阿默普萊斯金融 (AMP) 2009 Q3 法說會逐字稿

Welcome to the Ameriprise Financial Inc.

third quarter 2009 earnings conference call.

With me are Jim Cracchiolo, Chairman and CEO, and Walter Berman, our Chief Financial Officer.

After the remarks, we will take your questions.

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

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 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 would like to turn the call over to Jim.

Good morning.

Thanks for joining us for our third quarter earnings discussion, and thank you for adjusting to this new time for our conference call.

We thought we would give you a bit more time to understand the numbers so that we can focus our call on our strategy and progress.

As our results demonstrate, the Company continues to emerge from a very difficult period in excellent condition.

Throughout the financial crisis, our balance sheet strength enabled us to continue to invest while others retrenched.

Now with two quarters of stable and rising markets behind us, we are beginning to see improving traction in key business metrics, and we're regaining the earnings power that our diversified model provides.

We are also seeing positive trend lines across our segments.

Retail activity is beginning to improve, as our clients are starting to gain confidence and beginning to re-enter the equity market.

We haven't returned to the activity levels we had before the crisis, but the progress we're seeing is positive.

As a result of the stronger markets and increased flows, our asset levels are growing significantly, which is providing increased earnings leverage.

In fact, our total owned, managed and administered assets increased to $440 billion at quarter end, an 11% increase over the sequential quarter.

Just as important, our client and advisor retention both remained at very high levels.

And the core of our business, our client advisor relationships, remains strong.

We are also making good progress in integrating the acquisitions we made last year.

The Seligman integration is essentially complete, and we are beginning to see improving asset flows in those funds, along with solid growth in our hedge fund business.

The H&R Block financial advisors integration is proceeding according to plan, and we are in the process of completing systems conversions.

That acquisition has given us the opportunity to reengineer our employee advisor platform, and we believe that group will now have the ability to deliver stronger economics over time.

At the same time, our strong foundation in prudent operating principles continue to serve us well.

The balance sheet remains in excellent condition.

In fact, we swung to a net unrealized gain position during the quarter.

And because we pre-funded our acquisition, we will be able to execute the Columbia management transaction and still maintain significant capital flexibility with strong excess capital and liquidity positions.

In addition, we are continuing to reduce expenses and we are on pace to exceed our goal of $350 million in reengineering savings this year.

Overall, I'm comfortable with our earnings trends, and I'm confident in our ability to capitalize on the opportunities we've created for the Company.

Now before Walter gives you more detail on the numbers for the quarter, I would like to provide some insight into our operating segments.

Importantly, all of our segments were profitable in the quarter.

First, in advice and wealth management, our client assets increased 11% sequentially, which was driven by rising markets and net flows.

In terms of client activity, as I said we are seeing improvements and the pattern has been consistent with our expectations.

We knew from past experience that it usually takes retail clients about six months to return to the markets after a market downturn, and we are around that six-month point now.

Given the severity of this crisis, we are not surprised that activity is coming back slowly.

Over time, as clients continue to gain confidence and redeploy cash into the equity markets, this shift will provide an additional earnings lever for us.

As a result of clients remaining conservative, cash balances remain high in clients' accounts.

Because of very low short-term interest rates, the cash balances are not earning significant spreads, and this has created a drag on earnings.

If short rates begin to rise, we would see a nice benefit.

When clients are accepting more risk, they are tending to look for products that give them diversity and flexibility.

During the quarter we introduced a new product, active diversified portfolios, that is meeting this need.

It's the second product in our active portfolio series, and it has generated strong demand.

In our advisor group, we are beginning to derive benefits from our experienced advisory groups, who are succeeding in bringing their books of business to Ameriprise.

Clearly, we were able to recruit a higher-than-expected number of advisors as we took advantage of the turmoil in the industry earlier this year.

Now that conditions are calmer, recruiting has slowed.

We've also reduced the pipeline of advisors coming to Ameriprise, as we roll out a new brokerage platform and complete the Block acquisition.

Once we have our employee advisor group fully integrated into one broker dealer, operating on one new brokerage platform, we think we will present an even more compelling value proposition for experienced advisors.

