and productivity.

And in this case, we'll have people transfer in.

Those people clearly will be productive within weeks and they will bring their book over and that book over time will be up to more of an ongoing status of what our experienced people are doing.

Therefore, as you look at that versus in the past and our numbers were a lot more novices not producing any, our averages will go up.

And particularly you'll see them go up in our employee network first, but then overall, it has as they add more depending on how many we bring in.

So I do believe that it's not so much in the number of advisors because we're bringing down the number of novices which will save us money and cost and expense.

But the people we are bringing on board even though the numbers may not be higher in total, but the numbers of experienced people that really have books of business can be productive very quickly.

And so if you take that out a year or two and production comes back, meaning markets improve, it will give us a lot more leverage.

My second question deals with the annuity business and it's sufficiently detailed and I'm going to work with Laura on it so why don't I give it back to you.

Thank you.

Thank you.

Thanks, Eric.

Okay, that's as much time as we have tonight.

I want to thank you for listening in and for your questions.

Laura will be able to take any more of your questions tonight and tomorrow, so that you can update your models with information.

As I said I do feel that we had a good relative quarter based on the market conditions.

We think that we are managing the business prudently.

We think we're managing it conservatively.

We think that our financial position remains strong and gives us some degrees of freedom as we move forward to take advantage of the opportunities that may be there.

And so I would just say after the first quarter which none of us like the environment, I still feel quite good about our position to navigate it and to deal with the things at hand.

So I appreciate your time and thank you very much for listening.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may all disconnect.