阿默普萊斯金融 (AMP) 2011 Q2 法說會逐字稿

Welcome to the second quarter 2011 earnings call.

My name is Sandra and I will be your Operator for today's 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 this call over to Ms.

Alicia Charity.

Ms.

Charity, 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.

Following their remarks we will be glad to take your questions.

Some of the statements that we make on this call may be forward-looking 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 2010 annual report to shareholders, and our 2010 10-K report.

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

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

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

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

Good morning.

Thanks for joining us for our second quarter earnings discussion.

I'll stop by giving you my high-level view of the business.

Walter will discuss our financial results in more detail and then we will take your questions.

Let's begin.

Overall this was another very good quarter for Ameriprise Financial.

In our Advisory and Asset Management businesses we built on the momentum we've been generating over the past several quarters and delivered strong growth and profitability.

In fact, for the first half of this year, advice and wealth management and asset management contributed about half of our operating segment earnings, demonstrating our ongoing shift to earnings from our higher returning businesses.

At the same time, our annuity business delivered good earnings, and our insurance fundamentals remain solid despite higher claims, especially in auto and home.

The good performance across our franchise drove our operating return on equity to 14.5%, which is an all-time high.

And continues to move us closer to our 2012 objective of 15%, which we outlined in 2009.

Our strong foundation presents opportunities and gives us flexibility.

We are maintaining a large excess capital position.

We are investing to accelerate business growth.

And we are returning significant capital to shareholders.

During the quarter, we returned over $400 million through buybacks and dividends.

And so far this year, we returned well over 100% of our earnings to shareholders.

Now, I would like to provide some commentary on our performance in each business.

First, in Advice and Wealth Management we delivered strength in all of our key business metrics as well as compelling profitability.

I'd like to take a step back here and reflect on the upward trajectory we've put our Advice business on over the past 2 years.

Since we started emerging from the financial crisis in the second quarter of 2009, operating earnings in this segment have increased by a factor of 5, and operating margins have increased dramatically.

At the same time, quarterly revenue per advisor has grown from $65,000, to a record $99,000.

And, remember, we are generating strong earnings, even in a continuing environment of very low interest rates.

While the market improvement over the past 2 years have certainly helped, I want you to understand the significant changes we have made to drive up the profitability of the advisor business.

Years ago, the advisor business was regarded primarily as a distribution platform, and not a profit center.

We brought in a large number of novices advisors and trained them from scratch with field leadership and infrastructure to support them.

As a result, the employee channel was a significant expense.

Today, we're transformed the business both from an economic and operating perspective.

Our 2008 acquisition of H&R Block Financial Advisors gave us a big boost in our efforts to reengineer the employee platform.

Since then, we're put in place a much more efficient leadership model, lower-producing advisors have left the firm, and we instilled a sharper focus on productivity.

In addition, of the more than 1,000 experienced advisors we recruited over the past few years, the majority of them have joined the employee channel.

As a result of all these improvements, our employee advisor productivity is at an all-time high.

And our retention rate for this group has increased by 16 percentage points in just 2 years.

The franchise channel has always been highly productive with long-tenured advisors and very strong retention.

Those trends have continued throughout our time as a public company, but we haven't rested on our laurels.

We continue to enhance the platform and its leadership to ensure franchise advisors remain motivated and satisfied.

We made very significant investments in our advisors and we are continuing to do so.

We've consistently supported them with national and local marketing.

We've offered new products and enhanced existing options.

And we're delivering a number of important technology upgrades including the new brokerage platform that we are rolling out now.

Overall, our advisor force and field leadership have undergone extensive positive change, and the transformation has helped us deliver earnings growth and notable improvements in all of our important metrics.

To review -- record advisor productivity, good experienced advisor recruiting, excellent advisor retention, and increasing client assets including a record level of wrap assets.

Just as important, the strong and efficient operating platform I just described gives us significant leverage for continued growth, especially as we begin to increase our advisor force.

Now I will move on to Asset Management, which is also performing well, both in the US and internationally.

We're generating quarterly pretax operating earnings in the neighborhood of $150 million in this segment.

And, we have $467 billion of assets under management in this segment, which makes us one of the largest and most profitable asset managers.

In the US, the Columbia integration is nearly complete with only final technology work left to do.

Columbia's investment performance remains very strong with 52 4- and 5-star funds, which is among the most of any fund family.

At Threadneedle, investment performance remains exceptional, and the firm is creating increased traction in Asia and the Middle East.

Overall, our asset flows are improving across the business where we recorded net inflows of $450 million in the quarter.

We generated $257 million in US retail net inflows which included reinvested dividends.

Retail sales and flows have improved across all of distribution channels.

Of course, June was challenging with the weak and volatile markets, leading to sizable industry-wide outflows from equity funds.

That trend seems to have stabilized in July.

I feel good about the progress we're making, our fund mergers were essentially completed during the second quarter so our wholesalers no longer have to discuss pending mergers.

Now they can discuss a very high-performing, very diverse fund family.

At the same time, we started promoting our investment performance in a new advertising campaign, and we entered a new and promising asset class during the quarter, with the launch of absolute return funds.