Now I will turn to asset management, where we've generated total net inflows of $2.3 billion.

In domestic asset management, sales of mutual funds are beginning to increase and redemptions have remained steady, which has allowed us to return to net inflows in domestic retail funds.

We've also won some important institutional mandates, and our third-party distribution, which has been slow, is starting to gain traction again.

Overseas, Threadneedle continues to perform very well, with strong net inflows across its businesses, even with continued Zurich outflows.

In terms of investment performance, domestic performance continues its positive trend in the quarter, with improvements across equities and fixed income, and in both retail and institutional.

Most of our funds remain positioned for a recovery, and as a result, all of our asset-weighted performance numbers improved versus the sequential quarter.

At Threadneedle, performance remained excellent, with 90% of equity funds above their peer mediums for three years.

The quarter was highlighted of course by our announcement of the Columbia Management acquisition.

We continue to feel very good about the financial and strategic possibilities Columbia will give us, and about the cultural fit of the two organizations.

Columbia's employees and clients have received the combination very well, and the business continues to perform at a high level.

In fact, the long-term assets we will acquire have appreciated to $184 billion at the quarter end.

We remain confident that we will be able to execute the transaction efficiently, and that we will be able deliver on our financial projections for the deal.

Turning to annuities, we are continuing to drive strong results, and I feel good about the direction of that business.

In variable annuities, asset balances increased 13% sequentially, primarily from market appreciation.

Net flows remain positive despite slow sales, as clients remain reluctant to enter long-dated contracts.

We think sales will pick up as conditions continue to improve, and as two new products launched during the quarter gained traction.

The new secured source riders are designed to meet current client interest, while preserving strong returns for the Company.

Our variable annuity hedging program continued to perform well in the quarter, and DAC unlocking demonstrated the strong underlying fundamentals of the VA book.

In fixed annuities, our balances were up 25% compared to a year ago.

During the quarter we lowered our rates in response to the spread environment, which resulted in lower sales.

On the other hand, the growth in fixed annuity balances that resulted from strong sales over the previous several quarters is now generating solid returns.

In the insurance business, sales continue to be a challenge for the industry.

In general, we are seeing clients still opting for fixed products rather than variable, and sales are trending up but they are still below last year.

Total VUL and UL sales increased by 22% sequentially, but were down 4% compared to a year ago.

Importantly, our book of business in the protection segment remains solid.

We are also continuing to introduce innovative insurance products in response to current conditions.

During the quarter, we launched a new optional rider on permanent single life policies to help clients manage costs associated with chronic care, and we are seeing good initial traction in this product.

In addition, our [Order One] home business continued to generate solid growth, driven by an 8% increase in policy count over a year ago.

This business has generated very consistent growth, and it continues to produce nice margins.

Overall, as I look across our businesses I'm starting to see improvements in client activity, and along with that, we are realizing improved asset flows and nice growth in asset balances from the rising market.

At the same time, our solid financial foundation continues to support our model and our growth objectives.

Because of our strong capital base and our continuing focus on expense control, the Company is in an excellent position to navigate various market and economic conditions.

If markets continue to improve, we have substantial flexibility to invest in future growth or to return capital to shareholders as appropriate, and we have a lower expense base to help us drive earnings growth.

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

We believe in the strong earnings power inherent in our model, and we are confident that we can execute our agenda and bring that power to fruition.

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

Thanks, Jim.

We posted slides on our website again this quarter.

They will be updated with my talk points after the call.

Please turn to slide three.

We are beginning to see improved profitability trends.

Reported net income was $260 million compared to a prior year loss of $70 million, while our core operating earnings of $268 million were up 7%.

Core earnings growth was the result of improving fundamental drivers.

Please turn to slide four.

This chart reconciles reported and core operating EPS.

The differences were marginal this quarter, but we have continued to show this table because of the very significant market impacts on earnings last year.

In total, excluding non-core items, operating EPS declined from $1.13 to $1.03.

However, excluding the 36 million shares issued to prefund the acquisition, EPS was up $0.06 to $1.19.

