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Ameriprise Financial Inc. (NYSE:AMP)

Q3 2010 Earnings Call

October 28, 2010 9:00 am ET

Executives

James Cracchiolo – Chairman, Chief Executive Officer

Walter Berman – Executive Vice President, Chief Financial Officer

Laura Gagnon – Vice President, Investor Relations

Analysts

Tom Gallagher – Credit Suisse Securities

John Nadel – Sterne Agee

Andrew Kligerman – UBS

Suneet Kamath – Sanford Bernstein

Colin Devine – Citigroup

John Hall – Wells Fargo Securities

Operator

Welcome to the 2010 Third Quarter 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 the call over to Ms. Laura Gagnon. Ms. Gagnon, you may begin.

Laura Gagnon

Thank you and welcome to the Ameriprise Financial Third Quarter Earnings call. With me on the call today are Jim Cracchiolo, Chairman and CEO; and Walter Berman, Chief Financial Officer. After their remarks, we will take your questions.

During the call, you will hear references to various non-GAAP financial measures which we believe provide insight into the underlying performance of the Company’s operations. Reconciliations of non-GAAP numbers to the respective GAAP numbers can be found in today’s materials, available on our website.

Some of the statements that we make on this call may be forward-looking statements reflecting management’s expectations about future events and operating plans and performance. These forward-looking statements speak only as of today’s date and involve a number of risks and uncertainties. A sample list of factors and risks that could cause actual results to be materially different from forward-looking statements can be found in today’s earnings release and related presentation slides, our 2009 annual report to shareholders and our 2009 10-K report. We undertake no obligation to update publicly or revise these forward-looking statements.

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

James Cracchiolo

Good morning. Thanks for joining us for our third quarter earnings call. This morning Walter and I will give you our thoughts on the Company’s performance for the quarter and the progress we’re making across the business. We’ll also provide (audio interference). Let’s get started.

This was another strong quarter for us. In fact, despite the continuing challenges in the environment, we achieved our highest quarterly revenues and earnings since we’ve been a public company with $2.4 billion of net operating revenues and $355 million of operating earnings. Operating earnings per share of $1.37 represent an increase of 32% compared with a year ago, and 25% compared with last quarter. Our operating return on equity reached 12% which is up nicely compared with the last couple of years.

While we realized benefits from DAC in the quarter, strong business fundamentals drove these results. We continue to generate higher margins in our more fee-based segments - advice and wealth management and asset management - and our client base and advisor productivity continued to improve. We are realizing the benefits of the Columbia transaction and our other acquisitions which helped drive owned, managed and administered assets to an all-time high of $649 billion.

Our strong financial foundation and prudent operating principles continue to serve us well. The balance sheet remains very strong and we continue to hold considerable excess capital and liquidity positions which gives us significant flexibility to invest for growth, to manage through a difficult environment, and to return capital to shareholders. In fact, I believe we are one of the few firms in the industry that had the strength to repurchase shares. During the quarter, we bought back an additional 3.6 million shares for $153 million, bringing our total buyback for the year to 9.3 million shares for $373 million.

We’re also maintaining our commitments through reengineering and expense control, and we’re continuing to fund our investments with a portion of our reengineering savings. Expenses remain well-managed with general and administrative expenses down in every segment except asset management due to the Columbia acquisition.

Now I’d like to discuss our segment performance. First, advice and wealth management generated strong results. We reported pretax operating earnings of $88 million compared with 28 million a year ago. Our pretax operating margin in this segment was 9.3% for the quarter, up from 3.4% a year ago and up slightly over the sequential quarter. Our advisor retention rates remain very high with retention of our most productive advisors rising to well above 95%. Employee advisor retention is also up significantly, and that was a primary goal of our long-term work to reengineer the employee force with a focus on productivity.

We orchestrated a transformation of the advisor system. Lower producing advisors have left and we’ve reduced costs significantly while continuing to invest in the business. And even with the S&P 500 still 25% below all-time highs, advisor productivity is near our all-time highs; so we feel good about the economics we’re generating and the leverage we’ve created in the advisor system. Lower costs and higher productivity were our goals, and we are achieving them.

