Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Ameriprise Financial, Inc. (NYSE:AMP)

Q2 2009 Earnings Call

July 23, 2009 5:30 pm ET

Executives

Laura Gagnon - Vice President, Investor Relations

Jim Cracchiolo - Chairman and CEO

Walter Berman - Executive Vice President and Chief Financial Officer

Analysts

John Hall - Wells Fargo

John Nadel - Sterne Agee

Jeff Schuman - KBW

Andrew Kligerman - UBS

Suneet Kamath - Sanford Bernstein

Colin Devine - Citigroup

Tom Gallagher - Credit Suisse

Eric Berg - Barclays Capital

Operator

Good afternoon, ladies and gentlemen, and welcome to the Ameriprise Financial Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Ms. Laura Gagnon, Vice President, Investor Relations. Ms. Gagnon, you may begin.

Laura Gagnon

Thank you, and welcome to the Ameriprise Financial’s second 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 would be happy to take your questions.

During the call, you may hear references to various non-GAAP financial measures, which we believe provide insight into the underlying performance of the company’s operations. Reconciliations of non-GAAP numbers to the respective GAAP numbers can be found in today's materials available on our website. Some of the statements that we make on this call 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 to be found in today's earning release. Our 2008 annual report to shareholders, and our 2008 10-K report. We undertake no obligation to update or revise these forward-looking statements.

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

Jim Cracchiolo

Good afternoon, thanks for joining us for our second quarters earnings discussion. As our results demonstrate, conditions appear to be stabilizing and the market environment finally seems calmer than has been in quite some time. Our client activity is showing signs of improvement as retail investors begin to move past the period of fear and regain their focus on the long-term.

This initial business momentum along with the continued improvement in the equity markets contributed to growth in revenues and asset levels compared to last quarter. As you know, our balance sheet has remained strong and resilient during the market and economic downturn. In the second quarter, this strength was reinforced. Our net unrealized loss position decreased by 68% to 577 million and we took actions to further boost our financial flexibility.

In short, we’ve significantly enhanced our debt maturity ladder and raised equity to pursue opportunities. I'll come back to this in a moment. The message I want you to take away today is this: our metrics are beginning to show signs of improvement, our balance sheet is very strong, and we're in a position to pursue appealing growth opportunities. With that in mind, I would like to give you some insight into our results in the performance of the business.

For the quarter, we earned 95 million or $0.41 per share. Our core operating earnings were 133 million or $0.58 per share. We generated revenues of 1.9 billion, a sequential improvement of 9%. The decrease in our earnings compared with a year ago primarily resulted from the impacts of the 28% year-over-year decline in the S&P 500 and lower short-term interest rates.

The core of our franchise, which is long-term deep relationships between advisors and their clients remain strong. It's been a very difficult year for financial advisors. Despite the conditions, advisory retention remains near all time highs. In fact, retention among our productive advisors remains at 95%. We also recruited more than 200 experienced advisors to our branded platforms during the second quarter, bringing our total for the year to more than 400. That's ahead of the expectations we set at the beginning of the year.

Our advisors are staying with us and established professionals are joining us because of the company's strength and stability and because of our continued focus on providing excellent advisor support. We had continued to invest to enhance our capabilities, including marketing and technology. In fact, we will begin rolling out a new brokerage platform for early next year. And just as important, our brands have remained strong through this financial crisis.

Our client retention is very good, which is a testament to our advisor's diligent work and again to the strength of our relationships. Now that we've had four months of more positive market conditions, clients are beginning to regain confidence. As a result, client activity is beginning to pick up. You can see evidence of this upswing in our product movements, as our clients move out of defensive cash positions we're seeing positive momentum and asset lows across our product platform.

In the Second Quarter, we generated particular strength in our RAP accounts which had net inflows of $2.8 billion. Total asset management net flows turned positive and compared to about 100 million of net outflows in the First Quarter of this year and 4.8 billion of outflows a year ago. Our total managed asset increased by 12% to $214 billion over the sequential quarter as a result of the inflows and market appreciation.

In the domestic asset management business, total RiverSource net flows improved significantly on a year-over-year basis driven by slowing net outflows and retail funds resulted from a pickup in sales. We've also experienced strong inflows in institutional and a return to net inflows in alternative portfolios. We also returned to overall net inflows at the Threadneedle. Slowing Zurich outflows as well as net inflows into retail funds resulted in total net inflows of 470 million. Threadneedle experienced net outflows of 322 million a quarter ago and 2.5 billion a year ago.

In terms of investment performance, RiverSource performance improved during the period across both retail and institutional funds, as most of the portfolios are positioned for an economic recovery. Investment performance at Threadneedle remained quite strong with 93% of equity funds above the three-year medium. We're also continuing to drive positive flows in annuities, with total annuity net inflows of 1.1 billion in the quarter.

In the Fixed business, sales slowed as we continue to manage our rate to office to ensure favorable economics. Still our total ending fixed annuity balance is up 23% year-over-year, which is helping to generate improved net investment income. In addition, we produced good flows and variable annuities with 567 million in net inflows in the quarter. We feel comfortable with the profitability of the new business we're writing, given the changes we're making to our products and features as well as the success of our hedging program.

In the Insurance business, we're seeing some improvement in sales sequentially, but sales are still slower year-over-year. Permanent life insurance, cash sales were up 36% compared to the sequential quarter with universal life sales driving the increase. Variable universal life sales were flat compared to last quarter and down over a year ago because clients continue to be reluctant to move back to equity sensitive insurance products. The auto and home business continues to grow with a 7% increase in year-over-year policy counts. Overall, the Protection business and businesses remain strongly profitable as we continue to offer clients a wide range of product choices, and as we choose our risks carefully.

Now, before I turn it over to Walter, I would like to address three additional points: first, expenses. You'll see in our numbers that the general administrative expenses were up compared with the sequential quarter. I want to be sure you understand that the increase was driven by acquisition related costs as well as several relatively small one-time items, including additional legal expenses.

Last quarter, we told you that we had increased our goal for run rate expense savings to $350 million for 2009 and that we intended to deliver a majority of those savings to the bottom line. We're on pace to exceed those savings, in fact, we now are on a run rate of 110 million per quarter of expense saves. Second, I would like to help you understand that the net losses we're experiencing in the advice and wealth management and asset management segments.

In addition, to the significant market challenges of the past year, both segments absorbed unusual expenses during the quarter, including ongoing costs associated with integrating our recent acquisitions. In addition to the integration cost, we still have redundant expenses from running multiple platforms. Those expenses will go away when we're fully consolidated later this year. Aside from the acquisition cost and some higher one-time legal cost expenses in both businesses have decreased substantially.

