阿默普萊斯金融 (AMP) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Ameriprise Financial second quarter earnings conference 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.

I will now turn the call over to Ms.

Laura Gagnon, Vice President Investor Relations.

Ms.

Gagnon, you may begin.

Thank you, and welcome to the Ameriprise Financial second quarter earnings call.

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

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

During the call you may here 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 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 actual results to be materially different from forward-looking statements can be found in today's earning 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 would like to turn the call over to Jim.

Good afternoon.

Thanks for joining us for our second quarter earnings discussion.

As our results demonstrate, conditions appear to be stabilizing, and the market environment finally seems calmer than has been in quite some time.

Our client activity is showing signs of improvement, as retail investors begin to move past the period of fear and regain their focus on the long-term.

This initial business momentum, along with the continued improvement in the equity markets, contributed to growth in revenues and asset levels compared to last quarter.

As you know, our balance sheet has remained strong and resilient during the market and economic downturn.

In the second quarter, this strength was reinforced.

Our net unrealized loss position decreased by 68% to $577 million, and we took actions to further boost our financial flexibility.

In short, we have significantly enhanced our debt maturity ladder, and raised equity to pursue opportunities.

I'll come back to this in a moment.

So the message I want you to take away today is this.

Our metrics are beginning to show signs of improvement.

Our balance sheet is very strong.

And we're in a position to pursue appealing growth opportunities.

With that in mind, I would like to give you some insight into our results in the performance of the business.

For the quarter, we earned $95 million or $0.41 per share.

Our core operating earnings were $133 million or $0.58 per share.

We generated revenues of $1.9 billion, a sequential improvement of 9%.

The decrease in our earnings compared with a year ago primarily resulted from the impacts of the 28% year-over-year decline in the S&P 500 and lower short-term interest rates.

The core of our franchise, which is long-term deep relationships between advisors and their clients, remains strong.

It's been a very difficult year for financial advisors.

But despite the conditions, advisor retention remains near all time highs.

In fact, retention among our most productive advisors remain at 95%.

We also recruited more than 200 experienced advisors to our branded platforms during the second quarter, bringing our total for the year to more than 400.

That's ahead of the expectations we set at the beginning of the year.

Our advisors are staying with us, and established professionals are joining us, because the Company's strength and stability, and because of our continued focus on providing excellent advisor support.

We'll continue to invest to enhance our capabilities, including marketing and technology.

In fact, we will begin rolling out a new brokerage platform early next year.

And just as important, our brand has remained strong through this financial crisis.

Our client retention is very good, which is a testament to our advisors' diligent work, and again, to the strength of our relationships.

Now that we've had four months of more positive market conditions, clients are beginning to regain confidence.

As a result, client activity is beginning to pick up.

You can see evidence of this upswing in our product movements.

As our clients move out of defensive cash positions, we're seeing positive momentum in asset flows across our product platform.

In the second quarter, we generated particular strength in our wrap accounts, which had net inflows of $2.8 billion.

Total asset management net flows turned positive and compared to about $100 million of net outflows in the first quarter of this year and $4.8 billion of outflows a year ago.

Our total managed assets increased by 12% to $214 billion over the sequential quarter, as a result of the inflows and market appreciation.

In the domestic asset management business, total RiverSource net flows improved significantly on a year-over-year basis, driven by slowing net outflows and retail funds resulted from a pickup in sales.

We've also experienced strong inflows in institutional, and a return to net inflows in alternative portfolios.

We also returned to overall net inflows at Threadneedle.

Slowing Zurich outflows, as well as net inflows into retail funds, resulted in total net inflows of $470 million.

Threadneedle experienced net outflows of $322 million a quarter ago and $2.5 billion a year ago.

In terms of investment performance, RiverSource performance improved during the period across both retail and institutional funds, as most of the portfolios are positioned for an economic recovery.

The investment performance at Threadneedle remained quite strong with 93% of equity funds above the three-year medium.

We're also continuing to drive positive flows in annuities, with total annuity net inflows of $1.1 billion in the quarter.

In the fixed business, sales slowed as we continued to manage our rate office to insure favorable economics.

Still our total ending fixed annuity balance is up 23% year-over-year, which is helping to generate improved net investment income.

In addition, we produced good flows and variable annuities with $567 million in net inflows in the quarter.

We feel comfortable with the profitability of the new business we're writing, given the changes we're making to our products and features, as well as the success of our hedging program.

In the insurance business, we're seeing some improvement in sales sequentially, but sales are still slower year-over-year.

Permanent life insurance, cash sales were up 36% compared to the sequential quarter, with universal life sales driving the increase.

Variable universal life sales were flat compared to last quarter and down over a year ago, because clients continue to be reluctant to move back to equity sensitive insurance products.

The auto and home business continues to grow with a 7% increase in year-over-year policy counts.

Overall, the protection businesses remain strongly profitable as we continue to offer clients a wide range of product choices.

And as we choose our risks carefully.

Now, before I turn it over to Walter, I would like to address three additional points.

First, expenses.

You'll see in our numbers that the general administrative expenses were up compared with the sequential quarter.

I want to be sure you understand that the increase was driven by acquisition related costs, as well as several relatively small one-time items, including additional legal expenses.

Last quarter, we told you that we had increased our goal for run rate expense savings to $350 million for 2009, and that we intended to deliver a majority of those savings to the bottom line.

We're on pace to exceed those savings.

In fact, we now are on a run rate of $110 million per quarter of expense saves.

Second, I would like to help you understand that the net losses were experienced in the advice and wealth management and asset management segments.

In addition to the significant market challenges of the past year, both segments absorbed unusual expenses during the quarter, including ongoing costs associated with integrating our recent acquisitions.

In addition to the integration costs, we still have redundant expenses from running multiple platforms.

Those expenses will go away when we're fully consolidated later this year.

Aside from the acquisition costs and some higher one-time legal costs, expenses in both businesses have decreased substantially.

At the same time, as I've said, our business momentum has turned (inaudible) client activity and asset flows increasing.

We're confident that the lower expense base, along with the early signs of business improvement, will start to give us additional earnings power in the quarters ahead.

Finally, I would like to help you understand the rationale behind our capital decisions during the quarter.

We raised capital not because we had anything to repair, but to be at a position to play offense.

The debt we raised, along with the tender offer currently in progress, improves our overall debt position and prefunds the majority of our nearest debt maturity, which is in November of 2010.

We now have a much stronger maturity ladder with our next tranche of debt maturing in 2015.

And we feel very good about the overall debt positioning.

While I know that our equity offering generated some questions, it was a prudent strategic decision.