In the quarter, operating revenue per advisor increased 21% over a year ago. While we’re seeing some improvement in client activity compared to this time last year, advisor productivity was off slightly compared with the sequential quarter, mostly due to the slower summer months. Clients are more confident now than they were a year ago, but doubts and concerns are persisting; and as a result, investing behavior continues to show a fairly high level of risk aversion.

Even with the seasonality impact, we continued to generate asset growth in the advisor business during the quarter. Total client assets increased to $313 billion, up 9% over a year ago. Wrap accounts were an important contributor to these increases. We recorded net inflows in wrap accounts of 1.8 billion in the quarter and total wrap assets increased to 105 billion, an 18% increase over a year ago.

I should note that while the factors we can control are contributing to higher margins, a factor outside our control is offsetting some of our gains. The historically low short-term interest rates are impacting our profitability in this segment fairly significantly.

The asset management segment also delivered a strong quarter. We generated pretax operating earnings in the segment of $121 million compared with 17 million in the third quarter of last year and 104 million in the sequential quarter. The segments pretax operating margin was 18.3%. These results, which included a full quarter of Columbia contributions for the first time, demonstrate the improved profitability and scale of our combined asset management business.

Despite the 4% average decline in the S&P during the quarter, revenues grew 18% sequentially and global assets under management increased to a record high of $445 billion. In terms of asset management flows, we experienced global net outflows of 2.1 billion in the quarter with net inflows of 1.1 billion at Threadneedle, offset by domestic outflows of 3.2 billion.

While we obviously are working to return to domestic net inflows, we continue to feel comfortable with the progress we’re making in the business. Flows continue to be impacted by the industry wide weakness in retail equity fund flows and by the upcoming merges in our mutual fund lineup, which were announced last month. While institutional flows remain negative, we feel very good about the pipeline and the overall positioning of that business.

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

Our investment performance continued to improve in most asset classes, highlighted by stronger short-term domestic fixed income performance and continued strength in our three and five-year numbers. Threadneedle’s performance remained very strong and overall we feel good about our performance records.

The integration of the acquisition is proceeding according to plan. During the quarter, we completed the move to a common transfer agency for the combined business and we announced a new product lineup. Once our fund merges are completed, which will occur mostly during the first quarter of next year, we will have a more focused and strong performing product platform.

As we’ve gone through the integration process, which obviously imposed a significant change on the organization, the business has continued to perform well. We’ve retained talented people and maintained the two firms’ client bases, and we’re now operating truly as one firm with any disruptions from the transaction largely behind us.

In annuities, we reported pretax operating earnings of $265 million for the quarter, a slight decrease compared to a year ago and more than double our sequential earnings. This quarter reflects our annual DAC unlocking which had a positive impact on the quarter, although less positive than a year ago. While Walter will discuss the drivers of DAC shortly, I want to note that the primary driver of the positive impact was greater persistency of the book. Clients are staying in annuity contracts longer.

Business fundamentals remain solid despite a continued challenging environment for sales. We produced variable annuity net inflows of approximately $500 million, double our net inflows compared with the sequential quarter. The inflows were driven primarily by sales of a well-received new product that we introduced during the quarter.

The fixed annuity business remains stable. While we’re not writing much new business in fixed annuities because of the rate environment, we are seeing lower lapse rates and better than expected asset persistency in the book. We continue to generate stable spread earnings and good returns from the fixed annuity balances.

The protection segment produced pretax operating earnings of $65 million, a decrease of 53% compared to a year ago and 51% versus the sequential quarter. We recognized a $39 million expense related to DAC in this segment compared with a $24 million benefit in the third quarter of last year. Setting aside these impacts, profits were down $10 million year-over-year which resulted from increased claims. We not see the one-quarter increase in claims as a trend that is likely to continue.

While insurance sales remain well below pre-crisis levels with clients still reluctant to commit cash, we saw a continuation of a gradual improvement in total cash sales. Expenses remain well controlled in the insurance business and we are pursuing sales improvements through a new simplified approach to help advisors explain product benefits to their clients.