At the same time, as I've said, our business momentum has turned positive, client activity and asset flows increasing. We're confident that the lower expense base along with the early signs of business improvement will start to give us additional earnings power in the quarters ahead.

Finally, I would like to help you understand the rationale behind our capital decisions during the quarter. We raised capital not because we had anything to repair, but to be at a position to play offense. The debt we raised along with the tender offer currently in progress improves our overall debt position and prefunds the majority of our nearest debt maturity, which is in November of 2010.

We now have a much stronger maturity ladder with our next tranche of debt maturing in 2015, and we feel very good about the overall debt positioning. While I know that our equity offering generated some questions, it was a prudent strategic decision. Even when taking into account the estimated new capital requirements for variable annuities; our excess capital is now more than 2 billion in excess at the end of the quarter that provides a strong cushion if we experience any new deterioration in the markets, but just as important, we also now have the capacity to act quickly as we identify opportunities to grow the franchise.

We've often told you that we actively look for opportunities in asset management and retail distribution businesses, and that continues to be our focus. I want to ensure you that we will continue to be prudent as we pursue acquisitions and that we do not anticipate a need to raise additional capital if we make an acquisition. To summarize, I feel quite good about the direction and positioning of the company. Our advisor-client relationships remain strong. We're attracting new advisors. And our product areas are beginning to generate improved flows.

In addition, the strong financial position we've built now enables us to pursue opportunities to grow the business while many of our competitors will focus on repairing problems. That's not to say that I'm totally satisfied with our results. We still have work to do to overcome the weaker environment compared with a year ago. We need to build on the early signs of improvement. I'm confident that we will do that and that we will begin to realize the earning powers inherent in our model.

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

Walter Berman

Thanks, Jim. We posted slides on our website again this quarter, and they will be updated with my talking points after the call. If you would turn to slide three, my discussion today will focus on three points. Earnings, actions we're taking in the challenging environment to drive profitability, and our balance sheet strength and flexibility. Our second quarter results reflected the continued market challenges we face. We reported $0.41 per share profit and we achieved core operating EPS of $0.58 per share.

Turning to page four, here we'll provide more detail on specific non-core items in the quarter, which are detailed in the press release as well. In the quarter, we recorded $0.02 in net investment gains, compared to $0.08 in realized losses last year. We incurred $0.07 of acquisition-related integration charges, which are on track with our plan. Several markets conditions in the quarter drove $0.12 per share benefit related to DAC and DSIC mean reversion, compared to the negative impact of $0.03 in the prior year period.

This DAC benefit was more than offset by a $0.20 per share charge related to variable annuity guarantees, primarily from FAS 157. There are two offsetting components within the $0.24. First, we realized an after DAC - after tax impact $139 million or $0.60 per share related to FAS 157 non-performance risk and a change in the liabilities. This was partially offset by an improvement in basis risk and market driven variable annuity guarantee impacts of 84 million or $0.36 per share.

It’s important to know that the remaining exposure to FAS 157 on our balance sheet is manageable. Excluding all these items, core operating EPS was $0.58 per share compared to $1.03 last year. Next please turn to slide five. To help you clearly understand what is and is not in core, we have shown items that are included in our core earnings. Core earnings reflect negative impacts of the markets, and in this quarter, the lower year-over-year equity market levels reduced fees by approximately $0.36 per share. Lower short-term interest rates resulted in lower earnings of about $0.15 per share. We had a $0.07 per share provision for client settlement.

In addition, our effective tax rate in the quarter was 24.4%, basically a catch-up to get to our full year estimated effective tax rate of 20%. This resulted in a $0.02 per share negative impact to core in the quarter. The full year tax rate increase is the result of higher expected pretax profit for the year.

Lastly, we had a $0.02 per share gain on the repurchase of our hybrid debt. Of course, these changes in client activity and the product makeshift as a result of client seeking safety are included in core. These elements are difficult to quantify.

In summary, our earnings were down $0.45 versus last year and the primary driver of this decline was the market dislocation. If you turn to slide six, we continue to focus on executing, managing everything that is under our control, and our outlook for the balance of the year is more favorable. We continue to recruit experienced advisors who are bringing clients and assets to the firm. We attracted more than 200 advisors, which was our best quarter ever. We also saw initial signs of improvement in client activity.

As a result, we generated continued improvement in client asset flows with 2.8 billion of net wrap inflows in the quarter. Asset management flows have improved too, and so have investment performance both at Threadneedle and in the U.S. During the quarter, we redeployed approximately 1.5 billion of cash into longer dated fixed maturities, yielding an average of 6.5%. At the same time, we're continuing to implement our reengineering plans and with 110 million in savings in the quarter, we're on track to exceed our full year target of 350 million.

Turning to slide seven. Here I would like to help you understand the benefit we expect to derive from our reengineering work. For the first half of the year, we experienced 394 million of year-over-year negative impacts to our PTI, market impacts to our PTI. The bottom line impact of reengineering was $113 million. Therefore, we offset only about 30% of the market impact. For the balance of the year, assuming the S&P holds at 920, our anticipated market impact is a negative 120 million in pretax earnings.

The decline in year-over-year market impact is driven by the lower markets during the second half of 2008. We are anticipating reengineering benefits of 147 million to fall to the bottom line during the second half, or 121% of the estimated market impact versus last year. However, this table only reflects marketing, markets and reengineering. We will still be facing the impacts of lower client activity, the shift to lower margin products and the impact of our recent acquisitions.

If you turn to slide eight, I would like to give you some further details on our balance sheet. We now hold more than $2 billion in excess capital, which includes the 869 million of net equity we raised in the second quarter. It also takes into account the estimated additional capital requirements for variable annuities. We're also maintaining high levels of liquidity. Even after investing 1.5 billion in cash during the quarter, we still hold 3.8 billion of free cash. The 3.8 billion includes 1.5 -- 1.4 billion relating to our equity and debt offerings.

However, 450 million of this is committed to the tender offer for our 2010 debt. We think we made prudent decisions to prefund, and then tender for, a majority of our next year debt maturity. As Jim noted, we now have a much longer dated maturity ladder. Our capital ratio remains strong, with debt-to-total-cap ratio pro forma for completing the tender at 16.2%. Finally, our variable annuity hedging program continued to be extremely effective with performance in excess of 95% effectiveness target.