In the domestic institutional business we reported $256 million in net outflows, which is a significant improvement over both a year ago and sequential quarter.

We're winning important and attractive mandates and our pipeline of unfunded mandates continues to build.

Of course, the institutional business is lumpy so a single redemption can have a significant impact on net flows.

But overall, we are pleased with the trends we are seeing in this business.

Threadneedle returned to strong retail net inflows of over $2 billion in the quarter, with sales remaining strong and redemptions declining substantially.

Flows turned around after 1 quarter blip that was caused by the crisis in Japan and the Middle East.

The institutional business at Threadneedle also generated good net inflows apart from the continuing and expected runoff of low-margin Zurich assets.

Threadneedle won several nice mandates around the world including its first ever institutional win in Asia.

Now, I will move on to Annuities and Insurance.

We generated another good quarter in the annuities business.

The decision to focus our efforts on the Ameriprise channel where the risk and profitability are more attractive and to exit outside distribution of variable annuities is working well.

While total flows are impacted by the runoff in outside-of-variable annuities, we drove $400 million in net inflows in the Ameriprise channel during the quarter.

The overall economics in the business including its risk characteristics are in very good shape.

Fixed annuity sales remained slowed due to the interest rate environment.

Both annuity books, variable and fixed, continue to generate strong returns.

Like many other insurers, our Protection segment was impacted by increased claims from the storms that hit the Midwest and the South this spring.

Still, our second quarter catastrophic claims were manageable, just $15 million.

And the claims in the auto business are improving nicely.

Walter will provide more detail on this.

In the life and health insurance businesses, sales are still challenging across the industry.

But, we are seeing some improvement.

Overall, our life and health insurance business continues to provide reliable earnings and solid returns.

To summarize, Ameriprise is continuing to perform at a high level.

We've transformed the advisor business into a highly profitable, efficient contributor to our earnings.

Our large and global asset manager is generating strong profits and performance.

And, our insurance and annuity businesses continue to deliver good returns.

At the same time, we continue to manage our resources prudently.

Our balance sheet and capital are extremely strong, and returning significant capital to shareholders.

Overall, I feel very good about both this quarter and the trajectory of the Company.

The business is generating record revenues and very strong earnings.

And, our returns have improved substantially as we've grown and shifted the mix of earnings to our higher return businesses.

In fact, our returns compare favorably by segment and overall against the industry.

I believe we have the right strategy and the right market positions and the right foundation to continue to drive growth and higher returns in the years ahead.

Now, I will turn it over to Walter.

Thank you, Jim.

We generated strong earnings across all measures.

With operating EPS of 27%.

As Jim covered, core business trends are strong, and as a result we are delivering double digit revenue growth.

Earnings growth was very good across our businesses with the exception of Protection.

I was pleased overall with the earnings in the quarter.

There were few nonrecurring items, both positive and negative, which largely offset.

Importantly, our low capital intense businesses, Advice and Wealth Management and Asset Management, continue to drive our growth and earnings mix shift.

That shift, combined with prudent capital management, resulted in an operating ROE of 14.5% this quarter.

Now let's look more deeply at the drivers for Ameriprise and each segment.

We're generating strong 14% revenue growth and deriving a higher contribution from our less capital-demanding fee-based businesses where revenues increased 12% and 34%, respectively.

We're seeing slower revenue growth in annuities and protection.

In those businesses we maintained our price discipline and focused on the Ameriprise channel where the economics and risks are more balanced.

Turning to slide 5, we are seeing similar growth from an earnings perspective.

In the second quarter we generated strong 30% growth in pretax operating earnings.

And more than half of that was from low capital-intense businesses.

This is great progress towards our goal of approximately 60% over time.

As we shift the business mix we are generating significant excess capital.

In fact, about 90% of our operating earnings are available for capital redeployment, even though we are growing the Company at a strong rate.

Our excess capital has grown to over $2 billion, even after buying back $761 million of shares so far this year.

This change is the result of a number of factors, including the rate of shift in the business mix to low capital-intense lines, as well as the exit from selling variable annuities in the third-party channel.

On the next slide you'll see a bit more detail on our capital position.

We continue to prudently manage our financial foundation, which has enabled us to return capital to shareholders.

During the quarter, we repurchased 6.1 million shares for $366 million.

We recently announced an additional $2 billion repurchase authorization, bringing our total to $2.2 billion at the end of the quarter.

At our life companies our risk-based capital ratio is over 585%.

Well in excess of the required level, even after paying a $400 million dividend to the holding company in the second quarter.

We intend to bring that ratio down by year-end to below 500%, which is still in excess of the required amount.

The quality of our balance sheet is strong, with good liquidity, $1.3 billion of free cash and a low debt to capital level.

We ended the quarter with $1.7 billion of unrealized gains.

And our variable annuity hedging program continues to be quite effective.

Now, let's look at the performance of our business segments in more detail.

In Advice and Wealth Management earnings were up 26%.

Margins remain strong at 11.3%, up from 10.1% last quarter.

As Jim described, we are improving Ameriprise advisor productivity and growing assets under management.