Regarding taxes, in the 2009 quarter we increased our forecast of full year profits, which raised the full year effective tax rate estimate to 22% from 20% at the end of the prior quarter.

This catch up is reflected in the higher 23.7% effective tax rate for the quarter.

Turning to slide five, you can see the net revenue trends for the past five quarters adjusted for the impact of DAC on [locking in] both years.

On this basis, revenues increased by 7% compared with a year ago, and by 17% compared with the low point of the first quarter of this year.

These positive trends were driven by strong underlying factors.

First, growth in net investment income, as spread product account values and earned spread rate both increased.

These trends, along with our consistent insurance premiums, form a solid base for future revenues.

Second, growth in management and distribution fees reflects the equity market increases, as well as positive flows in acquisitions.

On slide six, you can see our reengineering progress.

This slide shows the increasing ability of our reengineering programs to offset the market impacts.

The estimated market impacts year-over-year are declining, as a result of both the recent equity market appreciation, as well as lower comparisons from last year.

At current equity levels, the fourth quarter 2009 daily average could actually exceed the current prior year quarter, although there is still a material difference in yield available for our liquidity pool.

We have employed reengineering to mitigate the market impacts on revenues and PTI, with about two-thirds of our reengineering savings falling to the bottom line.

The remaining one-third has been reinvested in the business to support longer-term growth.

In the third quarter, reengineering saves offset approximately 80% of the market impact.

Given our intention to maintain our focus on expense management, and at current equity levels, net reengineering benefits are expected to exceed the market impacts in the fourth quarter.

On slide seven, you can see the drivers of our unlocking.

The detailed line items impacted by unlocking are disclosed in our statistical supplement.

Bottom line, unlocking benefited core operating earnings by $0.33 per share compared to a $0.31 per share benefit last year.

The unlocking benefit was driven by improvements in the following assumptions - spread, persistency, expenses and mortality.

If you will turn to slide eight, I would like to point out just a couple of things related to our VA hedging.

You can see that our variable annuity hedging continues to effective.

As in the past quarters, nonperformance risk and basis risk have continued to offset each other.

While the nonperformance risk impact was a negative $27 million, basis risk was a positive $25 million for a net expense of $2 million.

The correlation is a result of the basis risk also being primarily driven by spread.

Death benefits were a positive impact in the quarter, as the equity market gains resulted in lower reserves.

In total, the variable annuity benefits impact was immaterial in the quarter.

Slide nine shows the major components of our unrealized gain position.

In total, we believe the improvement reflects the higher quality of the portfolio, as overall spreads narrowed and [risk free] rates declined during the quarter.

The primary driver of the $1.4 billion improvement was investment-grade corporates; the largest component of our available for sale portfolio with a fair value of over $15 billion.

The second largest driver is the CMBS segment, reflecting the overall high quality of that portfolio.

On a percentage basis, increases in fair value as percent of cost, the biggest positive movements were in the prime RMBS portfolio as well as the high yield corporate portfolio.

Next, I would like to address our balance sheet strength on slide ten.

We continue to maintain more than $2 billion in excess capital.

Of that, approximately $1 billion is expected to be deployed for the Columbia acquisition in the spring of 2010.

We do not anticipate any additional variable annuity capital requirements at year end.

We will continue to maintain appropriate liquidity levels down from prior quarters but still above early 2007 levels.

The target is somewhere between $1 billion to $1.5 billion in free cash for normal market conditions.

We expect to continue to maintain strong capital ratios.

Our debt to equity, excluding non-recourse debt, and with a 75% equity credit for our hybrids, is under 15%, and we anticipate our variable annuity hedging will continue to perform well.

I conclude with slide 11, our outlook for the remainder of the year.

We have a favorable view for the balance of 2009.

Given current equity markets, flows, and our spread product base, we expect continued favorable net revenue growth trends.

We expect to end the year with reengineering expense savings above plan, with some operating expenses impacted by improved profitability, namely taxes and compensation.

As a result of positive net revenue trends and continued reengineering benefits, we expect to see positive profitability and returns.