Turning to slide nine; I'll provide more detail on our excess capital position. We told you last quarter that we held more than $1 billion of excess. Now we have more than 2 billion after our equity offering and after accounting for the estimated additional capital and reserve requirements for variable annuities. The position also excludes AOCI. In addition to the equity offering, the net change was driven by several factors.

First, we estimated requirements for [VA carvum] and CTE 98. Second, we adjusted our methodology from fact to base to cash flow testing for all of our products and risk. Our June 30th position reflects market improvements during the quarter. Finally, the majority of the total position is now at the holding company level, which provides us significant flexibility.

Now turning to slide 10, here you see details of our investment assets. Our purchases during the quarter focused on investment grade bonds, residential mortgage backed securities, which were primarily agency and [revamped] non-agencies. Our asset backed to commercial mortgage backed securities that are short duration and senior in the capital structure.

In the residential mortgage portfolio, we recognized 31 million of impairments on mortgage backed securities that had been previously impaired. Mortgage market fundamentals have shown an improvement in the rate of new delinquencies. But severities upon liquidations continued to deteriorate. The commercial mortgage backed securities portfolio is nearly 100% AAA rated. It is seasoned and the underlying collateral is performing within expected parameters.

The direct mortgage loan portfolio ended the quarter with no delinquencies. Trends in the quarter in the market continue to indicate possible stress on commercial real estate. Our historic conservative underwriting of the portfolio has been critical for maintaining a high quality portfolio to-date and the portfolio and macro trends are being monitored closely.

If you turn to slide 11, we have once again provided significant detail on our unrealized loss position, which has decreased substantially. In fact, the total net unrealized loss position fell to $577 million, a decrease of approximately 1.4 billion compared with the sequential quarter. Unrealized losses after tax as a percentage of AOCI were just 4% down from 16% last quarter. Our website, on our website you can find the underlying details relating to each of these categories.

To conclude, our markets remain challenging compared with a year ago. We of course, see optimistic regarding the environment and our business activity. We are maintaining our sound conservatively positioned balance sheet, and we are taking actions to drive profits in this environment. We're confident that these actions will also improve earning power as markets continue to stabilize.

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

Question-and-Answer session

Operator

(Operator Instructions). The first question comes from John Hall from Wells Fargo.

John Hall - Wells Fargo

I was just wondering if you could offer a little bit more clarity on, I guess, the amount of redundant expenses wrapped up in the asset management sector. As I look over the course of 2009, we've got a loss of about $20 million in that segment. But you're looking to make an acquisition, a sizable one, I guess. Could you just give us a sense of what the run rate is there and if you're losing $20 million in that segment, why are you making a large acquisition and asset management is a good thing?

Jim Cracchiolo

Let me start and then Walter can jump in. I think if you adjust for the integration expenses from the acquisition as well as from some of the cost of an old client settlement, that segment turns positive in income. Within that is also some of the redundant expenses, so just as an example with the sellout memory two TA [triple A platforms] in a number of different things and we're merging all of that together right now. So that should be completed as we get to the latter part of the year that would also reduce some of the expense savings. The integration is actually working really well. It's actually on target. In fact, the savings are appearing to be even a bit stronger on the expense side.

We also, as we mentioned, are seeing some signs of turnaround in various of the flows, et cetera, and the markets have appreciated a little bit during the quarter. We actually see signs that we will continue to make progress improving the profitability as we go through the latter part of the year. Regarding our idea just like with Seligman, we feel that that was a very good purchase for us and we'll get some really good synergies. Of course, what happened over the last year is such a severe decline in the market, so it's affecting every asset management company in that regard.

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

John Hall - Wells Fargo

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

Walter Berman

Well, as we said before the dislocation has taken place, we were heading for above 20%, between the 20%, 25% and obviously the market dislocation that certainly took it the other way. Certainly that is our range that we are talking through, and as Jim said with the market where it is and the other items that Jim mentioned, we do anticipate profitability in the second half to improve.

John Hall - Wells Fargo

On the $2 billion of excess capital, how much of that $2 billion number can you effectively go to war with in the acquisition arena?

Walter Berman

It is excess by definition, and obviously, it's fact and circumstance driven, we believe an appreciable portion of that is will allow them, we'll sit and work with [the radiant] before we use your expression go to war.

John Hall - Wells Fargo

Essentially it's all available?

Walter Berman

It is classified as excess, yes.

Operator

The next question comes from John Nadel from Sterne Agee.

John Nadel - Sterne Agee

A couple quick ones for you, could you give us the estimate on what the VA [carvum] incremental impact was going to be. You mentioned that your excess capital is net of that incremental, but could you give us a sense for that?

Walter Berman

The estimate on the VA [carvum] impact and the CTE 98 was in excess of 600 million.

John Nadel - Sterne Agee

I wanted to go through the equity market drag, the $0.36 that you're sort of citing from the equity markets in the quarter and think about exactly how we should be comparing that. Like what period. Is that year-over-year, so 2Q ’09 versus 2Q ’08.

Walter Berman

Yes.

John Nadel - Sterne Agee

I just wanted to put it in context. So we should think about that versus the average S&P in the second quarter of '08, which was near 1400. But the average S&P in the second half of '08 was down around 1100. Is that sort of why your commentary about the second half of the year?

Walter Berman

That's exactly right. Because, remember, we ended the year at around 900 on the S&P, right, and we exited the third quarter at 1165, so then you're right. I'm giving you the ending point, but that's exactly right. We're getting the favorable compare there, but also like I said our reengineering saves are increasing too.

John Nadel - Sterne Agee

Right, but far more favorable comparison versus the first half of the year, right? Okay.

Walter Berman

Absolutely.

John Nadel - Sterne Agee

Then the last one I had for you, just something I caught as I was running through the model, just thinking about I was looking at the allocated equity in the annuity segment. It dropped pretty dramatically on a sequential basis. I guess, intuitively, I understand why the variable annuity allocated equity would come down with the market appreciating. But the fixed annuity allocated equity came down about 23% sequentially and yet that business is continuing to grow. Just hoping you could help us understand why that business gets less equity despite the fact that it [take around]-

Walter Berman

It did grow. It slowed its growth in the quarter, obviously. You remember, you get the first year effects coming through from the prior. I believe that was the main reason for it. We basically had a change from that standpoint.

John Nadel - Sterne Agee

Okay, so there were no significant assumption changes or economic sort of the allocation method?

Walter Berman

We went from factored to the cash flow testing from that standpoint.

