阿默普萊斯金融 (AMP) 2010 Q3 法說會逐字稿

Welcome to the 2010 third quarter earnings call.

My name is Sandra and I will be your operator for today's call.

(Operator Instructions).

Please note that this conference is being recorded.

I will now turn the call over to Ms.

Laura Gagnon.

Ms.

Gagnon, you may begin.

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

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

After their remarks, we 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 and related presentation slides, our 2009 annual report to shareholders and our 2009 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 call.

This morning, Walter and I will give you our thoughts on the Company's performance for the quarter and the progress we're making across the business.

We will also provide (inaudible).

Let's get started.

This was another strong quarter for us.

In fact, despite the continuing challenges in the environment, we achieved our highest quarterly revenues and earnings since we have been a public company, with $2.4 billion of net operating revenues and $355 million of operating earnings.

Operating earnings per share of $1.37 represent an increase of 32% compared with a year ago, and 25% compared with last quarter.

Our operating return on equity reached 12%, which is up nicely compared with the last couple of years.

While we realized benefits from DAC in the quarter, strong business fundamentals drove these results.

We continue to generate higher margins in our more fee-based segments, Advice & Wealth Management and Asset Management, and our client base and advisor productivity continue to improve.

We're realizing the benefits of the Columbia transaction and our other acquisitions which help drive owned, managed and administered assets to an all-time high of $649 billion.

Our strong financial foundation and prudent operating principles continue to serve us well.

The balance sheet remains very strong and we continue to hold considerable excess capital and liquidity positions, which gives us significant flexibility to invest for growth and manage through a difficult environment and to return capital to shareholders.

In fact, I believe we're one of the few firms in the industry that have the strength to repurchase shares.

During the quarter, we bought back an additional 3.6 million shares for $153 million, bringing our total buyback for the year to 9.3 million shares for $373 million.

We're also maintaining our commitments to reengineering and expense control, and we're continuing to fund our investments with a portion of our reengineering savings.

Expenses remain well managed, with general and administrative expenses down in every segment, except asset management due to the Columbia acquisition.

Now I would like to discuss our segment performance.

First, Advice & Wealth Management generated strong results.

We reported pre-tax operating earnings of $88 million compared to $28 million a year ago.

Our pre-tax operating margin in the segment was 9.3% for the quarter, up from 3.4% a year ago and up slightly over the sequential quarter.

Our advisor retention rates remain very high, with retention of our most productive advisors rising to well above 95%.

Employee advisor retention is also up significantly, and that was a primary goal of our long-term work to re-engineer the employee force with a focus on productivity.

We orchestrated a transformation of the advisor system.

Lower producing advisors have left and we've reduced costs significantly while continuing to invest in the business.

And even with the S&P 500 still 25% below all-time highs, advisor productivity is near our all-time highs.

So, we feel good about the economics we are generating and the leverage we've created in the advisor system.

Lower costs and higher productivity were our goals and we're achieving them.

In the quarter, operating revenue per advisor increased 21% over a year ago.

While we're seeing some improvement in client activity compared to this time last year, advisor productivity was off slightly compared with the sequential quarter, mostly due to the slower summer months.

Clients are more confident now than they were a year ago, but doubts and concerns are persisting and as a result, investing behavior continues to show a fairly high level of risk aversion.

Even with the seasonality impact, we continued to generate asset growth in the advisory business during the quarter.

Total client assets increased to $313 billion, up 9% over a year ago.

Wrap accounts were an important contributor to these increases.

We recorded net inflows in wrap accounts of $1.8 billion in the quarter, and total wrap assets increased to $105 billion, an 18% increase over a year ago.

I should note that while the factors we can control are contributing to higher margins, a factor outside our control is offsetting some of our gains.

The historically low short-term interest rates are impacting our profitability in this segment, fairly significantly.

The Asset Management segment also delivered a strong quarter.

We generated pre-tax operating earnings in the segment of $121 million, compared to $17 million in the third quarter of last year and $104 million in the sequential quarter.

The segment's pre-tax operating margin was 18.3%.

These results, which included a full quarter of Columbia contributions for the first time, demonstrate the improved profitability and scale of our combined asset management business.

Despite the 4% average decline in the S&P during the quarter, revenues grew 18% sequentially, and global assets under management increased to a record high of $445 billion.

In terms of asset management flows, we experienced global net outflows of $2.1 billion in the quarter, with net inflows of $1.1 billion at Threadneedle, offset by domestic outflows of $3.2 billion.