Client wrap assets were approximately $106 billion, with net inflows of $2.3 billion for the quarter.

Interest rates remain a headwind in this segment with over $13 billion of brokerage cash earning low spreads of about 44 basis points.

Expenses continue to be well managed.

As we invest in the advisor business we are also realizing the benefits of our reengineering in the prior periods.

Turning to Asset Management.

Asset Management has strong 40% operating growth in the second quarter.

We had a full 3 months of Columbia results this quarter compared to last year's quarter, which only reflected 2 months as the acquisition closed in May.

Normalizing for the extra month of Columbia's results, earnings would have been up 25%.

As Jim detailed, we had $450 million of net inflows, a net revenue increase of 34%.

The 19.4% operating margin includes the impact of reporting transfer agent fees on a gross basis versus net, and the impact of the Portfolio Navigator program modification.

As we discussed in the past, we show transfer agent revenues on a gross basis.

We have also modified our Portfolio Navigator program, which also grosses up revenues in this segment.

We did not anticipate these changes when we originally provided the 25% margin target for 2012.

These non-economic changes reduce our margin by approximately 200 basis points, and therefore, our more appropriate target operating margin would be 23%.

The adjusted net operating margin, which nets out the impact of these gross-ups increased from 33.8% to 34.9%.

The Columbia integration is progressing well.

With most of the fund mergers complete, and net expense synergies on track for our target of $130 million for 2011.

We are expecting net synergies in 2012 of approximately $145 million.

Now, turning to annuities.

Operating pretax income increased 46% compared to last year.

As a reminder, last year's earnings were impacted by about $17 million of unfavorable items including mean reversion, DAC model updates and the Portfolio Navigator modifications.

On an adjusted basis, earnings increased 23%.

The current level of earnings in the annuities segment represents a good quarterly run rate for 2011.

Of course, earnings will vary based upon DAC and lockings and mean reversion.

Since there was little impact from these factors this quarter, we wanted to ground you with our run rate.

The Ameriprise channel continued to generate strong sales of our new variable annuity product, RAVA 5.

Net inflows in this channel were about $400 million.

Overall growth of the variable annuity business will be lower, given our decision to exit outside distribution.

But profitability remains strong.

Reflecting the differentiated performance of business sold through our advisor network.

The fixed annuities book continues to experience net outflows reflecting low client demand in the current interest rate environment.

Returns for fixed annuities remain strong.

With an operating ROE of 20.3% and a 250 basis point spread this quarter.

Let's move on to Protection.

Operating pretax income was down 35% compared to last year.

Auto and home continues to grow with revenues up 5% over last year.

Results in the quarter were down $20 million and were impacted by severe storms in April and May.

Our catastrophic losses were $15 million, which is reasonably good given the severity of the storms, and compares well to the industry.

Our 91% reported loss ratio reflects these higher losses, as well as the continuing higher reserve for auto policies.

We have seen improving trends and we will closely monitor claims.

In the life and health businesses, earnings declined $26 million on an operating basis.

Earnings in each quarter had several unusual items.

So on a normalized basis earnings were essentially flat year-over-year.

As we noted last year, we had about $9 million of favorable items, including mean reversion, DAC model updates and the Portfolio Navigator modifications, as well as unusually low claims.

This quarter, claims were $7 million higher and in line with expectations.

We also put up a $7 million higher reserve on a year-over-year basis for universal life guarantees.

Which we started in the third quarter of 2010, and will be ongoing.

Looking ahead this level of life and health earnings represents a reasonable quarterly run rate for 2011.

To wrap, we continue to drive a study increase in operating ROE, reaching 14.5% this quarter.

We generated strong earnings as a result of solid underlying business performance and the investments we have made to drive growth.

Our mix continues to shift to lower capital businesses which is providing a strong source of excess capital.

We are prudent capital managers and we continue to return capital to shareholders.

Together this is driving up return on equity toward our target of 15% in 2012.

And, we see further opportunity to increase ROE beyond that.

Now, we will take your questions.

(Operator Instructions) Andrew Kligerman, UBS.

Just a couple quick updates.

First, Securities America.

Could you give us a quick update on whether that's close to closing?

Or could we be waiting a while on that?

The Securities America process for the sale is proceeding well.

We are continuing to move that along.

Yesterday, the court approved our class action settlement on the mid-cap issues.

That's also something that was good to get completed.

We are making good progress and we'll announce something in the near future based on continuing to move forward with the deal.

I thought I heard Walter say he wants to get the RBC ratio down to 500%, which would be a pretty big move given that you're spending down the equivalent of -- you're moving down earnings a fair amount each quarter with these buybacks.

Do you expect to do it all with the buyback or is there M&A plans down the road?

I will let Walter speak first to the dividends that we are looking at for the life company and then I can come back on your last part of the question.

We are anticipating that we will bring that ratio down to under 500, that is correct, you heard it.

The amount is probably going to be around $850 million as we work through.

We just have to get approval from the state but we don't see any problem.

From an overall capital position, we are continuing to buy back and we've got a new buyback authorization approved and we are continuing to execute there.

But, we also have, as you know, some flexibility if a good or right opportunity that would fit in, that we can get a good return or strategic capability from.