John Nadel - Sterne Agee

Did that transition from factored to cash flow testing have an impact on other segments as well?

Walter Berman

No. On other segments, no.

John Nadel - Sterne Agee

In terms of allocated equity?

Walter Berman

No. It should not have.

Operator

The next question comes from Jeff Schuman from KBW.

Jeff Schuman - KBW

A couple of questions; first of all, I'm hoping to better understand the earnings and certificate and banking. Sometimes you realize gains and losses in that segment, but if we kind of back those up from the time series, it looks like you usually make a few million dollars in certificate and banking pretax, in this quarter you made 28 million. I was just wondering if we could better understand the sequential improvement there.

Secondly, I wanted to come back to the issue of reengineering and make sure I understand the numbers. You talked about 170 million of reengineering generating a net expense reduction of 113 million for the first half. What I want to make sure I understand is, the 113 million, is that fully realized in the first half P&L or is there still some of that, that would be actually yet to be realized in the P&L in the second half? Those are my two questions. Thanks.

Walter Berman

Let me try this. What we’re doing there is, the answer to your question is being fully realized, but that is also as Jim and we said, that is approximately two-thirds of the reengineering save is full to the bottom line. That's why I was trying to match it from that standpoint to the impact of the market. Not all the reengineering saves to go to the bottom line, they are reinvested and things like that. While we have the savings, we give you the net impact of 160. That's how you got the 113. That is why, that we realized to 150. We reinvested back part of it, so the 113, the residue goes against the 394.

Jeff Schuman - KBW

That's fully realized in the first half P&L, so in the second half P&L, I should look for more saves because you've done more activity, but we were done with the realization of, where you net it out from the 170, okay.

Walter Berman

That's right. You're getting the saves continue. You're going to have more saves coming in as we go through. As we've also said, while we will realize over 350 million this year, the calendarization impact on full year basis will there will be another 100 million that will realize next year. Not everything was done on January 1.

Jeff Schuman - KBW

Understood.

Walter Berman

Now, I think the first question is really a function of really the investment and being able to pick up on the yield elements and the redeployment of more cash. That's why you see expenses coming.

Jeff Schuman - KBW

It seems like an awful big pickup. If I’m adjusting right for struck realized gains and losses, you never earned anywhere near that level. It seems like a big pickup?

Walter Berman

It was a big pickup and it's the first time the bank actually went into profitability on that basis, yes. The bank, it has been building and we record a good positioning on investing and the redeployment.

Jim Cracchiolo

We still have a lot more money to redeploy as well, so now it's getting into some of the spread and earnings.

Jeff Schuman - KBW

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

Walter Berman

Certainly, this is what we earned. Yes, I'll say this is what we earned, yes.

Jeff Schuman - KBW

Okay.

Operator

The next question comes from Andrew Kligerman from UBS.

Andrew Kligerman - UBS

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

Walter Berman

I think there are properties that are coming out. There are different interests that people have been exploring, the potential what I would call divestiture of various assets. Our feeling is that there will be more of that as people start to review, similar to the strains all of us are under a little bit of what happened with the depreciating markets. I do believe that there will be opportunities. There are already opportunities out there. As far as the likelihood in the near term, it really depends on whether everything clicks appropriately, whether it's the right asset, whether it's also at the appropriate price, and that strategically it will give us the capabilities we need. I don't really want to comment more than that, because until things are actually real, you don't really have anything.

Andrew Kligerman - UBS

I guess I would ask, Jim, which area you’re seeing more activity, asset management or brokerage?

Jim Cracchiolo

Well, in the brokerage world, we're actually growing the brokerage world because we are recruiting in a lot of experienced people. It's something brand new to us, but we're doing well in that and we put 400 new people, productive people on the books in the first half of the year. We are devoting energy and resources to that.

We are continuing to look at broker-dealer opportunities that may fit, as well to add on as we did last year with Brecek & Young as well as with Block, but in the asset management area, I would probably say this is an area that we would be looking for some reasonable size acquisition that would help really boost our domestic asset management activities or add to the capabilities we have with Threadneedle.

Those are things that we'll continue to look at and pursue. They may come along in the short-term or they may not, but these are the areas that we always had a focus on. With the extra equity that we raised purposely for that, as you saw we're able to handle now even if the environment gets bad having the cushion necessary to deal with that and still being able now to pursue opportunities that may come along. And that's really what we're looking to so that we have that flexibility.

Andrew Kligerman - UBS

It seems like you have got most of the style boxes covered in the asset management. It would just be to get more scale, just kind of lever up that back office or do you think --?

Jim Cracchiolo

I think with all of the depreciation of assets that have gone, I think a lot of us are feeling a bit of a pain of that and as you know when you have the lower assets, it does with your overhead you have a lot more capacity that you can manage. Yes, that would add and boost our profitability tremendously. Second, is it would expand our distribution if we figure out the right property, so that we can expand that more through third parties. In this time frame, even though you may be in all of the stall boxes, to have a level of even further diversity there and expand some of the products in these core areas I think is also helpful, particularly as you look to have a larger distribution.

Andrew Kligerman - UBS

I was looking at the performance in the domestic funds. It looks like International is excellent. The one-years have come up a little bit, but the asset-weighted rankings and equity were only 39% and in fixed income was only 42, Jim. Are you disappointed? Is there anything you might want to do if you don't do an acquisition? Are there any changes that you're thinking you might need to make, because again, this is not a terrific one-year numbers?

Jim Cracchiolo

We were disappointed and still are to some extent. I think what we're finding is in our fixed income we're getting strong performance over the course of this year. As we ended last year, our portfolios were geared a certain way. We're starting to realize that performance. We're beginning to feel pretty good about the fixed income performance and how that will be boosted across a number of our core portfolios.

I think in the equities, we're starting to see some good signs of life. We're not there fully yet, and now we have to continue to have that over a more prolonged period. We lost that, we had it for a period and then we lost that a bit a year ago. We want to sort of gain that back. We're not where we need to be, yet. Yes, we're still working hard on it. There's still a strong focus and we'll continue to make sure we can move the needle there.

Now that in itself, we still feel there are opportunities for us to continue to add some good capabilities like Seligman. Even where we purchased Seligman, we lost some flows there, not because their performance was bad, but because everyone pulled back from sales in these environments, but now we are starting to get that back as well.

Seligman performance is quite strong in a number of the key areas that has complimented ours. So, that's what we are going to continue to keep our focus on. Overall, as I said, yes, we are a bit disappointed. There is a lot more work that we need to do, but we do feel that there is a light at the end of the tunnel, if we can continue down this path.