While we obviously are working to return to domestic net inflows, we continue to feel comfortable with the progress we're making in the business.

Flows continue to be impacted by the industry-wide weakness in retail equity fund flows and by the upcoming mergers in our mutual fund lineup which were announced last month.

While institutional flows remain negative, we feel very good about the pipeline and the overall positioning of that business.

Internationally, Threadneedle's return to net inflows was led by strong institutional inflows which more than offset the outflows of lower margin Zurich assets.

Our investment performance continued to improve in most asset classes, highlighted by stronger short-term domestic fixed income performance and continued strength in our three and five year numbers.

Threadneedle's performance remained very strong, and overall we feel good about our performance records.

The integration of the acquisition is proceeding according to plan.

During the quarter, we completed the move to a common transfer agency for the combined business and we announced a new product lineup.

Once our fund mergers are completed, which will occur mostly during the first quarter of next year, we will have a more focused and strong performing product platform.

As we have gone through the integration process, which obviously imposes significant change on the organization, the business has continued to perform well.

We have retained talented people and maintained the two firms' client bases, and we're now operating truly as one firm with any disruptions from the transaction largely behind us.

In annuities, we reported pre-tax operating earnings of $265 million for the quarter, a slight decrease compared to a year ago and more than double our sequential earnings.

This quarter reflects our annual DAC unlocking, which had a positive impact on the quarter, although less positive than a year ago.

While Walter will discuss the drivers of DAC shortly, I want to note that the primary driver of the positive impact was great persistency of the book.

Clients are staying in their annuity contracts longer.

Business fundamentals remained solid despite a continued challenging environment for sales.

We produced variable annuity net inflows of approximately $500 million, double our net inflows compared with the sequential quarter.

The inflows were driven primarily by sales of a well received new product that we introduced during the quarter.

The fixed annuity business remained stable.

While we're not writing much new business in fixed annuities because of the rate environment, we are seeing lower lapse rates and better than expected asset persistency in the book.

We continue to generate stable spread earnings and good returns from the fixed annuity balances.

The protection segment produced pretax operating earnings of $65 million, a decrease of 53% compared to a year ago and 51% versus the sequential quarter.

We recognized a $39 million expense related to DAC in this segment, compared with a $24 million benefit in the third quarter of last year.

Setting aside these impacts, profits were down $10 million year-over-year, which resulted from increased claims.

We do not see the one-quarter increase in claims as a trend that is likely to continue.

While insurance sales remain well below pre-crisis levels, with clients still reluctant to commit cash, we saw a continuation of a gradual improvement in total cash sales.

Expenses remained well controlled in the insurance business, and we're pursuing sales improvements through a new simplified approach to help advisers explain product benefits to their clients.

The auto and home business continued its steady growth with policy counts increasing 10% over a year ago, and with promising benefits from alliance partnerships.

To summarize, we feel very good about the progress we have made and the results we generated over the past several quarters.

We're succeeding at driving higher margins in our less capital demanding businesses, and we are continuing to generate very real benefit from the scale and strength of each of our operating segments.

At the same time, we continue to manage our financial foundation carefully, and our risk and expense disciplines will not waver.

Overall, we're in excellent condition, and we're in a strong operating position.

Of course, the environmental factors remain challenging.

We expect the extended period of low short-term interest rates to continue for the foreseeable future, and while equity markets have improved they are still struggling to find a direction.

Of course, clients feel these environmental factors and we believe the trend in client activity continues to demonstrate the fragile state of the economic recovery in consumer mindsets.

So the environment continues to impact us across our businesses.

Asset-based fees, advisor productivity and our ability to earn investment income are all affected by soft conditions.

While these environmental risks remain, we are confident in our ability to navigate a wide range of conditions and generate good returns for our shareholders.

Now I will turn it over to Walter, and later we will 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.

Please take a moment to review the Safe Harbor statement on page two, and then turn to slide three.

This was a record quarter for Ameriprise.

Reported EPS was $1.32, and operating earnings per share were $1.37, up 32%.

Revenues were up 26% and we maintained strong expense control which resulted in improved margins.

Our operating return on equity, excluding AOCI, reached 12% and finally, our balance sheet fundamentals remain strong.

Slide four reflects the highlights of our performance.

In the quarter, our operating earnings were $355 million.

The 31% growth in operating earnings was achieved despite a significant year-over-year decline in DAC unlocking benefits.

In the quarter, we generated a net positive DAC unlocking and other benefits of $47 million versus $105 million last year.