But, having said that, we are going to continue to maintain some good flexibility but also retain our return to shareholders.

We think our stock price is pretty low right now.

So, M&A is quiet right now, then?

You don't really see much?

There are opportunities that are coming about in the marketplace, so we're going to continue to look and explore.

Those things come along now and then, so you have to be ready and we have the ready capability if we need to.

Are the dis-synergies on asset management over with?

No more of that affect on net flow in retail with Columbia?

As we announced, one of the big ones was the mergers that occurred in the second quarter.

We haven't seen any major planning disruptions, actually, from that, so we will see, as it settles in, if there is any flow adjustments.

From that perspective, it gives us an opportunity to hit the ground a little harder and consistently.

That's why we even stepped up our new advertising in the marketplace.

I hope you saw the ads.

We think they're pretty good and we really have something to talk about.

From that perspective, we think a large part of the synergies -- there is a few that will come about that we know about, institutionally, et cetera.

But other than that, I think the large part of the front end of what we needed to do in the business is done and integrated.

Right now we want to get back to work and make sure that we gain back our sales momentum and book some more business.

Any outflows would be very modest going forward with respect to dis-synergies?

Yes, what we might have caused from a disruption.

There are some larger entity, parent legal entity type of business that we know will come up and do from this arrangement when we did the deal.

We know that we are gaining new business in the institutional channel with higher fees and mandates, as we did in the second quarter.

We are looking over the next number of quarters for that to be offset and start to grow again.

John Nadel, Sterne Agee.

Walter, I think you mentioned in your opening remarks that the one-time items in the quarter are largely offset.

But I was wondering if we should be characterizing all of the items that you guys mentioned this quarter as nonrecurring?

This is the second quarter of higher Threadneedle comp expense, fourth quarter of higher UL reserving, second or third quarter of higher auto liability reserving.

I'm just wondering if you can help us understand where to think about all of those going from there.

As it relates to Threadneedle, the Threadneedle pattern is different than we've experienced because basically we've reconfigured the plan, working with the management at Threadneedle, to allow it to not be mark-to-market.

And you'll see that impact in 2012.

But there were certain amortization accelerations that were taking place, and also a higher amount was granted on the conversion of the older.

So you'll see that pattern continuing, possibly for the next quarter and then it will go back.

And, candidly, it's not really resulted in appreciably higher economic outlook, it's just changed the characterization of it.

On the bodily injury, the auto and home, yes, it's continued.

We are seeing encouraging signs, both in severity and in frequency, and we are monitoring that situation.

We are still booking at the high loss rate, reserving at the level from 2010.

If this trend continues we will obviously revisit that.

On the SOP, that is something that is continuing.

We indicated that, from that standpoint, it would continue.

And the other factor, of course, was the cat losses which took place, which was way above what we thought.

But again, certainly versus industry standards, quite good.

On the UL reserving one, we're at the point where we've lapped that higher level of reserving, correct?

So, from here is just a run rate?

That's right, it started in the third quarter.

I'm curious on the annuity segment.

It looks like your allocated equity to the VA business increased about 10%, maybe 11%, quarter-over-quarter, but VA account balances increased less than 1%, quarter-over-quarter.

Why the big disconnect there?

Is that just a matter of retaining earnings and the timing of dividends?

It's more we're adjusting the risk profile on the living benefits.

That was just the way the calculations ran when we did them this quarter.

That was strictly based upon that.

Looking out to 2012, I realize you guys will have an Investor Day in a few months but just an initial view.

If, other than upside from the equity markets, if we were to think about upside relative to your 15% ROE objective, where should we be focusing?

Overall, we are going to come forth in a few months and talk to you about how we are going to move our strategy forward now that we are going to be in 2012 shortly.

As Walter mentioned in his opening comments, we see the ability to grow our returns above 15%.

And we will be putting in place a plan that will show how we will look to do that.

We see greater opportunity in the Advice and Wealth Management business.

We think we have a good, strong capability overall in our Asset Management.

Our returns, as we de-risk some of our Variable Annuity business for the outside distribution, will start to reflect some of those opportunities as we move forward.

And the business will be more refined.

So again, as you're seeing in the quarter, we're getting good net flows in the Ameriprise channel, but we are in outflows.

But as we reconfigured our business, it's not going to be growing as quickly because we are not going through third-party channels, but it will be growing more profitably.

There are things such as that as we continue to shift the Company's mix.

Hopefully we will also see some changes.

Interest over time will have to start to percolate if we have a growing economy, and that will give us a lot of benefit.

We are going to come back to you, but we have an opportunity here to continue to build the business.

Based on what we've been able to accomplish and execute so far, we wanted to show you that we can get, and we wanted to deliver, to get to the 15% hurdle.

As you can see this quarter, we've made some really good progress in executing against our plan.

The next plan I put together is going to take us into another level.

You guys are obviously gigantic money managers, both on the General Account side and on the pure Asset Management side.

Just wondering, Jim, yours or Ted's perspective on what does it mean to Ameriprise if our folks in Washington don't get it together, and the US is downgraded?

We are in uncharted territory as a country.