We have completed the Seligman acquisition, and will be focusing on the operational consolidation of HRBFA, as well as launching the Columbia integration activity.

Finally, we expect to maintain strong balance sheet fundamentals.

In summary, we expect to exit 2009 with accelerated earnings and a very strong foundation.

With that, we will now open it up for questions.

Operator?

(Operator Instructions) Your first question comes from the line of Tom Gallagher with Credit Suisse.

Talk about what is going on in international institutional within asset management.

That's really where you had the main delta in terms of net flow turn around.

I know you mentioned that Zurich still had net outflows.

Can you talk about what's been driving that positively?

Yes, the Threadneedle business is starting to experience some good wins in their institutional mandates for external clients, and we -- the stronger institutional offset some of the continued outflows in the Zurich book.

But we are seeing some good wins there, based on their investment performance both in fixed as well as equity.

And people are beginning to get back into the markets both in Europe as well as we are winning some mandates in Asia and the Middle East.

Jim, would you say there was any -- were there any jumbo-type transactions, or were these the type of wins that you think are going to be recurring and sustainable so we can see this as more of a permanent level?

Well, we can't predict but I think there are a number of wins.

There wasn't necessarily one or two big mandates, but there they are reasonable size mandates, and we see our pipeline there looking pretty positive.

Got it.

Okay.

Next question is can you give an update on the incentive fee outlook for asset management, relative to where you are versus high water mark, on the assets that you manage with incentive or performance fees?

Well, I think overall, you know our performance has been coming back in a number of areas.

I mean, we still have some negative PIAs in some of our retail funds, so that has been a little bit of a drag on us.

But as we looked at the performance coming back this year, it's quite positive, particularly in the fixed income area.

When I look at the hedge funds particularly around [wix] area, that's been performing quite strongly, and so that will be positive, and we should be getting performance fees that we will be booking in the fourth quarter there.

You still do the one time true-up in 4Q for performance fees?

Yes.

Okay.

And the last question I had is related to variable annuities.

I was look at page 19 of the supplement, just looking at GAAP allocated equity to variable annuities.

And I noticed it hasn't increased.

Yet last quarter, you had said VACARVM and CTE 98 would require another $600 million of capital related to that business.

So my question is, is this -- should I not be looking at the GAAP allocated equity as being the real -- the actual capital required, because the $600 million was more of a statutory concept, or maybe you can help me reconcile that?

This is Walter.

So if you go back to Q2, when we did mention that if you took the impacts that we were estimating for VACARVM and CTE 98, that it was in the $600 million range, and that obviously we had an offset as it came as we went to cash flow.

That is reflected, the VACARVM is reflected in there, but of course we are now getting the improving market.

So it is our best surrogate to get to capital equivalent of risk base.

So it's there on that basis.

But Walter, if I look at the -- this is, again, just from your financial supplement, 1Q '09 said $1.1 billion of allocated equity to VA; 2Q '09, $800 million, 3Q '09, $986 million.

So -- and if I go back to 4Q '08, $1.3 billion.

So actually on a GAAP allocated equity basis it's come down, it hasn't gone up?

That is correct.

That's you having the markets move through there, you having basically the 157 moving there.

So you have a lot of moving factors going through, but VACARVM is within that calculation.

Okay, thanks.

Your next question is from Andrew Kligerman with UBS.

Good morning.

First question, and then two quick follow-ups.

With your advisor, your Ameriprise advisor, so it fell sequentially by 224 to about 10.3 thousand.

You mentioned a little earlier that you are moving on to one platform; could you give a since of the timing when that gets completed, and what type of advisor account growth objectives do you have over the next 12 months or so?

Well, there are two things happening right now.

One is as we are migrating to one platform, we are also combining the field office activities in certain locations and realigning the employee base to one sort of network.

So there are some adjustments occurring; some of the old P1 advisors that were more of the Ameriprise, some of them are deciding and they are migrating to our franchisee channel a bit.

Second is we've slowed down the recruitment activities because we are in the process of conversions, and so we are moving people from the old platform, first the block platform, over to the new and then our own advisors over to the new.