The substantial year-over-year improvement in operating performance reflects the following items.

Growth in business drivers, realized reengineering benefits, the acquisition of Columbia management, and the impact of a 10% year-over-year increase in the equity markets.

On the next slide, we will provide more insight into the DAC and our associated assumptions.

Of the $47 million in after-tax items in the quarter, $37 million of the benefit was generated by unlocking.

The two major drivers were first, updated persistency assumptions drove an overall benefit of $101 million.

Persistency on both fixed and variable annuities has improved to the point we needed to increase DAC amortization periods to better align the recognition of expense with revenues anticipated over the life of the business.

Of course, while improved persistency has a positive impact on continuing fees and spread revenue, it could also lead to increased benefit costs from variable annuity guarantees.

So, we needed to increase reserves for these benefits.

Consistent with our risk management philosophy, we adjusted our hedge in the third quarter so it is based on the same policyholder behaviors assumptions as the liability.

Secondly, we lowered our equity and fixed income return assumptions to reflect fair value of the equity market and the current interest rate environment.

This resulted in a $55 million expense.

Near-term equity markets now equal our long-term assumption of 9%, reflecting our view that the market is currently reasonably valued.

Fixed income return assumptions reflect our expectation of an extended period of low interest rates, gradually increasing over time.

In the quarter, we generated a mean reversion benefit of $25 million, reflecting the 11% absolute increase in the S&P 500 during the quarter.

And finally, the narrowing of our own credit spread drove $15 million in losses.

Remember, we do not hedge the impact of our own credit spread on the living benefit valuations.

On the next slide, operating net revenue growth was strong at 26%.

Revenues have been on an upward trajectory over the past five quarters.

Excluding the Columbia acquisition, revenue would have been up 13%, driven primarily by higher markets, positive retail flows, and increased client activities.

Let's turn to expenses.

We continue to manage our expense-base effectively.

Operating, general and administrative expenses grew 15%, primarily due to the Columbia acquisition.

Operating expenses in the other segments were down year-over-year, reflecting continued strong expense controls and reengineering benefits.

On the next slide, you can see we are continuing to drive our business mix towards lower capital, high return on equity businesses, namely Advice & Wealth Management and Asset Management.

Together these businesses, excluding the DAC impacts, generated 43% of our third quarter operating PTI, and you can see that we have been on a good trajectory for the past year.

Keep in mind, the fourth quarter 2009 results were skewed by the recognition of hedge fund performance fees.

This compares to a 29% mix from these businesses in the 2007 to 2009 periods.

One of our key objectives is driving this mix shift towards lower capital businesses, while effectively managing our excess capital position, which ultimately leads to a return on equity expansion.

On the next slide, I will turn to the segments.

This was an excellent quarter for Advice & Wealth Management segment.

Pre-tax operating earnings were $88 million in the quarter, and operating margins have improved from 3.4% last year, to 9.3% this quarter.

Year-over-year earnings growth and margin expansions were driven by several factors.

First, continued advisor productivity gains as a result of reengineering our business model.

Second, growth in average fee-based assets driven by market appreciation and wrap net inflows of $9.1 billion.

Third, lower operating and general and administrative expenses, reflecting strong expense management.

We achieved these expense savings even as we continued to make significant investments in the businesses, including increased marketing and our new brokerage platform.

And finally, an improvement in client activity, although it continues to be below pre-crisis levels.

Client activity typically declines in the third quarter, and average equity markets were down 4% sequentially.

That said, a portion of that seasonal drop was offset by stronger sales in our new variable annuity product, RAVA 5, and the market decline was partially offset by retail inflows.

As a result, revenues were down only 2% sequentially.

On the next slide, you can see we also had strong performance in our Asset Management segment.

In the quarter, we generated pre-tax operating earnings of $121 million, and an operating margin of 18.3%.

This is the first quarter reflecting a full three months of Columbia operating PTI.

While the year-over-year market appreciation benefited our margin, the sequential decline in average markets did put pressure on revenues.

We estimate the 4% decline in average markets lowered margins by approximately 1%.

The integration of Columbia continues to go well.

Please turn to the next slide for more details.

Year-to-date, we have expended $76 million in integration costs, with $18 million recorded in the Asset Management segment in this quarter.

Our estimate of total integration costs remains at $130 million to $160 million.

Our expense synergy estimates also remain on track, having realized approximately $47 million year-to-date versus our estimate of total expense synergies of $150 million to $190 million.

As we said before, integration was expected to impact flows.

There were three main factors impacting Columbia's retail flows.