When you have a risk-free rate of return that everyone benchmarks off of.

And we have some of the lowest rates here in the United States for government debt as well as what that triggers off of around the world.

I think we are going to see some change, particularly if we went into default.

Hopefully, what we are talking about now, which is not reasonable, even from those standards, as I mentioned is a downgrade.

If I apply that to Ameriprise, we have good liquidity situations as we look at the capital markets for debt, et cetera.

We are in a good situation.

There's nothing that we have to fund in a short-term basis.

We have good flexibility in our portfolios, where necessary, if various clients are needing liquidity or get concerned.

But our clients actually handled the financial crisis, which was much more significant in that regard, well.

And we maintained strong asset flows and maintained stability.

We are not expecting anything along those lines.

But, you know what?

We've made sure some of our portfolios have moved a little to the shorter term.

And the investment philosophies that Ted and his team, they've taken a conservative posture on the quality of assets that they've been investing in.

We feel good about the owned assets that we have.

So, we are going to be like everyone else, monitoring the situation and adjusting where necessary.

But, we don't see anything significant, particularly as we see this unfolding for now.

Longer term, I think is a larger issue for the country.

And, that will depend on whether congress and the president come together with something that's meaningful rather than just lifting the ceiling.

But, I think that's going to affect all of us, not just financial companies but the overall economy.

And you know that from your own analysis and working with the industry.

Jay Gelb, Barclays Capital.

I was hoping you could talk about the sustainability of the net inflows in the Asset Management business?

There was some benefits there from the reinvested dividends.

And you had mentioned that the Threadneedle sales could be lumpy.

I just want to get your sense on that going forward?

Let me start with Threadneedle.

In the first quarter, we had to comment on how that moved to a bit of outflows.

There was some increased redemptions that we saw out of the European area, as well as holding on mandates for investment based on what was happening in Japan and the Middle East.

And so we had mentioned that we saw stability coming and we saw improvement as we moved out of the April time frame.

That's what we are seeing now.

Threadneedle continues to gather good mandates.

We got our first mandate in Asia this quarter.

We are ramping up our activities there.

We think there's good opportunities.

Same thing with flows coming in now from the Middle East again.

So, the activity has increased.

Now, third quarter is always a little slower, as you know.

Having said that, we didn't see the volatility that we saw.

Europe is settling a little more with what happened in Greece, so hopefully that will be a bit better as we move forward.

Retail flows picked up strongly; you can never predict that -- because you are working through intermediaries, et cetera -- of that is.

But that looked nicely as a turnaround from the first quarter.

With Colombia, we were picking up sales nicely and sales were growing in June.

It became a bit more of a volatile period for equities, and I think you saw that across the industry.

July looks like that stabilized, again.

And, improved.

We have some things going on right now in the economy and with the country, so I can't predict what the flows will be as we look over the next quarter or so.

But, I feel good about the progress we've made with the fund families.

We are now putting the advertising, the wholesalers to work.

One set of group of funds, their clients don't have to deal with the proxies and the mergers, et cetera.

We've got to be hard at work here.

So, this is going to take some time to gain the ground that we want.

I can't predict that we are going to be in inflows in retail in the short term, but I am hoping that we're going to show continued improvement quarter to quarter.

Institutional, I do feel good about the pipeline there.

We know that we are going to lose some mandates from what we had previously, but we know that going in.

And so we are really working on mandates that have good fees, mandates that we have strong investment performance.

We have a much bigger and better lineup than we ever had with the combination of the 2.

We have a stronger Institutional Sales team on the ground now gaining traction.

We're out of the hold period on the consultants across the board.

So we are seeing things pick up, but those things continue to take time to build and get in front of people.

So far the traction's been pretty good and I think you saw that in the second quarter, building from the first quarter.

I can't tell you I can predict the flows.

I can just tell you that I think what we have in place is great capability, terrific performance, a motivated team.

And we'll deal with the economy and the markets as they unfold.

But again, I think we are someone that could be successful in the marketplace.

On the Property Casualty Personal Lines insurance business, can you give us a sense of strategically why it makes sense for Ameriprise to be in that business?

It appears to be subscale and has added some volatility in recent quarters.

I think you have to look at the components of it.

This is a direct affinity type model and at that level it is not subscale.

And in fact, it's come, over the last few years, into a scaled situation.

It is actually one of the better and larger providers in that light, and it's a very attractive space.

If you look at many of the large companies, they are starting to figure out whether they need to be there, looking at Progressive and others.

We were just rated in the top 5, ahead of all the majors in auto and home, in client satisfaction.

Which is pretty significant and there's only a few names there that are smaller and less visible to the broader public there.

We have a very good underwriting model.

If you look at the major storms that hit the Midwest and the South, and the billions that it cost the industry, we had $15 million in cat losses.

So, that's again, quite manageable through a very volatile period.

In the auto area, just so you know, in certain areas you do get spikes, in bodily injury or PIP, et cetera.

It's across the industry.

We've put in rate increases in those areas and we've adjusted where we underwrite a little bit more.

But, as Walter said, the claims have come down.