Andrew Kligerman - UBS

Then just real quickly some numbers questions. You mentioned that $1.5 billion was redeployed from cash into investments. How much more impact can you get from that? Because I assume it all didn't happen on day one. What kind of investment income upside can we expect to see in the third quarter that we didn't see in the second? Then the next part of that question is you have about for the press release 3.8 billion of free cash. How much of that can you put to work in the near term and what kind of upside do you expect from that?

Walter Berman

Again, the yield on that was around six that we picked up and yields have really come down, but if that was deployed around the six range. As it relates to AAA, in the AAA, I just got a caution that there is 1.4 billion relating to the 900 million or 869 that we did on the equity raise and the 500 million that we did on the debt raising, which we have now committed 450 to. We believe there's still room to go and we're looking at it, but we cautiously evaluate it. We might be redeploying some more as we see the opportunity.

Andrew Kligerman - UBS

It doesn't sound too massive and nothing like the 1.5 billion.

Walter Berman

As I told you, we were going to redeploy in this quarter and then we are going to evaluate and situate and we will do that, but we still have room to go.

Jim Cracchiolo

We have room to grow, Andrew. I think what Walter said is of the AAA, 400 we already targeted for the refunding of the debt. So you're down to $3.4 billion and then the 3.4 we did prior to the equity raise, we redeploy more, so we do have room. The question is how much of that do we want to put to long-term. How much do we want to maintain, both for combination liquidity or potential opportunities?

Walter Berman

The other thing is obviously as we take you through, we generate a lot of investable income as we go through, so it's quite replenishable.

Andrew Kligerman - UBS

The distribution fees went from 431 in the first quarter down to 423 and you mentioned some improvements like the wrap flows and so forth. So I was kind of wondering, was the productivity there, or am I missing something by seeing that come down. I thought, I would see a little improvement in that number. No?

Laura Gagnon

A good portion of the distribution fees are actually asset base fees. So around half or so are asset base fees and the rest are transition. You are seeing the impact of the lower asset levels.

Jim Cracchiolo

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

Andrew Kligerman - UBS

That's understandable, because the asset values even went up. Then I should look for a pickup in 3Q assuming things are constant with where they are today. Thanks a lot. I appreciate it.

Operator

The next question comes from Suneet Kamath from Sanford Bernstein.

Suneet Kamath - Sanford Bernstein

I just have two questions. The first one I just wanted to reconcile two comments on capital that were made on this call. I think, Jim, you just said that you did the equity deal. You've created some capital and now you have the ammunition to go out and do a deal and still maintain sizeable cushion in case the environment goes bad again. Then I didn't get a response to an earlier question, Walter, you had said that by definition all of the 2 billion plus excess capital is available if you wanted to do a deal. How do we reconcile those two statements because it seems like they both can't be true unless I'm missing something?

Jim Cracchiolo

If we classify its access, we will go through our requirement and we will then evaluate the amount of capital asset and we come through and a lot of moving parts certainly is taking place. From that standpoint, it's a fact and circumstance when you're going to look at a transaction, sitting down looking at the environment, you're in discussing with the rating agencies and other things. From our standpoint, it is certainly available and then we would sit down and work with the rating agencies and others to ensure that we maintain the safety sounds on our ratings as we move through. Is that still confusing from that standpoint?

Suneet Kamath - Sanford Bernstein

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

Walter Berman

The answer is yes and we have in excess of 2 billion but the question is we would sit down with the rating agencies also and ensure that everybody is comfortable looking at the transaction and ensure that even though it's available and it's there, from that standpoint we want to make sure our ratings are preserved but it is certainly from that stand available and we do have as our debt to capital ratios are quite good too, so we have backup there. We'll find the same methodology running and therefore when we say it's excess, it's like definition available subject to with the transaction you go through and then discussing it.

Jim Cracchiolo

Let me be very clear. We're not sitting at this point, depends on when it occurs and what type of deal is how we would think about it. It's not as though we're not going to be informed in the environment. What I did want to be clear on is that we could afford a reasonable size acquisition even if the market downturned a lot that would have impacted any of us that we would feel like we have to be on the sidelines. This equity raise gave us enough of a comfort to say that, we can still do a reasonable size acquisition.

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

Walter Berman

Now, the other thing is, while we've estimated now for the [CTE 98] and other things, this is as of the markets as they look today and as we're evaluating. Obviously, as markets did change, we would have to then reevaluate what the excess would be at that particular time. It's real.

Jim Cracchiolo

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

Suneet Kamath - Sanford Bernstein

My second question is on a related topic and it gets to this issue of timing. Obviously, you said there is nothing on the table right now in terms of a deal. How long are you willing to sit with this additional capital waiting for something to come up? If something doesn’t come up, what alternatives do you have to redeploy it? Because it seems like the company's overall shift has been to migrate to less capital intensive businesses. If you couldn't redeploy it in an acquisition, what would you do with it?

Jim Cracchiolo

Prior to this market downturn, when we saw that we were sitting with some sizeable capital cushions, we bought back a tremendous amount of stock in periods. When acquisitions came up, which was in the middle part of last year before the downturn, we still maintained enough so that we could do those two acquisitions. Then the market downturned a lot and we felt that all of the excess capital that we had at that point, we wanted to maintain, so that we can handle the difficult environment and we feel that that gave us the ability to navigate it.

Now what I would say is, at this point in time, we think the reason we raised it is because more opportunities will come along and we want the ability to go do it. I'm not saying that if I don't get an opportunity in the next month, I'm going to return it, but I think overtime if we didn't see good opportunities, or they weren't at reasonable appropriate prices that we can get the type of return we want for shareholders, then we would return it to you through buybacks, et cetera just like we did previously.

Hopefully, with the raise, we'll be able to do some of the things we wanted to do and this might be the right time to do it. Because of the accounting nuances, we had to go out before we would ideally like to, because we didn't have a deal on hand, but we wanted the ability to execute if the opportunity came along. If things don't overtime, we will definitely focus on driving up the return and giving it back to shareholders. We’re not going to do a bad deal, so I’d just be very clear, we’re not going to look to overpay to use the money.

Suneet Kamath - Sanford Bernstein

Last comment on that very last statement that you made, last question, excuse me. When you said, we're not going to do a bad deal, would you accept earnings dilution for say the first year and consider that a well-priced deal?