First, continuing impact of the integration on fund merger.

Second, we continue to experience significant sub-advisor outflows, and finally, the market demand continues to be skewed towards fixed income products.

Institutional flows, while still negative, have improved significantly and reflect the continued acceleration of our activities in that area.

We are seeing the best institutional pipeline we have seen for quite a while.

Finally, alternative flows are being impacted by a soft close of most of our hedge funds to allow us to maintain strong performance.

At Threadneedle, net inflows of $1.1 billion were driven by strong institutional flows, more than offsetting continued Zurich outflows.

Retail net outflows continue to reflect the overall market volatility in Europe.

Let's move on to annuities, which also generated strong results in the quarter.

The $265 million of operating earnings included the following.

$105 million in benefits from unlocking; $29 million in benefits from mean reversion; and $22 million in expenses from VA benefits.

Year-over-year underlying growth was driven primarily by higher account values as a result of markets and business growth.

Sequential underlying growth reflects higher revenues from an extra fee day along with lower amortization of DAC.

The ongoing impact of DAC amortization from unlocking should not be large, as lengthening the amortization period tends to reduce near term amortization while lowering market return assumptions, and certain other changes tend to increase near-term amortization.

Focusing on the underlying business trends, we continue to see positive net flows for variable annuities, with third quarter showing significant improvement over the second quarter of 2010.

The growth reflects the uptake of our new product, RAVA 5, which was introduced in July.

Our hedge program continued to work well.

The nonperformance risk, which is the impact of our credit spread on the GAAP liability valuation, is not hedged and is the main driver behind the VA benefit expense.

On the next slide the Protection segment reported lower operating earnings due to both unlocking and higher claims for disability income and long-term care insurance.

Operating earnings of $65 million included the following items.

Increased expense of $49 million due to unlocking, and a benefit of $10 million from mean reversion.

Sequentially, excluding the disclosed items, underlying earnings were down $21 million with about half attributable to higher DI and LTC claims, and half to higher VUL, and UL reserves and amortization expenses, primarily related to secondary guarantees and our expectation of lower interest rates.

On the next slide, we continue to manage our financial foundation well, which has enabled us to return capital to shareholders.

During the quarter, we repurchased 3.6 million shares for $153 million.

That brings our year-to-date repurchases to 9.3 million shares for $373 million.

We continue to hold more than $1.5 billion in excess capital, while our cash levels remain strong at $3.7 billion.

The $2.1 billion of free cash does not include the $340 million we will use next month to retire debt.

The underlying quality of our balance sheet also remains strong.

RiverSource Life's estimated RBC remains above 500%, and our unrealized gain position increased to $2.3 billion.

Our balance sheet ratios continue to remain conservative, both in terms of leverage ratios and coverage ratios.

Finally, our variable annuity hedge program continues to be effective.

So to summarize, we generated record earnings in the quarter as a result of strong underlying business performance, despite continued challenging markets.

Our actions have resulted in increased operating leverage and we are making good progress.

We are driving the mix towards lower capital businesses, effectively managing our excess capital, and driving improved operating returns.

Our balance sheet remains strong, including our capital and liquidity positions.

Now, we'd like to take your questions.

Thank you.

(Operator Instructions).

The first question is from Tom Gallagher from Credit Suisse.

Please go ahead.

Thanks.

A few detail questions for Walter.

You had commented about reducing the long-term interest rate assumptions.

Can -- first, first part of that is, can you comment on how much you've lowered your fixed income separate account return assumptions to?

I believe, from your 10-K disclosures, they were 6.5% a year.

So first question is, what has that been changed to?

It has been changed to 6%.

So from 6.5% to 6%.

Got it.

Yes, that's correct.

Now, just one mechanical question.

6% from this point forward with interest rates, with corporate bond yields in the 3% to 4% range, would imply capital appreciation to get to a 6% long-term return assumption.

So, is that consistent with -- so that, to me, implies that you're assuming interest rates will go down from here, for an extended period of time, to get to a 6% long-term return assumption.

Is that consistent with your interest rate assumptions on your general account right now?

What we assumed, Tom, was that for the near-term period that the rate on that would be sub-three, and then in the -- end of 2012 period it would, we're assuming the Treasury would be like a five, and then with the spread, we will take it to a six.

And that's how we got to it and we think that is consistent.

Okay.

Yes.

I guess, Walter, my point would be, for money that are going into these contracts today, 6% would appear to be, the only way that is going to happen is if rates go down and stay down.