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

To summarize, we feel very good about the progress we’ve made and the results we generated over the past several quarters. We’re succeeding at driving higher margins in our less capital demanding businesses, and we are continuing to generate a very real benefit from the scale and strength of each of our operating segments. At the same time, we continue to manage our financial foundation carefully, and our risk and expense disciplines will not waiver.

Overall, we are in excellent condition and we are in a strong operating position. Of course, the environmental factors remain challenging. We expect the extended period of low short-term interest rates to continue for the foreseeable future, and while equity markets have improved, they’re still struggling to find their direction. Of course, clients feel these environmental factors and we believe the trend in client activity continues to demonstrate the fragile state of the economic recovery and consumer mindsets.

So the environment continues to impact us across our businesses. Asset-based fees, advisor productivity, and our ability to earn investment income are all affected by soft conditions. While these environmental risks remain, we are confident in our ability to navigate a wide range of conditions and generate good returns for our shareholders.

Now I’ll turn it over to Walter, and later 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. Please take a moment to review the Safe Harbor statement on Page 2 and then turn to Slide 3.

This was a record quarter for Ameriprise. Reported EPS was $1.32 and operating earnings per share were $1.37, up 32%. Revenues were up 26% and we maintained strong expense control which resulted in improved margins. Our operating return on equity, excluding AOCI, reached 12%; and finally, our balance sheet fundamental remain strong.

Slide 4 reflects highlights of our performance. In the quarter, our operating earnings were 355 million. The 31% growth in operating earnings was achieved despite a significant year-over-year decline in DAC unlocking benefits. In the quarter, we generated a net positive DAC unlocking and other benefits of 47 million versus 105 million last year.

The substantial year-over-year improvement in operating performance reflects the following items: growth in business drivers, realized reengineering benefits, the acquisition of Columbia Management, and the impact of the 10% year-over-year increase in the equity markets.

On the next slide we provide more insight into the DAC and our associated assumptions. Of the 47 million in after-tax items in the quarter, 37 million of the benefit was generated by unlocking. The two major drivers were: first, updated persistency assumptions drove an overall benefit of 101 million. Persistency on both fixed and variable annuities has improved to the point we needed to increase DAC amortization periods to better align the recognition of expense with revenues anticipated over the life of the business. Of course, while improved persistency has a positive impact on continuing fees and spread revenue, it could also lead to increased benefit costs from variable annuity guarantees; so we needed to increase reserves for these benefits. Consistent with our risk management philosophy, we adjusted our hedge in the third quarter so it is based on the same policyholder behavior assumptions as the liability.

Secondly, we lowered our equity and fixed income return assumptions to reflect fair value of the equity market and the current interest rate environment. This resulted in a $55 million expense. Near-term equity markets now equal our long-term assumption of 9%, reflecting our view that the market is currently reasonably valued. Fixed income return assumptions reflect our expectation of an extended period of low interest rates gradually increasing over time.

In the quarter, we generated a mean reversion benefit of 25 million reflecting the 11% absolute increase in the S&P 500 during the quarter. And finally, the narrowing of our own credit spread drove $15 million in losses. Remember, we do not hedge the impact of our own credit spread on the living benefit valuation.

On the next slide, operating net revenue growth was strong at 26%. Revenues have been on an upward trajectory over the past five quarters. Excluding the Columbia acquisition, revenue would have been up 13%, driven primarily by higher markets, positive retail flows, and increased client activity.

Let’s turn to expenses. We continue to manage our expense base effectively. Operating, general and administrative expenses grew 15%, primarily due to the Columbia acquisition. Operating expenses in the other segments were down year-over-year, reflecting continued strong expense controls and reengineering benefits.

On the next slide, you can see we are continuing to drive our business mix towards lower capital, high return on equity businesses, namely advice and wealth management and asset management. Together these businesses, excluding the DAC impacts, generated 43% of our third quarter operating PTI, and you can see that we have been on a good trajectory for the past year. Keep in mind, the fourth quarter 2009 results were skewed by the recognition of hedge fund performance fees. This compares to a 29% mix from these businesses in the 2007 to 2009 period.