Jim Cracchiolo

Yes. I think the answer is, in certain respects including because of what happened with the market downturn, we accept the dilution even with the Block in the first year because in any deal of its size, you have integration in the first year. You're not going to get all of the synergies and the expense saves in that first year, so our plans are to have, it might be different, it may not be, but our plans would be that you possibly will suffer some dilution in the first year with accretion maybe in the second year, and that's really our focus.

Operator

The next question comes from Colin Devine from Citigroup.

Colin Devine - Citigroup

I have a couple questions; first, I just want to revisit the allocated equity in the annuity block and I'm trying to understand, Walter, how, if I look at how much equity you had against your VAs at the end of '06 before the market collapses about 2.1% of asset under management. Today it's 1.7 and yet you're in the money on the guarantees. Can you help me get through how come the allocated equity here is going down when the risk profile of the block has gone up with the markets? Isn't that a potential draw on the so-called excess capital?

The second thing, if we can just revisit what happened with the banking line and what is reasonable than earnings run rate going forward. I'm tremendously happy you've turned this thing around and you've made $28 million pretax, but what's realistically going forward? Finally on the fixed annuity line, the yield went up dramatically, and I’d like to understand how it was able to pop 80 points sequentially on that bigger block of assets. What are you out there buying that you were able to move the yard sticks that much? Thanks.

Walter Berman

Let me go. On the fixed annuities as we told you, the [debts and] yields were ranging in the 7s and we feel very prudent, we really were able to pick off very good returns on that basis. We feel quite comfortable with the quality and yield and again, we managed the credit rate to the customer and relative to ensuring that we had returns that were way in excess of what we normally would get in this sort of anomaly on fixed annuities. What was your second question was --?

Colin Devine - Citigroup

It just seems like a very good move on a $15 billion block, but, okay, I’m just trying to reconcile that -

Walter Berman

I'll do the best. I don't have the exact reconciliation on, but we certainly invested a substantial amount on the fixed annuities. I'll have to do the math to do the full reconciliation, we did that before.

Colin Devine - Citigroup

Then the banking line if we can just touch on that to be clear because I think it was a big surprise to all of us, and then the allocated equity on the VA, it seems to be going down from where it was pre the market crash and I just like to understand that. That's not then a potential drain on the excess capital position and that it may not be that excess.

Walter Berman

No. Just let me get to that one. On that one when we were doing this, and this is [pre-mediate and the] rating agencies and going everything, what we have done that is on a CTE 90 on the allocated basis sitting on there, we picked up the CTE 98 into the corporate side of it because that was done later, so from that standpoint the excess we're talking about does cover all of the contingencies that we have and it certainly reflects the improvement that’s taken place from the end of the first quarter.

We're comfortable with that positioning on it, and has as you know, a lot of moving parts going through it, but we've been through it. We've sat with the rating agency. We're still waiting to hear back, but certainly we feel comfortable with the positioning that we have set on that. As it relates to the bank, the investments on the bank and the profitability of the bank is certainly improved, and from that standpoint, I'm not going to run rate it, but certainly as we look at the investments and certificate in the bank, it is improving.

Colin Devine - Citigroup

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

Walter Berman

We will certainly revalidate that and we will check, but no, I do not believe there are unusual items in there. I will verify and get back because certainly when we speak to a lawyer, we will make sure if there is, we will communicate that out, but I don't believe that is.

Jim Cracchiolo

Just one thing before the next question, I just want to make sure I also say something regarding the last question we got regarding an acquisition. If we raise, we do evaluate whether we could, whether there is dilution in the first year because of integration and then accretion thereafter. If you assume that the equity raises already factored in and has caused a dilution, then there may not be further dilution, there might be some accretion compared to the dilution we already solved it. I'm just saying it will really depend on the deal, the size of the deal and the level of integration in the first year. I don't want someone to assume there might be further dilution on top of the dilution we already suffered from the equity raise. Next question.

Operator

The next question comes from Tom Gallagher from Credit Suisse.

Tom Gallagher - Credit Suisse

Jim, yes, just a quick follow-up on the point you just made. If I just run rate the earnings you reported this quarter, you raised equity at around 10 PE. Was your comment that if we used the 10 PE as the bogey for the block you're acquiring in terms of breakeven accretion dilution, that you may suffered according to that definition, but relative to what you're earning on the funds today, which presumably a lot of that's in cash. It would very likely be accretive relative to that lower bar. Is that what you're saying?

Jim Cracchiolo

There is an important point. Certainly the funds are deployed right now at a very low earning rate and we know that. The reality is when we do our analysis of that, we are looking at the transaction and I think we've said this. We look at it as if we use full equity at that point to looking it and then we are looking at is from the standpoint of using full cash. As a transaction, we have to make sure it meets our IRRs and elements there. We are not going to play off the fact. It has to be certainly beneficial on that standard.

Thomas Gallagher - Credit Suisse

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

Jim Cracchiolo

That's exactly right.

Thomas Gallagher - Credit Suisse

The next question I had, was I know there has been discussion, I think a couple of different times about shift to lower margin as management or advice and wealth management products. Can you comment on exactly what's going on? Is it money moving into cash or what exactly is the shift to lower margin products?

Walter Berman

What is happening in this phenomenal, it's been happening for a long. Actually it's beginning to shift back a little now. There was a tremendous shift into basically brokerage and short-term cash, which obviously has a low return characteristic to it but a lot of short-term cash. We were building a lot of cash on the brokerage and products which in this environment, certainly was not giving anywhere near the earning power of the equity driven products, but we're beginning to see a shift back now, a little.

Jim Cracchiolo

I think what Walter's comment is that the cash that either came in or if we moved to the sidelines that would have been normally deployed into things like wrap and other programs or funds was sitting there. Because the spread on that business is so low because of the short-term interest rates, we didn't have the earnings power on that as you would usually have even for cash.

Now that it's starting to shift back, we'll start to pick up some of the earnings power from the product flows and as we invest some of the things particularly in the bank and certificate a bit more that we feel comfortable with the environment, we're starting to get some spread back. That's a better earnings spread and that's why the bank has turned to profitability. That's what we were talking about, but in the first part of the year, those was sitting in very short-term liquid and based on short-term rates, we weren't really capturing any spread on them.

Thomas Gallagher - Credit Suisse

The next question I had was on overall net flows and then on performance fees. Certainly the overall net flow performance in asset management has improved. Just curious if there is anything unusual in there, or do you expect generally the trend to continue of at least breakeven to positive overall net flows. Then I guess, my question on performance fees was and I know it's typically a 4Q event for you and presumably it's the alternative portfolios that drop the bulk of that.