Even when taking into account the estimated new capital requirements for variable annuities, our excess capital is now more than $2 billion in excess at the end of the quarter.

That provides a strong cushion if we experience any new deterioration in the markets.

But just as important, we will also now have the capacity to act quickly, as we identify opportunities to grow the franchise.

We've often told you that we actively look for opportunities in asset management and retail distribution businesses.

And that continues to be our focus.

I want to ensure you that we will continue to be prudent as we pursue acquisitions, and that we do not anticipate a need to raise additional capital if we make an acquisition.

To summarize, I feel quite good about the direction and positioning of the Company.

Our advisor client relationships remain strong.

We're attracting new advisors.

And our product areas are beginning to generate improved flows.

In addition, the strong financial position we've built, now enables us to pursue opportunities to grow the business while many of our competitors are focused on repairing problems.

That's not to say that I'm totally satisfied with our results.

We still have work to do to overcome the weaker environment compared with a year ago.

We need to build on the early signs of improvement.

I'm confident that we will do that, and that we will begin to realize the earning powers inherit in our model.

Now I would like to turn it over to Walter for more detail on the quarter, and after that we'll take your questions.

Thanks, Jim.

We posted slides on our website again this quarter, and they will be updated with my talking points after the call.

If you will turn to slide three, my discussion today will focus on three points.

Earnings, actions we're taking in the challenging environment to drive profitability, and our balance sheet strength and flexibility.

Our second quarter results reflected the continued market challenges we face.

We reported a $0.41 per share profit, and we achieved core operating EPS of $0.58 per share.

Turning to page four, here we'll provide more detail on specific non-core items in the quarter, which are detailed in the press release as well.

In the quarter we recorded $0.02 in net investment gains compared to $0.08 in realized losses last year.

We incurred $0.07 of acquisition related integration charges, which are on track with our plan.

Favorable markets conditions in the quarter drove a $0.12 per share benefit related to DAC and DSIC, (inaudible) compared to the negative impact of $0.03 in the prior year period.

This DAC benefit was more than offset by a $0.24 per share charge related to variable annuity guarantees, primarily from FAS157.

There are two offsetting components within the $0.24.

First, we realized an after DAC, after tax impact of $139 million or $0.60 per share related to FAS 157 non-performance risk and a change in the liabilities.

This was partially offset by an improvement in basis risk and market driven variable annuity guarantee impacts of $84 million or $0.36 per share.

It is important to note that the remaining exposure to FAS157 on our balance sheet is manageable.

Excluding all of these items, core operating EPS was $0.58 per share compared to $1.03 last year.

Next please turn to slide five.

To help you clearly understand what is and is not in core, we have shown items that are included in our core earnings.

Core earnings reflect the negative impacts of the markets.

And in this quarter, the lower year-over-year equity market levels reduced fees by approximately $0.36 per share.

And lower short-term interest rates resulted in lower earnings of about $0.15 per share.

We had a $0.07 per share provision for a client settlement.

In addition, our effective tax rate in the quarter was 24.4%, basically a catchup to get to our full year estimated effective tax rate of 20%.

This resulted in a $0.02 per share negative impact to core in the quarter.

The full year tax rate increase is the result of higher expected pretax profit for the year.

Lastly, we had a $0.02 per share gain on the repurchase of our hybrid debt.

Of course, these changes in client activity and the product mix shift as a result of clients seeking safety are included in core.

These elements are difficult to quantify.

In summary, our core earnings were down $0.45 versus last year, and the primary driver of this decline was the market dislocation.

If you turn to slide six, we continue to focus on executing, managing everything that is under our control, and our outlook for the balance of the year is more favorable.

We continue to recruit experienced advisors who are bringing clients and assets to the firm.

We attracted more than 200 advisors, which was our best quarter ever.

We also saw initial signs of improvement in client activity.

As a result, we generated continued improvement in client asset flows, with $2.8 billion of net wrap inflows in the quarter.

Asset management flows have improved, too.

And so have investment performance both at Threadneedle and in the US.

During the quarter, we redeployed approximately $1.5 billion of cash into longer dated, fixed maturity yielding an average of 6.5%.

At the same time, we're continuing to implement our reengineering plans, and with $110 million in savings in the quarter, we're on track to exceed our full year target of $350 million.

Turning to slide seven, here I would like to help you understand the benefit we expect to derive from our reengineering work.

For the first half of the year, we experienced $394 million of year-over-year negative impacts to our PTI, market impacts to our PTI.

The bottom line impact of reengineering was $113 million.

Therefore, we offset only about 30% of the market impact.

For the balance of the year, assuming the S&P holds at 920, our anticipated market impact is a negative $120 million in pretax earnings.

The decline in year-over-year market impact is driven by the lower markets during the second half of 2008.

We are anticipating reengineering benefits of $147 million to fall to the bottom line during this second half, or 121% of the estimated market impact versus last year.

However, this table only reflects marketing, markets and reengineering.

We will still be facing the impacts of lower client activity, the shift to lower margin products and the impact of our recent acquisitions.

If you turn to slide eight, I would like to give you some further details on our balance sheet.

We now hold more than $2 billion in excess capital, which includes the $869 million of net equity we raised in the second quarter.

It also takes into account the estimated additional capital requirements for variable annuities.

We're also maintaining high levels of liquidity.

Even after investing $1.5 billion in cash during the quarter, we still hold $3.8 billion of free cash.

The $3.8 billion includes $1.4 billion relating to our equity and debt offerings.

However, $450 million of this is committed to the tender offer for our 2010 debt.

We think we made prudent decisions to prefund and then tender for, a majority of our next year debt maturity.

As Jim noted, we now have a much longer dated maturity ladder.

Our capital ratio remains strong, with our debt to total cap ratio pro forma for completing the tender at 16.2%.

And finally, our variable annuity hedging program continued to be extremely effective, with performance in excess of our 95% effectiveness target.

Turning to slide nine, I'll provide more detail on our excess capital position.

We told you last quarter that we held more than $1 billion of excess.

Now we have more than $2 billion after our equity offering, and after accounting for the estimated additional capital and reserve requirements for variable annuities.

This position also excludes AOCI.

In addition to the equity offering, the net change was driven by several factors.

First, we estimated requirements for VACARVM and CTE 98.

Second, we adjusted our methodology from fact to base to cash flow testing for all of our products and risks.

And our June 30 position reflects market improvements during the quarter.

Finally, the majority of the total position is now at the holding company level, which provides us significant flexibility.

Now turning to slide 10, here you see details of our investment assets.

Our purchases during the quarter focused on investment grade bonds, residential mortgage backed securities, which were primarily agency and (inaudible) non-agencies.

Our asset backed and commercial mortgage backed securities that are short duration and senior in the capital structure.