I understand your point that, as you move forward on average, if rates rise you would be clipping higher coupons.

But for funds that go into contracts in the next year, 6% seems unlikely unless rates actually go down from here and stay down.

But, we can debate that more off line.

Okay.

The other -- I don't know if you would agree or disagree with that.

I just -- I think it is (inaudible) improbable that you would get 6%, unless interest rates actually go down, for money being put into contracts now.

Like I said, we're assuming now for the shorter period that the rate is going to actually be substantially under that.

It is going to be under three, and then, as you look at the forward rate curve, they seem to support that in the two-year, three-year time frame you could get to the ranges that we're talking about.

So actually I think we're agreeing.

Okay.

And then just a related question.

Is that consistent with the discount rate changes you made on the general account side whether it is to the secondary guarantee UL or long-term care?

On the secondary, yes, it is reasonably consistent.

Okay.

And then last question, is the -- I just want to understand sort of go forward annuity DAC amortization, how we should be thinking about that.

I know there was a write-up this quarter and I understand, or at least have a rough understanding of the mechanics, but last quarter, I think the DAC run-rate amortization was about $85 million normalized?

This quarter it was $62 million?

Can you give some -- give us some idea of what the run-rate would be going forward?

Is the $62 million a good run-rate?

Is it going to go up or down?

Obviously -- let me try and do it this way.

This is -- the impact was effective in the quarter.

So when we look at going forward, as I said, with the lengthening of the lives and then with the overtrades, I don't think we see a major change in the near term, as it relates to that, versus --

So, Walter, would it -- would the $62 million amortization rate be a decent run-rate, which would imply annuity earnings of $150 million-plus a quarter, or is it back to 2Q level?

I just want to clarify that.

Probably closer to the 2Q level.

Understood.

Thank you.

Thank you.

The next question is from John Nadel from Sterne, Agee.

Please go ahead.

Good morning, everybody.

If we go back to slide 11 for a second, it indicates that you guys have year-to-date $47 million of synergies, or I guess I would just call that cost saves but, whatever.

If memory serves, at second quarter, that synergy estimate was $14 million?

So it looks like you got a pretty meaningful kicker, incrementally, of about $33 million?

I guess my question is one, am I doing that math right, and then if so, I guess I'm a little surprised that sequentially, or quarter-over-quarter, that Asset Management earnings didn't actually come through even better, despite the market drag with the average S&P down.

So there is something else we should be thinking about there?

Is it drag?

Is it fee rates coming down or anything like that, that we should be thinking about?

No, I don't think so.

I think, listen, the pattern of that as we went in -- it will slow a little and then build up in 2011.

And as it relates to the quarter, certainly we had the impact of the quarter over quarter 4% drop, but there is nothing that we see as problematic.

Okay so, but the math is right, right?

That is an additional $33 million?

Quarter-over-quarter?

Approximately right, yes.

That is approximately correct.

Okay.

Second question is just on the -- on protection.

In your remarks, Walter, I think you mentioned that about half of the -- I think you mentioned about half of the quarter over quarter decline, or about $10 million, was related to low interest rates and the impact on UL and VUL reserves.

Should we be thinking about that as a one-time item, or is that a -- if rates remain at around current levels we got to think about that as a sustainable sort of higher level of benefit.

I think --

Benefit expense.

If rates stay where they are, you should think of it as a continual benefit.

Got it.

And then finally, with your adjustments to the DAC in the annuity business, can you give us a sensitivity, if you lowered, for instance, the equity market assumption from 9% to 8% long-term, what kind of an impact that would be?

Well, it -- basically, you're taking out -- let me just say it this way.

I think when we adjusted through with the elements it's moved from like 10% -- yes, down from 10% to -- so the amount on that is -- I'm trying this -- on the equity side is around -- $36 million, and that is moving a point-and-a-half.

I'm guessing right now, maybe $20 million, something like that.

But it is a guess, it really is.

Okay, I'll follow-up with you afterwards.

Normally, we don't want to take it below 8%, or below 9.

Got it.

Thank you.

I hope you're right.

Thank you.

The next question is from Andrew Kligerman from UBS.

Please go ahead.

Good morning.

Couple of questions.

First, around the Asset Management business.

On the equity side, only 54% were in the top two quartiles.

Last quarter I think it was over 70%.

A little color on what is going on there.

And secondly, once you merge the funds, what -- if you had merged funds officially, this quarter, what would that number look like?

And then, tied into that question is the outflows in US mutual funds of about -- or net outflows of about $3.2 billion.