I noticed in the international alternatives portfolio, unless this is a misprint, it looks like that overall fund was down, something like 25% plus for the quarter which seems a bit startling and I presume that means international, if that's correct, international performance fees on the alternative side won't be there, which means then you would be left with domestic but anyway, it's kind of a long-winded question. Can you address the net flow outlook as well as performance fees?

Jim Cracchiolo

Well, I'll let Laura on the performance just to sort of check the math there but on the flows, if I start with Threadneedle, we're seeing some good flows both in the retail and institutional. We're getting some mandates, their performance has been quite strong. It really depends on markets and circumstances but, we feel good about the activity that's beginning to occur there.

Domestically, we've seen some positive flows in the business there in a sense of sales have picked up a bit where we were still holding redemptions but sales were lower. I’m assuming some of that coming back both in the institution and the retail side. It's hard for me to predict that going out, but at least it's turned more positive than it's been and hopefully with the improvements and some of the improvements also in performance like in the fixed area, we're hoping that will continue.

Laura Gagnon

I have two comments and Tom, I'll have to get back to you with more detail, but below the market performance line you'll see the foreign currency translation that's UK to US, but above there in the market, you're going to see all of the other translations that are taking it from their foreign investments and currency back to UK. I'll have to check and see how much of that is actual FX moves on the book.

Then the other thing I wanted to point out is that a very material portion of those performance fees get paid back out again to the portfolio managers. While there is margin contributed by them, it's not as material as the gross fees.

Thomas Gallagher - Credit Suisse

Is it fair to say though, just based on overall performance, that the alternative portfolio internationally was quite poor in Q2? I just want to make sure, I'm not misreading that.

Laura Gagnon

Without knowing what other currencies they might be compared to, I can't draw that conclusion, but I will do the research and get back to you.

Thomas Gallagher - Credit Suisse

I just want to better understand the $600 million VA carvum] comment CTE98. My understanding, not that I can understand everything about the VA [carvum] coming at this yearend, it was not CTE98, it was something less onerous than that, so is this 600 million something else? Is this a rating agency driven number or can you just give some color on what the $600 million is represent?

Jim Cracchiolo

It's going to a higher standard. That is correct. From a rating agency perspective, that was the standard that we were using.

Walter Berman

If we are using CTE98 and that's since we default to the most restricted standard, that's the number we use now.

Operator

Your next question comes from Eric Berg from Barclays Capital.

Eric Berg - Barclays Capital

My first question relates to just sort of how you organize your results. What is the difference between the reconciling items on the one hand between net income and core and core operating earnings on the one hand? In other words, those reconciling items on the one hand versus disclosed items on the other?

Walter Berman

Well, Eric, what we've done, I think, we'll try to do this in a very structured way, there are certain items that have continually impacted both as you look at, that are basically items that really don't reflect that we believe the ongoing nature of business, cap gains and impairments and everything of that nature has been excluded and that's one adjustment that has been standard. The others we put in there is obviously the integration course related to the acquisition.

Because of all of the fluctuation that have taken place is it relates to the newer version, the 157 and those aspects that have been the ever. Then there comes items that just happen once off that aren't normal then where something comes through, and that's, those are the disclosed items. The other ones have been part of us and we're just trying to give you a flow since this is, especially if you look at as I said, we're just taking a look at 157, that impact we're trying to give you insight into understanding that.

Eric Berg - Barclays Capital

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

Walter Berman

No. What happens is what we do is we go from reported with those standard items I just mentioned. Now, in there, now, then we get to core. Then you have within core some disclosed items, which we will then tell you about.

Jim Cracchiolo

Depending on how you run your analysis, you may say you didn't have factored that in against that because some of them are one time like a legal reserve or something like that that might be exceptional, which I think is the way we've been trying to do it for quite sometime.

Eric Berg - Barclays Capital

A couple more questions. Returning to the question about the amount of excess capital you have, if you were to sort of stop the clock right now and think about the $2 billion, it sure, it seems like, once again, I know the question has been asked, but it sure seems like the number is less than $2 billion. Because you have built an amount of funds here that contemplates a certain amount of potential deterioration. I'm thinking that the earlier question was really about sort of dividing the $2 billion between how much you could deploy if the balance sheet deteriorated and you had to use some of that between how much you could deploy if the balance sheet deteriorated on the one hand and how much you would need of the $2 billion to repair the balance sheet if it needed to be repaired. My question is, right now how much of the $2 billion is available, given that the possibility of a deterioration in the balance sheet?

Walter Berman

It is a balance sheet, so let's stop that's a period. It's as of this moment, and as of this moment, calculating all facts including the VA [carvum] and the CTE 98. Based upon where the markets are, we have in excess of $2 billion. Obviously one looks over the horizon and as you do it, so as we're contemplating the transaction as I said, we'll evaluate the circumstances we think we're heading into and look at that. It is based upon our calculations, which we then review with the rating agencies, the rating agencies then have to determine and, like I said, from that standpoint it's based upon reviews. We would then based upon a transaction or an event that would in the future could change the amount of excess as of that point in time. This period has $2 billion in excess, in excess of $2 billion.

Now, let me go the other way. If the environment improves, now we could get to $3 billion. Then I can say, yes, as of this moment. Then if it goes down, we could then say we go down. Eric, it's a moment you look. Now, the question if you always put on the side for contingencies. Because remember, we're very conservative and we think we prudently manage our asset, so we don't take risks that the thing could come back to us while anything could hit us. We certainly have very effective hedging, we have liquidity so we try to minimize the amount of exposure and contingency, but as of this moment, that's what the excess is.

Eric Berg - Barclays Capital

See, I was thinking that you're saying to yourself something along the lines. We have 1.3 billion, and I'm just making up numbers to illustrate the point. I'm thinking that you're thinking to yourself we have 1.3 billion to do an acquisition and 700 million to plugholes or we have 1.4 billion and 600 million. That's the sort of breakdown that I was hoping you would have said.

Walter Berman

It's interesting, Eric, so let me use your example. If that's the case, and we have 1.3 billion to do something with and that left an excess of 700 million plus, yes, that would be one way to evaluate it and we would sit with the balance sheet committee and look at and say do we feel comfortable, contingencies and things like that and we will look at it and then we go and talk to rating agencies, about the transaction, in your case, that you're talking about.