In the residential mortgage portfolio, we recognized $31 million of impairments on mortgage backed securities that had been previously impaired.

Mortgage market fundamentals have shown an improvement in the rate of new delinquencies.

But loss severities upon liquidations continue to deteriorate.

The commercial mortgage backed securities portfolio is nearly 100% triple A rated.

It is seasoned, and the underlying collateral is performing within expected parameters.

The direct mortgage loan portfolio ended the quarter with no delinquencies.

Trends in the market continue to indicate possible stress on commercial real estate.

Our historic conservative underwriting of the portfolio has been critical to maintaining a high quality portfolio to date, and the portfolio and macro trends are being monitored closely.

If you turn to slide 11, we have once again, provided significant detail on our unrealized lost position, which has decreased substantially.

In fact, the total net unrealized lost position fell to $577 million, a decrease of approximately $1.4 billion compared with the sequential quarter.

Unrealized losses after tax as a percentage of AOCI were just 4%, down from 16% last quarter.

On our website you can find the underlying details relating to each of these categories.

To conclude, while markets remain challenging compared with a year ago, we are cautiously optimistic regarding the environment and our business activity.

We are maintaining our sound, conservatively positioned balance sheet, and we are taking actions to drive profits in this environment.

We're confident that these actions will also improve earning power, as markets continue to stabilize.

With that, we'll be happy to take your questions.

Thank you.

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

(Operator Instructions).

The first question comes from John Hall from Wells Fargo.

Please go ahead.

Great.

Thank you very much.

I was just wondering if you could offer a little bit more clarity on, I guess, the amount of redundant expenses wrapped up in the asset management sector.

As I look over the course of 2009, we have a loss of about $20 million in that segment.

But you're looking to make an acquisition, a sizable one, I guess.

Could you just give us a sense of what the run rate is there, and if you're losing $20 million in that segment, why making a large acquisition in asset management is a good thing.

Well, let me start, and then Walter can jump in.

I think, if you adjust for the integration expenses from the acquisition, as well as from some of the costs of an old client settlement, that segment turns positive in income.

And then within that is also some of the redundant expenses.

So just as an example, with the Seligman we were on two TA triple platforms and a number of different things, and we're merging all of that together right now.

So that should be completed as we get to the latter part of the year, that would also reduce some of the expense savings.

And so the integration is actually working really well.

It's actually on target.

In fact, the savings are appearing to be even a bit stronger on the expense side.

We also, as we mentioned, are seeing some signs of turnaround in various of the flows, et cetera.

And the markets have appreciated a little bit during the quarter.

And so we actually see signs that we will continue to make progress improving the profitability as we go through the latter part of the year.

Regarding our idea, just like with Seligman, we feel that that was a very good purchase for us, and we'll get some really good synergies.

Of course, what happened over the last year is such a severe decline in the markets, it's affecting every asset management company in that regard.

We think that if there are good opportunities, that, in combination with what we have, we can get some really good synergies and even increase the profitability of the segment even more formally as we think about it.

So that's really our thought process there.

Do you have a target margin level that you would be shooting for?

Well, as we said, before the dislocation was taking place, we were heading for above 20%.

Between the 20%, 25%, obviously with the market dislocation, that certainly took it the other way.

But certainly that is our range that we are talking to.

And as Jim said, with the market where it is and with the other items that Jim mentioned, we do anticipate profitability in the second half to improve.

And then just quickly, on the $2 billion of excess capital, how much of that $2 billion number can you effectively go to war with in the acquisition arena?

It is excess, by definition.

And obviously it's fact and circumstance driven.

And we believe an appreciable portion of that is, then we'll sit and work with the rating agencies before we, use your expression, go to war.

So essentially it's all available?

It is classified as excess, yes.

All right.

Thanks very much.

The next question comes from John Nadel from Sterne Agee.

Please go ahead.

Good afternoon, everybody.

A couple quick ones for you.

Could you give us the estimate on what the VACARVM incremental impact was going to be.

You mentioned that your excess capital is net of that incremental, but could you give us a sense for that?

Yes, on the VACARVM impact, and the CTE 98 was in excess of $600 million.

Okay.

And then I just wanted to go through the equity market drag, the $0.36 that you're sort of citing from the equity markets in the quarter, and think about exactly how we should be comparing that.

Like what period.

Is that year-over-year?

So 2Q '09 versus 2Q '08.

Yes.

Sorry .

No, please.

I didn't realize --

I just wanted to put it in context.

So we should think about that versus the average S&P in the second quarter of '08, which was near 1,400.

But the average S&P in the second half of '08 was down around 1,100.

So is that --

Yes.

Is that sort of why your commentary about the second half of the year?

That's exactly right.

Because, remember, we ended the year at around 900 on the S&P, right.

And we exited the third quarter 1,165.

You're right.

I'm giving you the ending point but that's exactly right.

So we're getting the favorable compare but also, like I said, our reengineering saves are increasing, too.

Right.

But far more favorable comparison versus the first half of the year.

Absolutely.

Right?

Okay.

Absolutely.

And then the last one I had for you, just something I caught as I was running through the model, just thinking about, I was looking at the allocated equity in the annuity segment.

It dropped pretty dramatically on a sequential basis.

I guess intuitively I understand why the variable annuity allocated equity would come down with the market appreciating.

But the fixed annuity allocated equity came down about 23% sequentially, and yet that business is continuing to grow.

Just hoping you could help us understand why that business gets less equity despite the fact --

Well, it did grow.

It slowed its growth in the quarter, obviously.

And then remember, you get the first year affects coming through from the prior.

And also I believe, that was the main reason for it.

We basically had a change from that standpoint.

Okay.

So there were no significant assumption changes or economic allocation method--

We went from factor to cash flow testing from that standpoint.

Okay.

So did that transition from factor to cash flow testing have an impact on other segments as well?

No.

On other segments, no.

In terms of allocated equity?

No.

It should not have.

Okay.

Okay.

All right.

Thank you .

The next question comes from Jeff Schuman from KBW.

Please go ahead.

Thank you.

Good evening.

A couple of questions.

First of all, I'm hoping to better understand the earnings in certificate and banking.

Sometimes you have realized gains and losses in that segment.

But if we kind of back those out from the time series, it looks like you usually make a few million dollars in certificate and banking pretax, and this quarter you made $28 million.

So I was wondering if we could better understand the sequential improvement there.

And then secondly, I wanted to come back to the issue of reengineering and make sure I understand the numbers.

You talked about $170 million of reengineering generating a net expense reduction of $113 million for the first half.