That was a quarter, quarter-plus blip, so we don't know whether that's -- it didn't look like or realize to be, at this point, based on the next 2 quarters.

So I wouldn't say that 1 blip should be a big black mark because we have good earnings from this business over multiple periods.

We scaled it up, we are getting good returns on capital there, we've got good underwriting.

We save our clients, on average, $500 a year, and we have very high satisfaction.

We think it is a complement.

It's not necessarily an integrated part of the court, to the point you referenced.

So strategically, we do have flexibility as we think about it.

But we think it's a nice complement, it gives us some diversification.

And we think it does provide a good consumer benefit that we can gain relationships over time with.

We will always evaluate it if things change.

Outside of this blip period, we've got a good business here, and one that, as we continue to invest and scale up, will be worth, and is worth, a lot of money today.

Alex Blostein, Goldman Sachs.

Walter, wanted to go over some of the margin numbers with you one more time.

Last quarter in Asset Management you already had the transfer agency arrangement in place, gross versus net, as well as the Portfolio Navigator change.

Yet, I think last quarter you stuck to the 25% operating margin goal for 2012.

What changed sequentially?

I don't think anything's changed.

I think we're making you aware of the impact, a factor, of those 2 items.

And trying to just recalibrate from that standpoint.

Nothing has changed; these are big gross ups and they have an impact on margin.

That's all we are letting you know.

One thing I would just add to that.

Walter is 100% right.

If you look at the gross up, it's in revenue, and the same amount goes into expense.

There is no PTI.

When you look at the margin, particularly off the business, it grew even from last year, it actually squeezes the margin more because of it as an in and out.

Columbia used to have that as a net.

As we looked across the industry; we adjusted it to be industry standard.

But when we came out with a GAAP margin, we didn't have that factored in, we didn't realize the significance of it.

And the same thing as we adjusted EP.

That's why we are starting to look at the adjusted margin as the key number.

And when we look at the adjusted margin, that comes out.

Like this quarter, we are at 34.9%, we have not adjusted the goal or anything that we want to get that to close to 40%, even though the GAAP margin.

But we noticed many of you are tracking the GAAP margin against the 25% so we wanted to highlight that as the business grows we would actually get more squeeze based on that gross up of revenue and expense, a net wash to 0 margin.

But, on the adjusted, we haven't changed anything because that gets washed out.

We are still striving to get to that 40% mark rather than where we are today, 35%.

Does that help you?

That's very helpful, thanks.

On Threadneedle, you eliminated the mark-to-market impact of comp, and starting 2012 it's going to be more of a fixed number?

Is that higher or lower from the run rate this year?

No, it's going to take on the characterization of options or anything of that nature.

It's not going to be in a mark-to-market category.

So it would be substantially muted.

We'll still have the amortization expense but that has always been in there.

But you're not going have that lumpiness as you saw back in 2010, 2011.

We redesigned the program to allow us not to go to mark-to-market.

And then shifting gears a little bit, net interest income, it sounds like short-term rates is a big drag for you and a lot of other folks.

If you look sequentially, some of the bigger drags came from AWM, as well as annuities business.

If you think about the risk, going forward, let's say short-term rates don't go up and the shape of the U curve doesn't change.

How low do you think this could go?

What's the risk over the next year plus?

On the short-term side, on the sweep accounts, we are at reasonable level.

It will stay at that.

Long rates is where the problem is on our asset earning rate as we replace and redemptions take place, maturities take place.

We are investing at lower AERs.

So that will continue and will build if the yield curve does not change.

So it will continue.

As we indicated previously, we will have an impact.

It's manageable, but we will have an impact.

And you are seeing some of that in this quarter.

Have you guys ever quantified it?

Alex, we didn't hear that.

Have you guys quantified the impact?

Knowing what you know about reinvestment and the rates going out, let's say they stay the same.

What will be the impact?

I don't think we've quantified it.

But it depends on how long it goes and what level.

But you would see, I think we talked about it, in the $30 million, $40 million range.

We'll update all that based on what unfolds over the next quarter or so, definitely by the analysts meeting but probably by the next time on the third quarter.

And that was an annual number I was giving you.

That was an annual number, and that was done a while ago.

Jim, you obviously think the stock is pretty attractive here.

How do you think about the pace of deploying the new $2 billion buyback?

Same run rate, $300 million to $400 million a quarter?

Or do you think there's an opportunity for you guys to step up a little more?

What I would say is when we started the program, and we started where we saw an opportunity and then we slowed that down during the latter part of last year.

And that we accelerated again based on what we saw happening with the value of the Company, as well as the flexibility we have.

I'm not going to pigeonhole it to a quarterly number.

The stock is attractive, we have capital.

We also will make sure that we look out for good opportunities.

We have the flexibility to do what we think is appropriate to return to shareholders.

So, let me just leave it at that, not to be tied into anything that won't give me the flexibility to operate.

Suneet Kamath, Sanford Bernstein.

I wanted to follow up on Alex 's question about the Asset Management margin.

The reason a lot of us model to GAAP results is because that is the way you report it.

And that is also the target that you've established.