We would see how they would feel about our ratings and everything of that nature and say okay, but say a transaction was now $2 billion. That you would then have the similar conversation, and the question is while it's still in excess, what's your comfort level and that will be based upon a rise you're looking at, the situation you're looking at and everything of that nature. We may say, you know what, that's fine. We'll go to rating agencies and discuss, if they feel comfortable once we release a forward outlook. We don't have to cut into required capital to do it.

Eric Berg - Barclays Capital

All right.

Jim Cracchiolo

Eric, I see your point and, again, I think you're right in your thinking that it really is dependent on the circumstances at the time. What we're just saying is this, at this point in time covering what we think of all the known requirements, based upon the quality of the balance sheet, knowing that we are comfortable with the situation we have, the liquidity, the investment portfolio, we're saying we have more than $2 billion of excess after all of those requirements.

Now, we may choose that we could deploy all of that. We may choose to deploy some of it. We may choose if we needed to raise a bit of debt if we wanted to a along those lines, but what we're driving, conditions don't improve but get worse and there are some other factors that come on. We have money there if we don't deploy $2 billion fully in capital against that. If things could improve, we still have the ability to even do more.

To your point raised, it will really depend on all of the facts and circumstances that deal itself, how we want to structure that appropriately? What Walter is describing that because people always ask what is your point in time of the excess, this is what the point and time is.

Walter Berman

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

Jim Cracchiolo

We did try to take into the other requirements again those things also affluent, but we try to take into account all of the requirements that we know about. Because some people said, well you have other requirements coming what does that look like, so we factored that into this analysis as we saw it today.

Eric Berg - Barclays Capital

Last question, and much more straightforward and narrow one, getting back to the issue about the certificate company and the banking operation, can you build upon your earlier response, I guess, to Colin's question. If there were no unusual items, as best as you know in the banking operations, when you say that you made greater, something about investment. How was the bank operated differently in the June quarter versus the previous quarters that caused this swing from a loss over each in the last four quarters to a $20 million pretax profit? What did you do differently in running the business?

Jim Cracchiolo

There were impairments in some of the prior quarters.

Walter Berman

What we've done is through a series of looking at the bank, we had liquidity to deploy and we had different investment options that still met our liquidity requirements that gave us highest returns. Those were executed in the latter half of the first quarter that started paying us higher spread capabilities that still take into consideration our liquidity and meeting our liquidity test.

It is basically just working pretty hard with the treasury group as it relates to investing and out and staying within our liquidity guidelines. We've invested out and we've also in very long-term, short-term in different ways which we'll now generate but certainly staying within, as we told you our liquidity positioning and that's sort of we've been factored that.

Operator

The final question comes from John Nadel from Sterne Agee.

John Nadel - Sterne Agee

Two quick ones, one is just sort of a modeling question thinking about the 20% tax rate. Is that something that we should feel reasonably good about modeling out for forward years as well 2010, 2011, or is it going to be more gravitating higher assuming pretax income is going to grow?

Walter Berman

It will gravitate higher as PTI goes and we then of course, we come with our tax planning. It obviously will gravitate higher, that's what happened this time with the market improvement and the other tractions we were getting, we forecasted higher PTI and that's why we did catch up in the second quarter. It will gravitate higher.

John Nadel - Sterne Agee

I just wanted to follow-up and go all the way back to the beginning of the Q&A. I think John Hall had asked a little bit about margin targets for the asset management division. If you look back to 2006 or '07, it might have been 2007, the pretax margin there and there's probably some noise in the numbers, but it looked like it was about 17%, maybe 17.5%. Definitely in line and gravitating towards that 20 to 25 that you offered up earlier, but obviously asset levels were significantly higher. You've done the Seligman deal, since then expense cuts have come through, market is down, and there is a lot of moving parts.

I guess my question is without a deal, because I don't think we can model anything that we can't see. With what you have today, what kind of timeframe are we looking at, if we just assumed a reasonable market, that normal long-term S&P, typical assumption of 2% a quarter or something? What kind of time frame are we looking at to get back towards that high teens, 20% sort of level? Is it in the next 18 months or is that more like the next three to five years?

Jim Cracchiolo

There is a lot of parts that are moving because we have Seligman coming through now. would say my feeling on that, if the markets are improving at the 8% range and we're starting to get the traction on the net flows and the expense and we're still making heavy investments in the third party, so there also with the third party distribution.

I'll probably guess it's a little longer than 18 months for sure and there will probably be, if I had to guess certainly in the timeframe probably in the three year timeframe. Again, assuming nothing else changes and I think that's reasonable.

John Nadel - Sterne Agee

I would just ask since there's been a lot of discussion, obviously there has been a lot of rumors out there. It seems to me that people are still very confused about how to think about or how you guys are thinking about dilution and accretion and there's discussion about the dilution, that's already in there from the equity raise. We've taken earning levels down to reflect that so maybe its accretion from here.

I guess I’d just ask you, can you go through that maybe one more time, so that hopefully there is real clarity on what senior most management is thinking about in terms of hurdles?

Walter Berman

What we would approach, forgetting whatever our issues now, when we do analysis, ten analysis that we do, we look at it both on two ends of the spectrum. We certainly look from the standpoint of using equity, on one end of the spectrum issuing new equity at that point. Then we evaluate the transaction itself, not trying to hide behind the earning power of the firm. We're trying to evaluate the transaction itself that it will have give us a return on a capital that meets our hurdles and heavily guided towards expense saves of that nature and not just going for revenue saves.

As Jim says, we go for an outer marker of a two year accretion on that basis and we run it through both and then that is basically and it has to meet our hurdle rates. We have to meet our confidence rate that we can execute on that basis. Then you roll it into the whole company and then see what the implication is on EPS. The hurdle rate right now is 15 plus hurdle.

John Nadel - Sterne Agee

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

Walter Berman

Yeah.

Laura Gagnon

I will be in my office for a large part of the rest of the evening. If anybody has any follow-up calls that number is 612-671-2080.

Jim Cracchiolo

I want to thank you for staying late to ask your questions and understand a little more about our quarter. As I said, I do think that the company is in a good position. There is continued work, the markets are still what the markets are, but we're seeing some signs and we feel like we're in a good position.

We have a solid core franchise that we can navigate and hopefully come out of this in a stronger way as things improve. I appreciate the time and Laura will take any of the questions. I hope we've been able to clarify some of the questions that you had. Thank you.

Operator

Thank you for participating in the Ameriprise Financial second quarter earnings conference call. This concludes your conference for today. You may all disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Ameriprise Financial, Inc. Q2 2009 Earnings Call Transcript
This Transcript
All Transcripts