And what I want to make sure I understand is, the $113 million, is that fully realized in the first half P&L or is there still some of that that would be actually yet to be realized in the P&L in the second half?

Those are my two questions.

Thanks.

Okay.

So let me, what we're doing there, the answer to your question, it is being fully realized.

But that is also, as Jim has said and we have said, that is approximately two-thirds of the reengineering segment stays full to the bottom line.

And that's why I was trying to match it from that standpoint to the impact of the market.

Not all of the reengineering saves to go to the bottom line, they are reinvested and things like that.

So while we have the savings, we are giving you the net impact of the 160.

Okay, that's how you got to 113?

So that is why that we realized to 150.

We reinvested back part of it.

So the 113, the residue goes against the 394.

Okay.

But that's fully realized in the first half P&L, so in the second half--.

Absolutely.

So in the second half P&L, I should look for more saved because you have done more activity, but we're done with the realization of the, what you netted out from the 170, okay.

That's right.

So you're getting the saves continue.

You're going to have more saves coming in as we go through.

And as we've also said , while we will realize over $350 million this year, the calendarization impact on a full year basis, there will be another $100 million that we'll realize next year.

Because not everything was done on January

Understood.

All right.

Now, I think the first question is really a function of, really the investment and being able to pick up on the yield elements and the redeployment of more cash.

It seems like an awful big pickup.

If I'm adjusting right for realized gain and losses, you've never earned anywhere near that level.

So it seems like a big pickup.

It was a big pickup, and it's the first time the bank actually went into profitability on that basis, yes.

And the bank has been building, and we record a good positioning on investing and the redeployment.

So it would be appropriate --

And we still have a lot more money to redeploy as well.

So (inaudible) some of it, and now it's getting into some of the spread and earnings.

So it would be appropriate to take the $21 million earnings level in certificates in banking and actually potentially increase that as we roll forward.

Certainly this is what we earned.

And, yes, you can -- I'll say it's just what we earned, yes.

Okay.

I don't want to do the math.

Okay.

Thanks a lot, guys.

All right.

The next question comes from Andrew Kligerman from UBS.

Please go ahead.

Hi, good evening.

A couple of questions.

The first one, maybe an update on what you're seeing in the M&A environment, and what the likelihood is that something might happen in the near term.

Well, listen, I think there are properties that are coming out.

There are different interests that people have in exploring the potential, what I would call divestiture of various assets.

And our feeling is that there will be more of that as people start to review, similar to the strains all of us are under a little bit, of what happened with the depreciating markets.

And so, I do believe that there will be opportunities.

There are already opportunities out there.

As far as the likelihood in the near term, it really depends on whether everything clicks appropriately.

Whether it's the right asset.

Whether it's also at the appropriate price.

And that strategically it will give us the capabilities we need.

So I don't really want to comment more than that, because until things are actually real, you don't really have anything.

I guess I would ask, Jim, which area is more -- are you seeing more activity, asset management or brokerage?

Well, in the brokerage world, we're actually growing the brokerage world because we are recruiting in a lot of experienced people.

It's something brand new to us, but we're doing well in that.

And we put 400 new productive people on the books in the first half of the year.

So we are devoting energy and resources to that.

We are continuing to look at broker dealer opportunities that may fit, as well to add on as we did last year with Brecek and Young, as well as Block.

But in the asset management area, I would probably say this is an area that we would be looking for.

Some reasonable size acquisition that would help really boost our domestic asset management activities or add to the capabilities we have with Threadneedle.

So those are the things that we'll continue to look at and pursue.

They may come along in the short-term or they may not.

But these are the areas that we always had a focus on.

With the extra equity that we raised purposefully for that, as you saw, we're able to handle now, even if the environment gets bad, having the cushion necessary to deal with that and still being able now to pursue opportunities that may come along.

And that's really what we're looking to, so that we have that flexibility.

Okay.

And it seems like you have most of the stall boxes covered in the asset management.

It would just be to get more scale and just kind of lever up that back office.

Well, I think with all of the depreciation of assets that have gone, I think a lot of us are feeling a bit of the pain of that.

And as you know, when you have the lower assets, it does -- with your overhead, you have a lot more capacity that you can manage.

So, yes, that would add and boost our profitability tremendously.

Second is, it would expand our distribution if we figure out the right property, so that we can expand that more through third parties.

And in this time frame, even though you may be in all of the stall boxes, to have a level of even further diversity there and expand some of the products in these core areas, I think is also helpful, particularly as you look to have larger distribution.

Great.

And I was looking at the performance in the domestic funds.

It looks like international is excellent.

The one years have come up a little bit, but the asset weighted rankings in equity were only 39%, and in fixed income it was only 42, Jim.

Are you disappointed?

Is there anything you might want to do if you don't do an acquisition.

Are there any changes that you're thinking you might need to make?

Because, again, this is not terrific one-year numbers.

We were disappointed, and still are to some extent.

I think what we're finding is in our fixed income, we're getting strong performance over the course of this year.

And as we ended last year, our portfolios were geared a certain way.

We're starting to realize that performance.

And so we're beginning to feel pretty good about the fixed income performance and how that will be boosted across a number of our core portfolios.

I think in the equities, we're starting to see some good signs of life.

We're not there fully yet.

And now we have to continue to have that over a more prolonged period.

We lost that, we had it for a period and then we lost that a bit a year ago.

And we want to sort of gain that back.

So we're not where we need to be yet.

Yes, we're still working hard on it.

And there's still a strong focus, and we'll continue to make sure that we can move the needle there.

Now, that in itself, we still feel there are opportunities for us to continue to add some good capabilities, like Seligman.

Even where we purchased Seligman, we lost some flows there, not because the performance was bad but because everyone pulled back from sales in these environments, but now we're starting to get that back as well.

And Seligman's performance is quite strong in a number of the key areas that has complimented ours.

And so that's what we're going to continue to keep our focus on.

And overall, as I said, yes, we are a bit disappointed.

There is a lot more work that we need to do.

But we do feel that there is a light at the end of the tunnel if we can continue down this path.

Got it, Jim.

And then just real quickly some numbers questions.

So you mentioned that $1.5 billion was redeployed from cash into investments.

How much more impact can you get from that?

Because I assume it all didn't happen on day one.

What kind of investment income upside can we expect to see in the third quarter that we didn't see in the second?

And then the next part of that question is, you have about, per the press release, $3.8 billion of free cash.

How much of that can you put to work in the near term, and what kind of upside do you expect from that?

Andy, it's Walter.

How are you doing.

Good.

Again, the yield on that was around six, that we picked up.

And, again, we did it during the -- and yields have really come down.

But that was deployed around the six range.