So, I'd just like to be clear, is the message that we are getting today that, because of these changes, the new 2012 Asset Management pre tax margin target, on a GAAP basis, is 23%?

Or are you saying that these changes are causing a 200 basis point drag, but you still think that you can hit the 25%?

Based on this extent of the gross up that we are doing with the TA, which is pretty significant, and I don't think we realized that impact against the margin target when they made this adjustment to tell you, it is a 200-basis points change against that goal from 25% to 23%.

If you look at it now, if you cull that out, and we are doing it the way, when we set up the goal even last year, you would find that the 19.4% number would go up, adjusted just by pulling out the gross revenue and the expense, based on making that change.

So, the goal in itself hasn't changed.

The accounting, based upon what we made the change, has caused the GAAP margin to get compressed.

But the range of improvement from when we started, if you pull out that accounting change, would still get you to 25%.

So, we can look at it 1 or 2 ways.

We can report to you every quarter what that gross up is, and adjust for it so that we can say 19.4% becomes 20%, 21%-plus against the 25%.

Or we can say that's the way we are going to report it, and the 25% is really 23%.

Over time, I would hope we would talk about the adjusted margin number.

And I would hope to say to you that 35% I want to get to 40%.

But you can see the difference there on a gross and net is due to that in and out.

Suneet, if it was helpful, we would say to you, if you want to track it based on reported, the 25% is 23%.

I have no problem if you want to stick to the 25%, that we try to identify what that gross up is every quarter, and report it to you.

So, it is 1 of 2 ways.

When we set that up, and we disclosed, those programs were not understood.

Certainly EPM was that there.

When we evaluate it, and while we are tracking, we are beginning to see the draft of that.

We're going to try and go from the 34.9% up to 40% and increase our margin.

But the EPM program is quite a large program.

In the transfer agency we announced we made the alignment last quarter.

But the EPM is the larger of the issue, and that is large.

And as it's large, it certainly is very beneficial for the Company.

But, it does have an impact on the margin.

So, we are just giving you that information.

I just want to be clear for someone.

If it's not clear, maybe we have to do a little spreadsheet on it.

We have not changed the goal from when we started against the base business as it was done when we acquired Columbia.

EPM came in last year.

And when we actually acquired Columbia we realized that their accounting was not including it on a gross basis the way it is, that we wanted to adjusted it like we used to do it.

So, that's really what occurred after we set the target.

Remember, we set the target before we ever closed on Columbia.

We are just trying to be clear with you, but the goal and the improvement over what was the core of the business has not changed.

Okay, I would vote for more detail until we get to Investor Day this year and then you give us the adjusted margin target so we can all talk about what I think you are referring to as the more important measures.

That would be my advice.

We will be happy to do that.

We understand this is something we are introducing.

We'll wait until the financial community, we will show you what everything looks like there.

But we will continue to report with the adjustments that we'll provide you as commentary.

And then on the capital side of the picture.

In your prepared comments, Walter, you talked about 90% of your operating earnings being deployable capital.

Should we view that as sustainable?

Presumably what that would imply is that all of your Asset Management and Advice and Wealth earnings are redeployable and a pretty good chunk of your business earnings, maybe upwards around 75% for the protection and annuity business, is redeployable.

Is that really sustainable?

Or should we expect that 90% to come down, because you think at some point you'll start to reinvigorate some of the sales growth?

Let me answer the question this way.

I do believe it is sustainable.

And what drives it is the shift that we are seeing as we continue to generate substantial earning growth in our AWM and our Asset Management business.

We also are gain the benefit, the markets being where they are, are certainly lowering the requirement for the annuities business.

From that standpoint, if the current trend lines stay, with the market staying in these ranges, I believe that is sustainable with the shifts we see in our mix.

That's why we reported it that way because we used to talk to you about new business, there's actually a lot of activity going on, the total business, which creates that 90/10 situation.

So, I do believe it is sustainable in the current, external environment.

My last question for Jim is, given the pieces that we are talking about here, significant amount of excess capital generation every quarter, a significant amount of excess capital on the balance sheet, even with the capital redeployment that you've done.

And then a stock price that is obviously a lot lower than where it has been earlier

Would you consider doing something like an accelerated buyback on the assumption that you still have debt capacity if you came across an acquisition opportunity given where your debt to capital ratio is?

Excellent question.

We are continuing to analyze the situation.

The stock has pulled back a lot in the period.

We are looking at the market environment, looking at opportunities.

And these are the things that we discuss with our Board.

To make sure that we are taking everything into account for the best overall return over time to the shareholders.

Your hypothesis, your evaluation is right on.

Those are the things we think about, and the things that we will continue to have discussion on.

I'd like to probably leave it at that at this point in time, knowing that I've received good input from people such as yourself.

Eric Berg, RBC Capital Markets.

I have just 1 question.

I think earlier Jay was mentioning that, and I noticed this too, that the Columbia closed on the retail side, which helped it a very big way by this reinvestment of dividends.

A level of reinvestment that was much higher than what we saw in most of the other quarters, certainly in the year-ago quarter.

I understand that this has something to do with VPN, the variable annuity product, as well as the timing of dividends.

2 questions.

What is really going on here?