One of our key objectives is driving this mix shift towards lower capital businesses while effectively managing our excess capital position, which ultimately leads to a return on equity expansion. On the next slide, I’ll turn to the segments.

This was an excellent quarter for the advice and wealth management segment. Pretax operating earnings were 88 million in the quarter and operating margins have improved from 3.4% last year to 9.3% this quarter. Year-over-year earnings growth and margin expansions were driven by several factors: first, continued advisor productivity gains as a result of reengineering our business model; second, growth in average fee-based assets driven by market appreciation and wrap net inflows of 9.1 billion; third, lower operating, general and administrative expenses reflecting strong expense management. We achieved these expense savings even as we continued to make significant investments in the businesses, including increased marketing and our new brokerage platform. And finally, an improvement in client activity, although it continues to be below pre-crisis levels.

Client activity typically declines in the third quarter and average equity markets were down 4% sequentially. That said, a portion of that seasonal drop was offset by stronger sales in our new variable annuity product, RAVA 5; and the market decline was partially offset by retail inflows. As a result, revenues were down only 2% sequentially.

On the next slide, you can see we also had strong performance in our asset management segment. In the quarter, we generated pretax operating earnings of 121 million and an operating margin of 18.3%. This is the first quarter reflecting a full three months of Columbia operating PTI.

While the year-over-year market appreciation benefited our margin, the sequential decline in average markets did put pressure on revenues. We estimate the 4% decline in average markets lowered margins by approximately 1%. The integration of Columbia continues to go well. Please turn to the next slide for more details.

Year-to-date, we’ve spent $76 million in integration costs with 18 million recorded in the asset management segment in this quarter. Our estimate of total integration costs remains at 130 to 160 million. Our expense synergy estimates also remain on track, having realized approximately 47 million year-to-date versus our estimate of total expense synergies of 150 to 190 million.

As we said before, integration was expected to impact flows. There are three main factors impacting Columbia’s retail flows: first, the continuing impact of the integration on fund merger; second, we continue to experience significant sub-advisor outflows; and finally, the market demand continues to be skewed towards fixed income products.

Institutional flows, while still negative, have improved significantly and reflect the continued acceleration of our activities in that area. We are seeing the best institutional pipeline we’ve seen for quite a while. Finally, alternative flows are being impacted by a soft close of most of our hedge funds to allow us to maintain strong performance.

At Threadneedle, net inflows of 1.1 billion were driven by strong institutional flows, more than offsetting continued Zurich outflows. Retail net outflows continue to reflect the overall market volatility in Europe.

Let’s move on to annuities which also generated strong results in the quarter. The 265 million of operating earnings included the following: 105 million in benefits from unlocking, 29 million in benefits from mean reversion, and 22 million in expenses from VA benefits. The year-over-year underlying growth was driven primarily by higher account values as a result of markets and business growth. Sequential underlying growth reflects higher revenues from an extra fee day along with lower amortization of DAC.

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

Focusing on the underlying business trends, we continue to see positive net flows for variable annuities with third quarter showing significant improvement over the second quarter of 2010. The growth reflects the uptake of our new product, RAVA 5, which was introduced in July.

Our hedge program continued to work well. The non-performance risk, which is the impact of our credit spread on the GAAP liability valuation, is not hedged and is the main driver behind the VA benefit expense.

On the next slide, the protection segment reported lower operating earnings due to both unlocking and higher claims for disability income and long-term care insurance. Operating earnings of 65 million included the following items: increased expense of 49 million due to unlocking, and a benefit of 10 million from mean reversion. Sequentially, excluding the disclosed items, underlying earnings were down 21 million with about half attributable to higher DI and LTC claims, and half to higher VUL and UL reserves and amortization expenses, primarily related to secondary guarantees and our expectation of lower interest rates.

On the next slide, we continue to manage our financial foundation well which has enabled us to return capital to shareholders. During the quarter, we repurchased 3.6 million shares for $153 million. That brings our year-to-date repurchases to 9.3 million shares for $373 million. We continue to hold more than 1.5 billion in excess capital while our cash flows remain strong at 3.7 billion. The 2.1 billion of free cash does not include the 340 million we will use next month to retire debt.