The question is, how much of that would you say is related to the integration and when does the integration of Columbia RiverSource become a nonevent?

Drew, first I would say that, in speaking to our investment professionals, they have had a bit more of a defensive position.

They actually feel quite good about the make-ups of the portfolios and the type of securities that they have in them.

And so, I think quarter-to-quarter, you're always going to experience a level of volatility.

But we think, we got good three and five year records.

We think the consistency of their performance over the last number of periods adds value to that.

So they feel very comfortable with it.

So, we don't have a concern here that the overall performance is slipping in any fashion.

In regard to the -- your second question was around -- ?

Just if you had combined all the funds now and dropped off the weaker ones, would that 54% be materially higher?

Yes, I think what you'll find is that, as we merge as we merge all the funds together, we will have a better lineup of performance.

And we will be dropping off some of the underperforming records that we have and some of the smaller funds as well.

But I would say overall, we have a good lineup.

I am quite excited about what that looks like as a consolidated sort of lineup of funds, and I think once that starts to get communicated and consistently applied out through the distribution force, that should be good as a positive.

Regarding the flows, I would just say it is a combination of factors, as Walter and I have mentioned.

Clearly, you do have an industry-wide pull out of equity funds.

I mean, redemptions are a bit up across the industry and new sales aren't coming in there.

I think a lot of flows in some of the fund families have really come into the fixed income.

Over 60% of our funds are more in the equity base.

That is sort of the positioning that we have had out in the market place.

The second thing, as you would imagine, is we just announced the lineup of the new funds so people don't want to put into funds that they may think closed.

We also just got the new wholesaling force coordinated, and they are picking up the new products and the new territories.

So that takes a bit of time.

And we still are experiencing some outflows in some of the sub-advisor funds that have underperformed in the past.

So, I think the reason you see a bit of an increase is because this -- we picked up three months of Columbia for the third quarter.

We only had two in, in the second quarter, that was in some of the outflows that we're continuing to see.

So, I think that's along the lines -- it -- we would love for it to, help to get it turned around and that's what we're really focused on, but we did expect some of this based on a combination of the factors that I just mentioned.

Then just a quick follow-on question on the protection segment, with disability income and long-term care claims elevating.

Can you reiterate -- I think, Jim, you were saying it was about a $10 million impact, and, what are you doing in those product lines to mitigate it?

Are you repricing the DI and the LTCI?

Or do you just think things are going to revert to where -- to where results were?

Okay.

It is Walter, Andrew.

On the LTC, obviously, we are in repricing and we've certainly filed for pricing.

As relates to the DI, as we indicated it looked like that was a spike-up in the quarter.

On a year-to-date basis, it is actually on trend line, where we are.

So we're feeling quite comfortable.

No action.

We have some of the lowest claim rates, probably in the industry.

So we don't really feel there is a pattern change here at all, at this stage.

What is the repricing on the LTCI?

We have been filing for rate increases in various state venues as we -- for the --

Like 10%, 12%, 15%?

We have been doing that for quite some time and we continue to file that.

Yes, but, I mean, like how much, 10%, 15%?

You know --

It varies.

It varies, obviously there is a whole set of tests that you go through with the states, to demonstrate the profitability of it.

it's ranged all over, depending on the state --

All right.

But, it has been a program we have been doing and we obviously evaluate that relative to the current rates, so it is -- it is a detailed review that goes on.

But it's -- we constantly assess and we're constantly filing.

All right.

Thanks a lot.

Thank you.

The next question is from Suneet Kamath from Sanford Bernstein.

Please go ahead.

Thank you, and good morning.

A couple questions on the Advice & Wealth business.

The first questions is, if we think about that 21% lift in productivity from the third quarter of 2009, can you tell us how much of that was based on just markets being higher this quarter, versus how much of it was from actual increases in, like, real productivity, client activity, that sort of thing?

We probably don't have the exact.

But the way I would probably think about it is, your markets were up roughly 9% on equity and so, not all the assets are equity-based, heavily they're not.

So I think you get a piece of it from the equity markets, a piece of it from increased client activity, and then, a piece from client inflows that we have experienced over the last year, that has also moved into products like the wraps.

So it was roughly $2 billion just for the quarter.

But if you add up the total quarters over the year, you will find that it was a nice increase.

So it is a combination of those factors.

Okay.

I might request, if it is possible to maybe break that out in your supplement going forward, I think it would be helpful to understand the health of the business.

The second question is --

We will look at it and see what makes sense.