And that's taking place in the fourth quarter.

So it's more difficult to bring people over and transfer their books during that time.

Third, in the franchisee channel we do have some attrition.

It's mainly in more of the advisors that are part of the franchisee teams that were under them in their team structure, where they've tightened their reins a little bit based levels of activity.

And so some of those lower level advisors and those team practices were let go or they moved on.

So it's a combination of those things that we saw.

The strong recruitment we did in first part of the year, before we migrated to the platforms and what was happening in the industry, those people are on board and we're getting them all situated and they're bringing over their books.

So what I would say is fourth quarter is going to be another slow quarter for us based on the changes that we are making.

And then we are hoping to get more in to a stable flow next year.

And then as we migrate our franchisees over to the platform we can probably even open up recruitment more strongly in the franchisee channel next year as well, which we are just starting to do.

Just quickly on a follow-up to that, is there any particularly compelling about the new platform that you didn't already have?

Is there a major, major change there?

Well, our platform previously, we put in a great front end system which is advisor planner focused, and we have all of the ways that you could work with clients, for performance tracking, for goal tracking, for integrated activities regarding a broad product set, which includes protections and annuities, et cetera.

What we did not have is the latest in the features and functionality on the brokerage side.

So this new platform will give us state of the art of those capabilities.

Combined with our front end, we should then have one of the best technology infrastructures in the industry.

So we are quite excited about adding the new brokerage platform, that would be great complement to the front end advisor workstations we have on line.

In terms of the cost savings, if I add up the first three quarters of savings you got $290 million, and I think in the third quarter alone you got $120 million.

You are saying for the year, you want to be doing more than $350 million.

That would imply at least $60 million in the fourth quarter.

But I'm assuming you probably do at least the $120 million you did in the third quarter, is that the right thinking?

Secondly, as you're reinvesting the moneys from your saving, what's the primary focus for reinvesting?

So on the first question, you know our run rate in reengineering has continued to pick up.

It's quite strong, it was $120 million in the third quarter.

We see that run rate somewhat continuing.

I won't give you an exact figure, but it will be greater than the $60 million, and we see it will definitely be above the $100 million mark as we get into the fourth quarter.

In regards to how we think about reinvestment, this year alone we have been making investments, we have cut them down and scaled them.

There are certain things that we probably want to start picking up again next year, but I think we are going to continue to keep a focus on expense control, particularly in many of the areas where we've made the adjustments and reengineered out the cost.

There are a few areas we might invest a bit more in again next year, depending on the market situation, things such as advertising, media, things such as that.

But we have been making core investments in our architecture.

We did commit to this new brokerage platform.

Part of the expenses you see, even in AWN this quarter, is because of that new platform we are putting in, and that will continue as we go into next year.

But that's all been counted as part of the investment strategy we already have.

So investments may pick up a little as business has continued to come back strong, but I do believe we already have a base level of investments that we are still having in our plan this year.

So it's not like we are going from scratch.

Perfect.

Then real quickly, $2.1 billion of free cash mentioned, do you put any of that to work or do you kind of keep that as sort of a buffer?

Right now we are thinking that in this environment, looking at it, that we can be in the range of between $1 billion and $1.5 billion, and then we will just adjust it as we see the situation.

That seems like a pretty good range for us.

Perfect.

Thanks a lot.

Thank you.

Your next question comes from the line of Jeff Schuman with KBW.

Good morning.

A couple of follow ups on the issues around the advisors and the platform.

It sounds like the roll-out of the platform is significant enough to influence your recruiting plans.

I just want to be clear, is there potential for this to actually be disruptive in terms of productivity for the existing advisors, or is that not a concern?

No, I think what it is, is there will be some disruption as we convert over, but the conversion has been going smoothly.

What you really have is people getting more familiar with the new system, so there is some additional training depending on what they are familiar with and where they came from.

So there is probably a bit less for the Block advisors that were on a version of this type of platform.

It's probably a bit more for our advisors in our P1 channel, but it also -- our P1 channel don't do a lot of transaction processing activities.