As it relates to 3.8, in the 3.8, I just have to caution you that there is $1.4 billion relating to the $900 million or $869 million that we did on the equity raise and the $500 million that we did on the debt raising, which we have now committed $450 million to.

So we believe there's still room to go.

And we'll look at it.

But we cautiously evaluate it.

But we might be redeploying it some more as we see the opportunity.

Okay.

It doesn't sound too massive then.

Nothing like the $1.5 billion?

Well, as I told you, as I think we were talking about last time, we were going to redeploy in this quarter, and then we were going to valuate and situate, and we'll do that but we still have room to go.

We have room to go, Andrew.

I think what Walter said is, of the 3.8, 400 we already targeted for the refunding of the debt.

So you're down to $3.4 billion.

And then, the 3.4 we did prior to the equity raise did redeploy more.

So we do have room.

The question is how much of that do we want to put to long-term.

How much do we want to maintain, both for combination liquidity or potential opportunities.

Andy, the other thing is obviously we generate a lot of investable income as we go through.

So it's quite replenishable.

Great.

And then just lastly, the distribution fees went from 431 in the first quarter down to 423.

And you mentioned some improvements like the wrap flows and so forth.

So I was kind of wondering, was the productivity there or am I missing something by seeing that come down.

I thought I would see a little improvement in that number.

No?

Andrew, this is Laura .

A good portion of the distribution fees are actually asset base fees.

So a little -- around half or so are asset base fees and the rest are

Got it.

So you are seeing the impact of the lower asset levels.

And I would say, Andrew, that more of the activity came back in the latter part of the quarter than the beginning part of the quarter.

Okay.

That's understandable.

Because the asset values even went up.

Okay.

So then I should look for a pickup in 3Q, assuming things are constant with where they are today?

Thanks a lot.

I appreciate it.

You should .

The next question comes from Suneet Kamath from Sanford Bernstein.

Please go ahead.

Thanks, and good evening.

I just had two questions, the first one, I just wanted to reconcile two comments on capital that were made on this call.

I think, Jim, you just said that you did the equity deal.

You've created some capital, and now you have the ammunition to go out and do a deal, and still maintain sizeable cushion in case the environment goes bad again.

But then I didn't get a response to an earlier question, Walter, you had said that by definition all of the 200 -- excuse me, $2 billion plus excess capital is available if you wanted to do a deal.

So how do we reconcile those two statements because it seems like they both can't be true unless I'm missing something?

Well, let me try and position it my way.

If we classify it as excess, we go through our requirement and we then evaluate the amount of capital we have, so then we come through and a lot of moving parts certainly have taken place.

From that standpoint, it's a fact and circumstance, when you're going to look at a transaction, sitting down looking at the environment you're in, discussing with the rating agents and other things.

So, from our standpoint it is certainly available.

And then we would sit down and work with the rating agencies and others to ensure that we maintain the safety and sounds on our rating as we move through.

So is that still confusing from that standpoint?

No.

I guess I'm just wondering, is $2 billion really available and could you go out tomorrow and do a $2 billion deal, especially since you said that you have no intention of raising capital for M&A, now that you've done--.

The answer is yes.

And then we would then -- and we have in excess of $2 billion.

But the question is, we would sit down with the rating agencies, also ensure that everybody is comfortable from looking at the transaction and ensure that even though it's available and it's there, we would certainly -- from that standpoint we want to make sure our ratings are preserved.

But it is certainly from that stand, available.

And we do have as our debt to capital ratios are quite good too, so we have backup there.

So, again, we're applying the same methodology, running it, and therefore when we say it's excess, it's by definition available subject to the transaction you go through and then discussing it, and yes.

And so let me be very clear.

We're not out this point, depends on when it occurs and what type a deal is how we would think about it.

So it's not as though we're not going to be informed in the environment.

What I did want to be clear on is that we could afford a reasonable size acquisition even if the market downturned a lot, that would have impacted any of us that we would feel like we have to be on the sidelines.

This equity raise gave us enough of a comfort to say that we can still do a reasonable size acquisition.

Now, if conditions continue to improve or stay where they are, then that acquisition amount could even be larger as part of what Walter said is up to the $2 billion or whatever, without even raising more debt.

Now, the other thing is, while we've estimated now for the CTE 98 and other things, this is as of the markets as they look today and as we're evaluating.

So obviously as markets did change, we would have to then reevaluate what the excess would be at that particular time.

But it's real.

All right.

And the other thing is, we did include those sort of latter part of the year requirements from the rating agencies into this analysis that we just reflected to you.

Okay.

That's helpful.

My second question is on a related topic and it gets to this issue of timing.

Obviously you said there is nothing on the table right now in terms of a deal.

But how long are you willing to sit with this additional capital waiting for something to come up.

And if something doesn't come up, what alternatives do you have to redeploy it?

Because it seems like the Company's overall shift has been to migrate to less capital intensive businesses.

So, if you couldn't redeploy it in an acquisition, what would you do with it?

Well, listen, prior to this market downturn, when we saw that we were sitting with some sizeable capital cushions, we bought back a tremendous amount of stock in periods.

And then when acquisitions came up, which was in the middle part of last year before the downturn, we still maintained enough so that we could do those two acquisitions.

Then the market downturned a lot, and we felt that all of the excess capital that we had at that point, we wanted to maintain so that we can handle the difficult environment, and we feel that that gave us the ability to navigate it.

Now what I would say is, at this point in time, we think the reason we raised it is because more opportunities will come along and we want the ability to go do it.

So, I'm not saying that if I don't get an opportunity in the next month I'm going to return it.

But I think over time, if we didn't see a good opportunity or they weren't at reasonable appropriate prices, that we could get the type of return we want for shareholders, then we would return it to you through buy backs, et cetera, just like we did previously.

Hopefully with the raise, we'll be able to do some of the things we wanted to do, and this might be the right time to do it.

Because of the accountant nuances, we had to go out before we would ideally like to because we didn't have a deal in hand.

But, we wanted the ability to execute if the opportunity came along.

But if things don't over time, we will definitely focus on driving up the return and giving it back to shareholders, and we're not going to do a bad deal.

So just be very clear.

We're not going to look to overpay to use the money.

Last comment on that very last statement that you made, last question, excuse me.

When you said we're not going to do a bad deal, would you accept earnings dilution for, say, the first year and consider that a well priced deal?

Yes.

I think the answer is, in certain respects including because of what happened with the market downturn, we accepted dilution even with the block in the first year because in any deal of the size, you have integration in the first year.

You're not going to get all of the synergies and the expense saves in that first year.

So our plans are to have -- it might be different, it may not be.

But our plans would be that you possibly will suffer some dilution in the first year, with accretion maybe in the second year and that's really our focus.