All right, that is great.

I appreciate it.

Second question on the business is the employee advisor retention at, I think, 78%.

I think that is probably one of the highest levels I have seen.

Should we assume from that, that you're sort of done with the productivity -- minimum productivity standard implementation and perhaps now we can start to think about growing the employee advisor base over the next couple quarters?

Or do you still think that advisor count is going to be flat to down?

I think as you said, the retention rate is probably, for our employee system, the highest that we have had it at, and we continue to see a slowing, quarter-to-quarter.

It is not necessarily completely over, because there are still people that we had added, a year ago and two years ago that continue just as you know, as they mature, you always have an attrition rate, because they can't necessarily keep on taking the step up.

And we still have advisers in the system such as that.

But I think as it goes on, we will have a more normalized, as you see the retention rate starting to pick up.

We're hoping to get that into the 80s.

And so for the employee system and the franchisee system, it is quite strong.

From a replacement perspective, as you know, when you have 11,000, 12,000 advisers, just to replace normal attrition, people leaving, succession planning, people retiring, et cetera, you have to make up for all of that.

And what we have been doing is, instead of looking at it as just a count of advisers, we're trying the add to teams, we're trying to give them greater support that they can build out their practices, not necessarily with new reps, but with support staff and assistant advisers.

We're also recruiting in, we think, more experienced people, that have books of business already.

So we're focused more on the productivity aspects.

Over time, I would say over the next number of quarters, yes, I would like to get that to be more of a flat first and then hopefully, get it to rise slightly in the periods.

But the focus will be on increased productivity and growth of practices, in combination to the number of people that we have.

Got it.

Okay.

And then the last question I have is just on the impact of low interest rates on the Advice & Wealth business.

Walter, in your prepared comments you talked about that drag being significant.

Can you help us quantify what that drag is right now, and -- that would be helpful, thanks.

Yes.

If you're referring to the Advice & Wealth Management, obviously, the drag is continuous.

So the change is really not an impact for us, from that standpoint.

It is just staying at a lower rate, as we spoke to you about that we were hoping and as we looked at the rates going forward, that they would increase, which would then generate profitability.

But the quarter-over-quarter change and -- is not significant at all, from that standpoint.

It is certainly just -- we're looking for the uplift, as the short-term rates go up.

No, I got that.

But just the absolute level of drag.

I'm not talking about quarter-over-quarter.

What are the cash balances?

What do you normally earn on them, and what are you earning right now?

Maybe that's the way to do it --

As we indicated last time, we're earning in the 50 basis point range on the sweep accounts, and we continue to earn in that range and that is at the low end of the spectrum.

It is -- that's what we see continuing until -- until we start seeing the short rates go up.

Got it.

And the sweep balance right now is how much?

It is still about 11 -- it is still, I think -- we will get back to you, but I think, it is about in the 11 range.

$11 billion?

Yes.

Thank you.

(Operator Instructions), The next question is from Colin Devine from Citi.

Please go ahead.

Good morning.

I have a couple of questions.

Walter, with respect to the changes made on the variable annuity line, which is on persistency and then also benefit payment expectations, I was wondering if you can just expand on that a little bit.

Now why do you -- in terms of your DAC policy, over how many years has that now changed?

And then in terms of future benefits, what has changed in your thinking as to what you are going to be paying out?

Is it death benefits, is it lifetime benefits?

And then how much did you add to reserves?

I'm trying to make that up from the stat supplement.

I don't know if it was actually a couple hundred million dollars, but perhaps could you expand on that.

And then just changing gears, perhaps for Jim.

I know a big focus has been to bring in non-proprietary products and to get those sold through your system.

Can you give us some update as to how that is evolving, please?

(inaudible) what's changed -- certainly we have observed that people that have living benefits tend to lapse less, and certainly people, as you have indicated, certainly in the money tend to lapse less also.

And on that basis, we have gone in looking at the behavioral patterns and made the adjustment, and the number is in the $200 million range.

As it relates to the -- the amortization period on variable annuities, it was looking and evaluating where we were.

The -- it basically, it went up to, I believe, it doubled for -- went from 20 to 40 on fixed annuities -- on variable annuities, and on fixed annuities it went up to 30 years.

And that's based upon the actuaries evaluating the performance characteristics, so --

Walter, just -- I'm sorry, did you say your DAC and your variable annuities now over 40 years, or did I misunderstand you?

No, did you not misunderstand me.

Okay.

And in terms of your commission structure, are you largely -- are your VAs largely sold with a C share or an L share?