And can we anticipate that this will be sustainable?

On the dividend side, it is sustainable based on many of our clients have reinvestment plans appropriate, particularly as we look at the VIP funds in the annuity area, et cetera, and you know we have a very good business there.

So that's a real positive versus the industry that there is a higher level on those distributions that come out.

So that's one thing.

As far as the number by quarter I'll ask Walter, because he can probably answer that a little better from what we are tracking.

The majority of that is the variable annuities.

And it is concentrated more in the second quarter.

And that is pretty much an automatic, from that standpoint.

So, certainly it is sustainable.

And, as you are aware, we actually earn money on this.

But it is something that we anticipate.

The ones coming from the non-BPO spread, the concentration is in the second quarter.

And, a little bit in the fourth quarter.

So, are you saying, that we will see it in the future, but it is, let's call it, seasonal, meaning tied to the quarters 2 and 4?

Yes.

Tom Gallagher, Credit Suisse.

Good morning, just a few Asset Management questions.

Walter, I just want to make sure I got the margin numbers straight, in terms of the 23% target.

The corresponding number this quarter would have been the 19.4% margin, which then, if we normalized the Threadneedle unusually high expenses, would've been 20.4%?

You are expecting 20.4% this quarter, to get to 23% -- is it by the end of 2012?

Or is that the average of 2012?

I just want to make sure I have that math correct.

19.4% is the start point.

And then we talked about the 200 basis points that is relating to the gross up, which, if that wasn't there, it would have been 200 basis points higher.

The Threadneedle -- I haven't actually done the calculation on the 7 of Canada, but it looks approximately right from that standpoint.

As I indicated, we will get a little bit of carryover into the third quarter on the Threadneedle again, and then it will dissipate and go into a normal pattern.

So if the math is right on the 7, yes, you can take it and add it to that point.

And when would you expect to get to 23% by, just from a timing standpoint?

The 23% was, we were going to achieve that -- if you're using 23% now versus the 25% we said we would achieve that in the 2012 time frame.

Would that be an average in 2012?

It will be the annual return in 2012 on the PTI margin.

And just to clarify, the change that we are seeing here, that's resulting in higher revenues, but not lower profitability?

So the profits are the same as you thought, but the reported GAAP revenues are higher, is that the main difference?

We grossed it up.

That's right, we grossed the revenue; PTI does not change at all.

On the flows, Jim, you had mentioned, in July, things had gotten a bit worse in June but then you saw it stabilize in July.

By stabilize, do you mean things have improved from a net flow standpoint from June into July?

Or are they running at the same level?

Was that a comment just on the US or was that broader?

Because I would be curious if you are seeing any changes in Threadneedle, just because of what is going on in Europe, particularly into July.

Thank you for asking for the clarification.

Yes, it could be misinterpreted, as you actually just said it.

What we meant, it went back to the way it was prior to June.

So, it was improving, again.

And not getting that ratchet effect of what we saw in June.

And that was really talking domestic.

From an international perspective in July, I don't have a lot of that information yet, but it looked like it continued good flows through the June period.

It didn't look like June had the effect that we had in the US.

I can't tell you what July looks like in Europe but I'm not expecting any radical change.

Based on things settling down in Europe with Greece, hopefully that will become a little more stable.

Mr.

Cracchiolo, I will turn the call back over to you for final remarks.

I want to thank everyone.

I know we had adjusted the time today.

We know that there was a number of other earnings releases coming out so we wanted to give you an opportunity, in case you were double-booked.

And we hope that we've been clear with the information we are providing.

We are trying to give you more, you can look at what we've given you in the supplements so that you can do your analysis.

Alicia is going to be around working with you if you have any other questions or comments.

I will leave you with this thought.

I know it is always hard, quarter-to-quarter, and there's a lot of ins and outs last year.

So for you to track some of those against this year, I can understand some of the questions and some of the differences.

We are going to try to get better and be clearer.

Last year, there was a lot going on with the DAC unlockings and the mean reversions and the market changes.

But we feel like we're getting to a more normalized period now.

We feel the business is operating quite well.

As I said, you can't market to market, day-to-day.

There's always going to be variations in the businesses that we are in.

But the trend line, if you look over the quarters, if you look at what we said we wanted to do and how we are doing it, we are executing.

We are getting good results.

The profitability in these segments, even at the margins we are at, et cetera, are quite good compared to the industry.

Quite good compared to generating the type of scale businesses we now have.

And so, we feel good.

We tried to communicate to you that we have good flexibility.

We are one of the few people buying back stock at this level, if you look at our cap level and look at our capital.

And having a flexibility that we have today.

Though the environment has improved out there.

So, we will continue to look at the best ways to deploy that.

The best ways to continue to invest for growth.

We don't want to stop at where we are.

We feel we are on a good trajectory, we want to continue that.

Given markets are reasonable and hopefully our government will do their work, as we are all trying to do, so that we can get back to a good stead.

So thank you, and if there's anything else please let us know and we will continue to try to communicate as best we can.

Have a great day.

Thank you.

Ladies and gentlemen, this concludes today's conference.

Thank you for participating and you may now disconnect.