Okay.

Thanks very much.

The next question comes from Colin Devine from Citigroup.

Please go ahead.

Good evening.

I have a couple questions.

First, I just want to revisit the allocated equity in the annuity block.

And I'm trying to understand, Walter, how, if I look at how much equity you had against your VAs at the end of '06 before the market collapsed, it was about 2.1% of assets under management, today it's a 1.7 and yet you're in the money on the guarantees.

Can you help me get through, how come the allocated equity here is going down, when the risk profile of the block has gone up with the markets.

And isn't that a potential draw on the so-called excess capital?

The second thing, if we can just revisit what happened with the banking line and how -- what is a reasonable then earnings run rate going forward.

I'm tremendously happy you've turned this thing around and it made $28 million pretax.

But what's a realistic one going forward.

And then finally, on the fixed annuity line, the yield went up dramatically.

And I would like to understand how it was able to pop 80 points sequentially on that big a block of assets.

What are you out there buying that you were able to move the yard sticks that much?

Thanks.

Let me go.

On the fixed annuities, as we told you, the investment yields were ranging in the 7s and we feel very prudent, we really were able to pick off very good returns on that basis.

And so we feel quite comfortable with the quality and the yield.

And, again, we managed the credit rate to the customer relative to ensuring that we had returns that were way in excess of what we normally would get in this sort of -- normally on fixed annuities.

Your second question was --

It seems like a very big move on a $15 billion block.

But, okay.

I'll do my best.

I don't have the exact reconciliation.

But certainly we invested a substantial amount on the fixed annuities.

I'll have to do the math--.

Okay.

All right.

Then the banking line, if we can just touch on that to be clear.

Because I think it was a big surprise to all of us.

And then the allocated equity on the VA seems to be going down from where it was pre the market crash.

And I would just like to understand that that's not then a potential drain on the excess capital position and that it may not be that excess.

No.

Let me get to that one.

On that one, when we were doing this, and this is pre meeting at the rating agencies, what we have done, that is on a CTE 90 on the allocated basis, sitting there, we picked up the CTE 98 into the corporate side of it, because that was done later.

So, from that standpoint, the excess we're talking about does cover all of the contingencies that we have, and it certainly reflects the improvement that is taking place from the end of the first quarter.

So we're comfortable with that positioning on it.

And it has, as you know, a lot of moving parts going through it.

But we've been through it.

We've sat with the rating agency.

We're still waiting to hear back.

But certainly we feel comfortable with the positioning that we have said on that.

As it relates to the bank, the investments on the bank and the profitability of the bank is certainly improved.

And from that standpoint, I'm not going to run rate it.

But certainly as we look at the investments and certificate in the bank, it is improving.

There weren't any unusual items in there you would highlight?

We will certainly -- I'll go revalidate that and Laura will check, but no, I do not believe there are unusual items in there.

But I will verify and get back because when you speak to Laura, we will be able to make sure, if there is we'll communicate that out.

But I don't believe that is.

Thank you.

Just one thing before the next question, I just want to make sure I also say something regarding the last question we got regarding an acquisition.

If (inaudible) raised, we do evaluate whether there is dilution in the first year because of integration and then accretion thereafter.

If you assume that the equity raise is already factored in, and it's caused the dilution, then there may not be further dilution, there might be some accretion compared to the dilution we have already suffered.

So, I'm just saying it will really depend on the deal, the size of the deal and the level of integration in the first year.

So I don't want someone to assume there might be further dilution on top of the dilution we already suffered from the equity raise.

Next question.

Thank you.

The next question comes from Tom Gallagher from Credit Suisse.

Please go ahead.

Jim, yes, just a quick follow-up on the point you just made.

So, if I just run rate the earnings you reported this quarter, you raised equity at around a 10 PEA.

So was your comment that if we used the 10 PE as the bogey for the block you're acquiring in terms of break even accretion dilution, that you may suffer according to that definition, but relative to what you're earning on the funds today, which presumably a lot of that is in cash, it would very likely be accretive relative to that lower bar.

Is that what you're saying.

Yes.

Certainly the funds are deployed right now at a very low earning rate.

And we know that.

The reality is, when we do our analysis of that, we're looking at the transaction and we've always -- I think we've said this.

We look at it as if we use full equity at that point to look at it, and then we're looking at it from the standpoint of using full cash.

And as a transaction, we have to then make sure it meets our IRRs and elements there.

So we're not going to play off the fact it has to be certainly beneficial on that standard.

So ultimately the measure of the economic value of the transaction will be measured relative to your cost of equity capital?

That's exactly right.

Okay.

The next question I had was, I know there's been discussion, I think a couple of different times about shift to lower margin asset management or advice and wealth management products.

Can you comment on exactly what's going on?

Is it money moving into cash or what exactly is the shift to lower margin products?

What is happening, and this phenomenon has been happening for a while, actually it's beginning to shift back a little now.

There was a tremendous shift into brokerage cash and into basically brokerage and short-term cash, which obviously has a lower return characteristic to it but a lot of short-term cash.

And we were building a lot of cash on our brokerage and products which in this environment certainly was not giving anywhere near the earning power of the equity driven products.

But we're beginning to see a shift back now.

A little.

So I think Walter's comment is that the cash that either came in or we moved to the sidelines, that would have been normally deployed into things like wrap and other programs or funds was sitting there.

And because the spread on that business is so low, because of the short-term interest rates, we didn't have the earnings power on that as you would usually have even for cash.

And now that it's starting to shift back, we'll start to pick up some of the earnings power from the product flows.

And, again, as we invest some of the things, particularly in the bank and certificate a bit more, that we feel comfortable with the environment, we're starting to get some spread back.

That's a better earnings spread, and that's why the bank has turned to profitability.

So that's that we were talking about, but in the first part of the year, those were sitting in very short term liquid, and based on short term rates, we weren't really capturing any spread on them.

Okay.

And then the next question I had was on overall net flows and then on performance fees.

So, certainly the overall net flow performance in asset management has improved.

Just curious if there's anything unusual in there or do you expect generally the trend to continue of, at least break even to positive overall net flows.

And then I guess my question on performance fees was -- and I know it's typically a 4Q event for you, and presumably it's the alternatives portfolios that drive the bulk of that.

And I noticed in the international alternatives portfolio, unless this is a misprint, it looks like that overall fund was down something like 25% plus for the quarter, which seems a bit startling.

And I presume that means international, if that's correct, international performance fees on the alternative side won't be there, which means then you would be left with domestic.

But anyway, it's kind of a long-winded question.

Can you address the net flow outlook, as well as performance fees.

Well, I'll let Laura on the performance just to sort of check the math there.