So a core of what they do is the same, it's just more of getting used to the functionality and how to process work, et cetera.

We are rolling this out to the franchisees over time based upon their need, so that's going to be scheduled out over the course of next year.

So we don't look for any major impacts.

The only reason we had to do a major conversion on the employee side is because we are putting together two broker dealers with the acquisition of H&R Block.

And that's what's caused us to do the migration all within a set time frame so that we can move to one legal entity.

Thanks, that's helpful.

Then when you get back to a somewhat higher level of recruiting, what kind of general plan -- are you going to get back to more your historical strategy around recruiting sort of newer advisors, or are you going to continue on with the more recent strategy of targeting your current folks, or how does it kind of roll forward?

I think as we start moving forward, we are going to continue focus on -- a bit more on the experience front.

We are probably going to push a bit more in hoping to bring in more people that also want to move to an independent in the franchisee channel.

And we will probably start sometime next year again bringing in more of focused career changers that are pretty well established in understanding how to sell, et cetera, from other different venues that they've been in their careers, but we would probably start that up again in a very focused way.

So the complement in the employee channel will be through a combination of experience and career changers, and then in the franchisees we will be bringing in more of those people either coming from independents or coming from people, [wire houses], that want to be more independent.

Next question?

Your next question comes from the line of Suneet Kamath with Sanford Bernstein.

Thanks.

Two questions, please.

First on the advice and wealth business, if I look at I guess it's page 11 of your supplement, where you break out the pretax earnings from the certificates and banking piece, as well as the wealth management and distribution, if I exclude the certificates and banking, maybe give you some credit for the integration costs, it just seems like this business is still -- you know, the pure wealth management and distribution part of the business, is still break even, maybe losing a little bit of money.

So my question is, what is the strategy in terms of turning that around, and what are maybe a couple of the major leverage points that you have to get this business back into profitability?

Okay.

Let me start.

There is a few things.

First of all, our activity is, as I said, beginning to come back.

What we are seeing, there are two parts of that activity.

One is, as you are well aware, a large part of our business is fee-based.

So as the markets pick up and the activity -- the account balances pick up, that will be flowing into the type of wrap fees and quarterly fees that the advisors get.

We've seen a nice trend pick up of that over the last two quarters, and so it's starting to get back to nice balances that will start to realize some of the annuity streams from that.

And since our advisors don't do a lot of immediate transaction business, you haven't seen that come back quickly into the distribution revenue yet.

The second part of that is activity levels for some of the other products, like transactions, annuities, some of the longer-term accounts and insurance, as well as even transactions in regard to things like REITs, et cetera, has not come back as quickly.

We are seeing signs that it's picking up.

But that, after such a volatile market change, just in a normal down market it was six months before clients normally came back to some of the more normalized activity levels.

Then the third, on the revenue side, is the brokerage spread on the cash.

It's getting a few bips that we are earning on it.

If you go back and normalize short-term rates, if you get them over 1% to 2%, you would find that that would be a very lucrative profit margin that us and many other firms, including Schwabs and others of the world of retail brokerage, would find is an important revenue stream for profitability.

So that's really been a drag on us.

On the expense side, if you net out the integration costs we are up to about $28 million, but that includes some of new things I mentioned, the new brokerage platform we got is part of operating expense.

We still operate with two old platforms, what we have Block on.

We have the Block operating environment plus our own continuing to go on until we merge the broker dealers.

So some of those expenses are not in the integration expenses, and so they're included into the operating, and when the revenue compressed that really hurt the profit margin.

So as we get through the fourth quarter, some of those expenses should be relieved.

And therefore hopefully with the pick ups I've mentioned in some of the other categories of revenue, we will start getting back to much stronger profits hopefully in AWM, if the markets continue to hold.

That's helpful, Jim.

When you announced the Columbia deal, you kind of gave us some useful information in terms of the margin potential for the asset management business.

I think you said something like 20% to 25% by 2012.

Could you give us just a ballpark guess in terms of where you think the margins in advice and wealth management business, assuming kind of market trends are stable, could be by 2012?

I would say, you know, we probably get back to margins between 10% and 15%, depending on where cash is and short-term rates.