I'm not following you.

Say it again?

Do they have a trail commission on them, or is largely an upfront commission that you're--

It's largely upfront.

All upfront.

Okay, thank you.

Largely, yes.

Thank you.

Colin, regarding --

The next question is from John Hall from Wells Fargo.

Please go ahead.

Great.

Thanks very much.

When I look at the $1.5 billion of -- or more than $1.5 billion of excess capital and then I look at the -- the amount of shares that were repurchased in the quarter of 150 some-odd million, roughly half of income generated in the quarter, I just wonder about what is driving the pace of share repurchase.

At that rate, you're not actually reducing your capital at all.

You're -- you're barely holding even with that -- that $1.5 billion of excess.

So I was wondering if you could just comment on how you think about the pace of share repurchases going forward.

All right.

The pace was established, as we went out with authorization back in the second quarter, we established the 1.5 buyback, and certainly that pace is looking at and we look at a multitude of factors.

We look at, certainly, the situation.

We look at, certainly as we shift to lower capital intense activities.

So there is a whole host of elements that go in.

Right now with the $1.1 billion left, we intend over the period to, certainly depending on the situations today, that we will -- we will execute the share repurchase.

You're right.

But the fact is the earnings are growing and they are generating a return and factored into how we evaluate it is the generation of earnings, and we will reevaluate as we generate the earnings, we look at the situation, and we evaluate what the best way is to return it to our shareholders.

So we still have $1.1 billion.

We will evaluate it and intend to -- just in light of the current environment continue on the pace that we have seen, measuring the environment and measuring our capacity and to return.

I guess the question is, is the objective of the share repurchase program to whittle away that $1.5 billion of excess that you have, or is it just to, on a recurring basis, return a certain percentage of the earnings that you generate.

I think it -- the objective is twofold.

Obviously safety and soundness of the organization to ensure at any given time, as we look at the situation, we have appropriate capital to meet the needs of the business.

So that is a changing situation.

Part of the formula goes in there is the earning generation and the situation that we think we are.

We don't believe retaining excess capital is certainly in the best interest of shareholders, so therefore, we look at various ways to return that and we are generating a lot, and certainly our required capital is going down, as we shift into the lower capital intense.

That will be taken into consideration as we evaluate how to best return it to shareholders.

Okay.

My next question has to do with the -- the sales of the annuities.

The new product.

Was this an entire -- a full quarter of that new product being on the shelf, or are the sales reflective of some partial period of it being available?

I think it is more reflective of partial as it builds up through the network.

It takes time to get to a steady state.

It was launched towards the latter part of July.

And so it -- the sales were building up through the quarter, so it did not have a full quarter of activity.

I also would like to just circle back to Colin's last part of -- his third part of the question.

We did add other annuity products to the shelf in the quarter, at the same time we launched the new product.

We have received some uptake, but still a large part of the sales have gone to the -- the new RiverSource product.

In regards to what we have done over time is, we have a pretty large group of funds in SMA accounts on our shelf over the years, thousands of them.

But we have also added hundreds more as people have requested some different variety, or if people are joining us and had certain other fund activity or separate accounts they wanted to bring over.

So we got a very wide and broad platform on the investment side.

We started with the launch of the -- some additional annuity products in the channel, as we said in July.

The architecture, even for our annuities, is all open architecture under it for investment.

And then in the insurance, we have a wide range of products from different companies, also on our shelf that our advisers can utilize for their client needs.

And so, we will continue to look to expand that over time.

And we're doing it in a very informed way, so that we can get the right uptake and the right training and the right support.

Great.

My final question has to do with, I guess it is a little bit more forward looking into the fourth quarter, and concerns performance fees potentially generated.

Where -- where you stand on those types of assets and accounts, where you would generate performance fees, are you in a position where that is a net positive in your mind right now?

As of now, and as you know it changes, we are in a net positive position.

Great, thank you.

You're welcome.

(Operator Instructions).

At this time, there are no further questions.

I will turn the conference over to Ms.

Laura Gagnon for final remarks

Thank you.

Before we end the call, I would like to remind you that we will holding our annual financial community meeting on November 11 at the New York Stock Exchange.

At that meeting, we will provide some commentary on our progress and performance, and we will give you an in-depth look at our global asset management business, with presentations from Ted Truscott and Crispin Henderson.

We hope to see you there.

With that, we would like to thank you for joining us today.

Thank you.

Ladies and gentlemen, this concludes today's conference.

Thank you for participating.

You may now disconnect.