But on the flows, if I start with Threadneedle, we're seeing some good flows both in the retail and institutional.

We're getting some good mandates.

Their performance has been quite strong.

Again, it really depends on markets and circumstances.

But, again, we feel good about the activity that's beginning to occur there.

Domestically, we've seen some positive flows in the business there in a sense of sales have picked up a bit.

Where we were still holding redemptions but sales were lower, and we are seeing some of that coming back, both in the institution and the retail side.

Again, it's hard for me to predict that going out.

But at least it's turned more positive than it's been.

And hopefully with the improvements and some of the improvements also in performance like in the fixed area, we're hoping that that will continue.

Laura, do you want to comment on that?

Yes.

I have two comments.

Tom, I'll have to get back to you with more detail.

But, below the market performance line you'll see the foreign currency translation that's UK to US.

But above there in the market, you're going to see all of the other translations that are taking it from their foreign investment in currency back to UK.

So, I'll have to check and see how much of that is actual FX moves on the book.

And then the other thing I wanted to point out is that a very material portion of those performance fees get paid back out again to the portfolio managers.

So, while there is margin contributed by them, it's not as material as the gross fees.

Okay.

Is it fair to say, though, just based on overall performance, that the alternative portfolio internationally was quite poor in 2Q.

I just want to make sure I'm not misreading that.

Without knowing what other currencies they might be compared to, I can't draw that conclusion.

But I will do the research and get back to you.

Understood.

Thanks.

And then one last question if I could.

I just want to better understand the $600 million VACARVM comment, CTE 98, my understanding, not that I understand everything about the VACARVM coming at this year end, was that it was not CTE 98.

It was something less onerous than that.

So is this $600 million something else?

Is this a rating agency driven number, or can you just give some color on what the $600 million is.

It's going to a higher standard.

That is correct.

From a rating agency perspective, that was the standard that we were using.

And we are using CTE 98, and that was since we default to the most restrictive standard, that's the number we use now.

Okay.

Thanks.

You're welcome.

The next question comes from Eric Berg from Barclays Capital.

Please go ahead.

Thanks very much.

Good evening.

My first question relates to just sort of how you organize your results.

What is the difference between the reconciling items on the one hand between net income and core, and core operating earnings on the one hand.

In other words, those reconciling items on the one hand versus disclosed items on the other?

Well, Eric, what we've done, and I think we've tried to do this in a very structured way, there are certain items that have continually impacted both, as you look at, that are basically items that really don't reflect, that we believe the ongoing nature of the business.

So candidly, cap gains and impairments and other things of that nature have always been excluded and that's one adjustment that has been standard.

The others we have put in there is obviously the integration course related to the acquisition.

And then, because of all of the fluctuations that have taken place as it relates to the mean reversion, the 157, and those aspects, that have been (inaudible).

Then there comes items that aren't normal where something comes through, and those are the disclosed items.

But the other ones have been part of us and we're just trying to give you a flow.

Especially if you look at -- as I said, just taking a look at 157, that impact, we're trying to give you insight into understanding that.

So are disclosed items, Walter, a subset of the reconciliation between net and core operating?

No.

What happens is, what we do is we go from reported with those standard items I just mentioned.

Now, in there -- now, then we get to core.

Then you have within core some disclosed items, which we will then tell you about.

And depending on how you run your analysis, you may say, you didn't have that factored in.

Because some of them are one time like a legal reserve or something like that, that might be exceptional.

Which I think --

Okay.

Which is the way we've been trying to do it for quite some time.

Okay.

A couple more questions.

Returning to the question about the amount of excess capital you have, if you were to stop the clock right now and think about the $2 billion, it sure seems like, once again, I know the question has been asked, but it sure seems like the number is less than $2 billion.

Because you have built an amount of funds here that contemplates a certain amount of potential deterioration.

So I'm thinking that the earlier question was really about sort of dividing the $2 billion between how much you could deploy if the balance sheet deteriorated, and you had to use some of that -- between how much you could deploy if the balance sheet deteriorated on the one hand, and how much you would need of the $2 billion to repair the balance sheet if it needed to be repaired.

So my question is, right now how much of the $2 billion is available given the possibility of a deterioration in the balance sheet?

Okay.

But it is a balance sheet.

So let's start -- that's a period.

It's as of this moment.

And as of this moment, calculating all facts, including the VACARVM and the CTE 98.

Based upon where the markets are, we have in excess of $2 billion.

Obviously one looks over the horizon.

So as we're contemplating a transaction, as I said, we'll evaluate the circumstances we think we're heading into and look at that.

But it is based upon our calculations, which we then review with the rating agencies and the rating agencies have to determine and, like I said, from that standpoint it's based upon reviews that we would then, based upon a transaction or an event that would, in the future, could change the amount of excess as of that point in time.

So this period has $2 billion in excess.

An excess of $2 billion.

Now, what happens -- now, let me go the other way.

If the environment improves, now we could get to $3 billion.

So then I can say, yes, as of this moment, then if it goes down, we could then say it will go down.

Eric, it's a moment you look.

Now, the question if you always put on the side for contingencies.

Because, remember, we're very conservative, and we think we prudently manage our assets and we don't take risks that we think could come back to us.

Anything could hit us.

We have very effective hedging, we have liquidity.

So we try to minimize the amount of exposure and contingency.

But as of this moment, that's what the excess is.

See, I was thinking that you're saying to yourself something along the lines of, we have $1.3 billion.

And I'm just making up numbers to illustrate the point.

I'm thinking that you're thinking to yourselves, we have $1.3 billion to do an acquisition and $700 million to plug holes.

Or we have $1.4 billion and $600 million.

That's the sort of break down that I was hoping you would have said.

Okay.

It's interesting, Eric.

So let me use your example.

If that's the case, and we have $1.3 billion to do something with, and that left an excess of $700 million plus, yes, that would be one way to evaluate it, and we would sit with the balance sheet committee and look at and say, do we feel comfortable with contingencies and things like that.

And then we go to rating agencies about the transaction, in your case, that you're talking about, and then we would then see how they would feel about our ratings and everything of that nature and say okay.

But say a transaction was now $2 billion.

You would then have the similar conversation.

And the question is, while it's still an excess, what's your comfort level.

And that would be based upon the horizon you're looking at, the situation you're looking at and things of that nature.

And we may say, do you know what, that's fine.

We'll go to rating agencies and discuss it, if they feel comfortable as it relates to flow outlook.

We don't have to cut into required capital to do it.

So, Eric, I see your point.

And, again, I think you're right in your thinking that it really is dependent on the circumstances at the time.