Great.

And then the second question was for Walter on the risk based capital, have you run your calculations for 9/30/09 in terms of where you think the RBC might be?

Yes, we have -- obviously, as we said, we do it once a year, but we can take a rough shot of it.

It is certainly in excess of the $350 million.

I would have thought it would be much higher than that.

You get a combination if you look at unsmooth, smoothing, you are having the markets move around, but it's clearly in excess of that, substantially in excess.

Okay, thanks.

Thank you.

Your next question comes from the line of Eric Berg with Barclays Capital.

Thanks, and good morning to everyone.

My first question actually returns us to page 11 of your supplement.

Even though you are reporting profits on a pretax basis out of your certificates and banking business, it looks like in the September quarter the number was $37 million pretax, you're showing negative [number] on allocated equity.

Help me understand how you could have positive earnings on allocated equity, but a negative pretax return on allocated equity?

Is that figure calculated differently from how it sort of normally is?

Obviously, it's bank regulatory equity is basically the way that is factored in on that basis, so I think it is totally consistent from that standpoint.

So we are factoring in the bank regulatory equity into that calculation.

So the calculation is based not on the --

Eric, if you look at it, if -- we are first coming out of de novo status now.

and we are in discussions with the OTS as it relates to the dropping capital requirement as it [looks it], which is substantially higher than an ongoing banking situation that we believe.

So we -- again I don't want to get ahead of yourselves with the OTS, but certainly we see there will be a -- we are hoping for reasonable drop in that.

I guess I'm trying -- you've given very helpful and comprehensive answer to my question, but I'm really asking a very simple one.

How could you be -- irrespective of how much equity you have in the business, how could you be showing a negative return if your numerator, namely your earnings, are positive?

Yes, I understand, but Eric if you go through the calculation, it's a four quarter calculation, so you get the full effects of it trailing through, so it's not just a turn quarter, you have to do it over the trailing 12.

That's it.

I think that will work if -- we can go offline with Lori after, but it should really resolve, it is trailing calculation.

It had to do with some of the losses recognized in the fixed book previously.

Got it.

No, that -- now I feel I have the answer to the puzzle, so to speak.

Jim, in the September quarter, it was striking by how much the performance improved at RiverSource in the equity funds compared to the June quarter performance.

It seems as if there was really a leap upward in the percentage of the assets being managed in the top half of their Lipper quartile, you know, in the top half of their Lipper peers.

Help us understand how in one quarter you could see such a -- what would appear to be on page 14 a dramatic improvement in performance?

And then just one more question, thank you.

Yes, I think as we were looking at the performance of the product, there was included in the second quarter a gradual trend up.

So part of the performance improved toward the latter part of that performance, and some of the weaker performance from the earlier vintages were rolling off.

And that's why it sort of blipped up, because it just needed to hit certain thresholds to get it up to the next level.

So we continue to feel very good about the performance trends coming back there.

And hopefully based on what our investment people are focused on that will continue.

Okay.

Thank you.

And then my last question, back to you Walter, on page eight of your slides where you are comparing the 25 to the negative 27, and you're circling them, at least on my slides it's circled, as if to suggest you want to look at those numbers together.

I'm just wondering, the -- I'm wondering whether it's coincidence or purposeful that those numbers are so close to each other in the sense that I thought the basis risk arises from sort of the difference in the sensitivity to credit spreads of your hedge on the one hand, and your GMWB liability on the other.

Sort of the difference in sensitivity to credit spreads, that's kind of the basis risk, and that the FAS 157 credit spread number; the negative 27, really has nothing to do with the basis risk but simply reflects uniquely on your own credit worthiness.

Yes -- I didn't mean to interrupt, I thought you had finished.

No, no, I was going to say -- so I'm just wondering whether the fact that the 25 and 27 are so close together netting to a small number, a negative two, whether that's coincidence or purposeful?

It's correlated.

I think we have been seeing a pretty close correlation with that.

Again, at different times it's widened out, but it certainly has been closely correlated.

Okay.

Thank you.

Your next question comes from the line of Colin Devine with Citi.

As far as just -- Walter you mentioned with respect to the bank and the capital, I just wanted to clarify, in your estimate of excess capital, does any of that include the potential capital relief from what you are holding for the bank, assuming you get it out of the de novo status?

So that's question one.

Question two, a little more detail, if you could give us some more transparency on what really happened behind this DAC unlock?

I know you provided some numbers there.

But I would like to understand a little bit more, given the decline in long-term interest rates, the narrowing of credit spreads, as well as just what equity markets have done.

In a sense why you did it, but also what are your key assumptions then in terms of persistency?

How long are you amortizing your DAC over?

What sort of market returns are you assuming?

What asset mix within the products are you assuming?

That would be very helpful, thank you.

As far as the excess capital, until we actually resolve and get clarity with the OTS about what the amount of capital being required, we will not calculate it in our excess.

But if that does come to fruition, we would then count that and have the ability to [give] that up, so to speak, and that will become part of the capital --

Do you have an estimate as to what that might be?

We are in discussions right now.

We are technically out of de novo and we are filing our three-year plan.

We have to go through it.

I don't want to be presumptuous, so I will let the process go through its normal course.

As far as basically looking at the assumptions, obviously you are aware that we go through a fairly extensive review by our actuaries, looking at all aspects of this.

I think we have a little different opinion about credit spreads.

They have widened, and we have seen the benefit of that reflected, and that was calculated in from that standpoint.

So we do see that is certainly -- it has been certainly looked at and validated with our external accountants, and they have looked at the persistency and the mortality; we do, like I said, reinsure 90% of it.

So from that standpoint, we feel comfortable with those elements and looking at the expense benefits we've predicated in.

So when we look at the markets and the DAC, the DAC is matched to each product in how they evaluate it and look at it from that standpoint, and the trends that they feel have developed and the behavioral patterns that have developed.

So we are comfortable from that standpoint.

All the assumptions are very consistent with the actuarial tests that go through.

So as far as the markets right now, on the DAC, we basically are assuming that the way we have seen it and we've looked at it before, we had that it was going to be certainly be a little more lumpy.

We've smoothed it, and feel the rates now are in the 11% range, and we are feeling comfortable that as we monitor -- but as you are aware, we certainly adjust that on a quarterly basis as we see it.

Just -- I'm not sure if I caught that.

Did -- you said you are assuming an 11% market return, okay.

I didn't catch in terms of the -- are you assuming if it is 11%, is that on the VA overall balances, because I would have thought a third to half of them are in fixed income now?

So I would appreciate some clarification on that.

I don't think I caught where you mentioned what drove the persistency change or how it has changed.

What sort of persistency are you assuming, and then also over what period are you DACing, in terms of --

Like I said, the DACing goes over -- depending on the different products that they are, the DACing goes over the length of the product, so I can't -- I don't have that with me.

Laura can get you the information on that particular issue.

As it relates to the assumptions on the equity markets, obviously with dividends and everything, right now looking at it over the time horizon, which we do quarterly.

It is an 11% factor with the dividends, and there is a factor built in obviously for the account values to stay within the variable annuities, which is much lower.

So those assumptions, like I said we feel quite comfortable, and certainly with coming back with the markets and everything, we have basically brought down, as we explained to you, the assumptions on lumpiness and we've just smoothed it out.

Okay, but I guess I'm still missing this.

It's the 11% on the equity market piece, okay, then you got a portion of your VA -- of accounts in fixed, I assume it's lower, bringing down the overall return assumption, or are you saying it's 11% overall on your VA --

No, it is 11% for the portion that relates to the equity, and we use a lower amount as relates to the account value within the variable annuities and within the fixed -- within the variable annuities.

Thank you.

There are no further questions at this time.

Okay.

Thank you very much for participating in our call today.

If there are any other follow-ups, you can give Laura a call.

But hopefully that's been informative for you.

And as I said I feel we had a good quarter and we feel like things are on the right track going forward.

And with that in mind we will continue to plow away.

Thank you and have a great day.

This concludes today's conference call.

You may now disconnect.