What we're just saying is this, at this point in time, covering what we think are all of the known requirements, based upon the quality of balance sheet, knowing that we're comfortable with the situation we have, the liquidity, the investment portfolio, we're saying we have more than $2 billion of excess after all of those requirements.

Now, we may choose that we could deploy all of that.

We may choose to deploy some of it.

We may choose, if we needed to raise a bit of debt if we wanted to along those lines.

But what we're driving (inaudible) conditions don't improve but get worse, and there are some other factors that come on, we have money there.

If we don't deploy $2 billion fully in capital against that.

If things improve, we still have the ability to even do more.

But to your point raised, it will really depend on all of the facts and circumstances, the deal itself, how we want to structure that appropriately.

But what Walter is describing, because people always ask what is your point in time of the excess, this is what the point and time is.

And I think, Eric, hopefully you feel we always demonstrate a degree of prudence as we evaluate.

And we did try to take into the other requirements, again those things also are fluid.

But we tried to take into account all of the requirements that we know about.

Because some people said, well, you have other requirements coming.

What does that look like.

So we factored that into this analysis as we saw it today.

Last question, and much more straightforward and narrow one, getting back to the issue about the certificate company and the banking operation, can you build upon your earlier response, I guess, to Colin's question.

If there were no unusual items, as best as you know in the banking operations, when you say that you made greater, something about investments, how was the bank operated differently in the June quarter versus the previous quarters, that caused this swing from a loss over each of the last four quarters to a $20 million pretax profit.

What did you do differently in running the business?

There were impairments in some of the prior quarters.

What we've done is, through a series of looking at the bank, we had liquidity to deploy, and we had different investment options that still met our liquidity requirements that gave us highest returns.

And those were executed in the latter half of the first quarter, that started paying us higher spread capabilities that still take into consideration our liquidity and meeting our liquidity test.

So it is basically just working pretty hard with the treasury group, as it relates to investing and out and staying within our liquidity guidelines.

So we've invested out, and we've also, in very long-term, short-term and different ways, which we'll now generate but certainly staying within, as we told you, our liquidity positioning and that is where we have factored in.

Thank you.

You're welcome.

Operator, we have time for one more question.

Thank you.

The final question comes from John Nadel from Sterne Agee.

Please go ahead.

Wow.

I get a payoff for hanging around.

So two quick ones.

One is just sort of a modeling question.

Thinking about the 20% tax rate.

Is that something that we should feel reasonably good about modeling out for forward years as well 2010, 2011, or is it going to be more gravitating higher, assuming pretax income is going to grow?

It will gravitate higher as PTI goes, and then, of course, we cover our tax planning.

But it obviously will gravitate higher.

That's what happened this time, with the market improvement and the other tractions we were getting, we then forecasted our higher PTI, and that's why we did the catchup in the second quarter.

But it will gravitate higher.

Okay.

Yes.

Okay.

And then the last one, I just wanted to follow-up, and go all the way back to the beginning of the Q&A.

I think John Hall had asked a little bit about margin targets for the asset management division.

And I understand if you look back to 2006 or '07, it might have been 2007, the pretax margin there.

And there's probably some noise in the numbers.

But it looked like it was about 17%, maybe 17.5%.

So definitely in line and gravitating towards that 20 to 25 that you offered up earlier.

But obviously asset levels were significantly higher.

You've done the Seligman deal since then.

Expense cuts have come through.

Market is down.

There is a lot of moving parts.

I guess my question is, without a deal, because I don't think we can model anything that we can't see, so with what you have today, what kind of time frame are we looking at if we just assumed a reasonable market, that normal long-term S&P, typical assumption of 2% a quarter or something.

I mean, what kind of time frame are we looking at to get back toward that high teens, 20% sort of level?

Is it in the next 18 months or is that more like the next 3 to 5 years?

Listen, there's a lot of parts that are moving because we had the Seligman coming through now.

I understand that.

That's why I'm asking you guys.

Yes.

I would say my feeling on that, again, if the markets are improving at the 8% range, and we're starting to get the traction on the net flows and the expense, and we're still making heavy investments in the third party.

So that is still there also with the third party distribution.

I would probably guess it's a little longer than the 18 months for sure, and there will probably be, if I had to guess, certainly in the time frame probably in the three-year time frame.

Again, assuming nothing else changes.

And I think that's reasonable.

And, sorry, I'm going to sneak one more in.

Jim, I would ask --

I was just kidding.

Oh, sorry.

I was kidding.

Jim, I would just ask, since there's been a lot of discussion obviously there's been a lot of rumors out there.

It seems to me that people are still very confused about how to think about, or how you guys are thinking about dilution and accretion and there's this discussion about, well, the delusion that is already in there from the equity raise.

We've taken earning levels down to reflect that, so maybe its accretion from here.

Can you go through that maybe one more time, so that hopefully there is real clarity on what senior most management is thinking about in terms of hurdles.

Yes.

Listen.

Let me step back.

What we would approach, forgetting issues now, when we do our analysis, standard analysis that we do, we look at it both on two ends of the spectrum.

We certainly look from the standpoint of using equity, on one end of the spectrum, issuing new equity at that point, or issuing pure cash, using our pure cash.

And then you go in between.

And then we evaluate the transaction itself.

Not trying to hide behind the earning power of the firm.

We're trying to evaluate the transaction itself, that it will give us a return on a capital that meets our hurdles.

And heavily guided towards expense saves of that nature, not just going for revenue saves.

And as Jim said, we go for an outer marker of a two-year accretion on that basis, and we run it through both, and then that is basically, and it has to meet our hurdle rates, and our confident rates that we can execute on that basis.

Then obviously --.

And the hurdle rate -- I'm sorry.

The hurdle rate.

I'm sorry, Walter.

You roll it into the whole company and then see what the implication is on EPS.

But the hurdle rate right now is 15 plus.

All right.

So the hurdle rate is 15 plus percent after tax return?

Yes.

Okay.

Thank you very much.

You're welcome.

Thank you.

This is Laura.

I will be in my office for a large part of the rest of the evening.

If anybody has any follow-up calls, that number is 612-671-2080.

Jim?

I want to thank you for staying late to ask your questions, and understand a little more about our quarter.

As I said, I do think that the Company is in a good position.

There's continued work.

The markets are still what the markets are.

But we're seeing some signs.

And we feel like we're in a good position.

We have a solid core franchise that we can navigate.

And hopefully come out of this in a stronger way as things improve.

So I appreciate the time, and Laura will take any of the questions.

I hope that we've been able to clarify some of the questions that you had.

Thank you.

Thank you for participating in the Ameriprise Financial second quarter earnings conference call.

This concludes your conference for today.

You may all disconnect at this time.