The underlying quality of our balance sheet also remains strong. RiverSource Life’s estimated RBC remains above 500%, and our unrealized gain position increased to $2.3 billion. Our balance sheet ratios continue to remain conservative, both in terms of leverage ratios and coverage ratios. Finally, our variable annuity hedge program continues to be effective.

So to summarize, we generated record earnings in the quarter as a result of strong underlying business performance despite continued challenging market. Our actions have resulted in increased operating leverage and we are making good progress. We are driving the mix towards lower capital businesses, effectively managing our excess capital, and driving improved operating returns. Our balance sheet remains strong, including our capital and liquidity positions.

Now we’d like to take your questions.

Question and Answer Session

Operator

Thank you. We will now begin the question and answer session. If you have a question, please press star then one on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question please press star then one on your touchtone phone.

The first question is from Tom Gallagher from Credit Suisse. Please go ahead.

Tom Gallagher – Credit Suisse Securities

Thanks. A few detail questions for Walter. You had commented about reducing the long-term interest rate assumptions. The first part of that is, can you comment on how much you’ve lowered your fixed income separate account return assumptions to? I believe from your 10-K disclosures, they were 6.5% a year. So first question, is what has that been changed to?

Walter Berman

It’s been changed to 6.

Tom Gallagher – Credit Suisse Securities

So from 6.5 to 6? Got it.

Walter Berman

Yes, that’s correct.

Tom Gallagher – Credit Suisse Securities

Now just one mechanical question. Six percent from this point forward with interest rates—with corporate bond yields in the 3 to 4 range, would imply capital appreciation to get to a 6% long-term return assumption. So is that consistent with—so that, to me, implies that you’re assuming interest rates will go down from here for an extended period of time to get to a 6% long-term return assumption. Is that consistent with your interest rate assumptions on your general account right now?

Walter Berman

What we assumed, Tom, was that for the near-term period that the rate on that would be sub-3; and then in the end of 2012 period, we’re assuming the Treasury will be, like, a 5, and then with the spread we’ll take it to a 6. And that’s how we got to it, and we think that is consistent.

Tom Gallagher – Credit Suisse Securities

Okay. I guess, Walter, my point would be for money that are going into these contracts today, 6% would appear to be—the only that’s going to happen is if rates go down and stay down. I understand your point that as you move forward on average, if rates rise, you’d be clipping higher coupons. But for funds that go into contracts in the next year, 6% seems unlikely unless rates actually go down from here and stay down. But we can debate that more offline.

Walter Berman

Okay.

Tom Gallagher – Credit Suisse Securities

I don’t know if you agree or disagree with that. I just—I think it’s improbable that you’d get 6% unless interest rates actually go down for money being put into contracts now.

Walter Berman

Like I said, we’re assuming now for the shorter period that the rate is going to actually be substantially under that. It’s going to be under 3, and then as you look at the forward rate curve, they seem to support that in the two to three-year time frame, you could get to the ranges that we’re talking about. So actually I think we’re agreeing.

Tom Gallagher – Credit Suisse Securities

Okay. And then just a related question – is that consistent with the discount rate change you made on the general account side, whether it’s to the secondary guarantee UL or long-term care?

Walter Berman

On the secondary, yes. It is reasonably consistent.

Tom Gallagher – Credit Suisse Securities

Okay. And then last question is the—I just want to understand sort of go-forward annuity DAC amortization, how we should be thinking about that. I know there was a write-up this quarter and I understand—or least have a rough understanding of the mechanics. But last quarter I think the DAC run rate amortization was about 85 million normalized. This quarter it was 62 million. Can you give us some idea of what the run rate would be going forward? Is the 62 million a good run rate? Is it going to go up or down?

Walter Berman

Obviously—let me try and do it this way. The impact was effective in the quarter, so when we look at going forward, as I said, with the lengthening of the lives and then with the overtrades, I don’t think we see a major change in the near term as it relates to that, versus—

Tom Gallagher – Credit Suisse Securities

So Walter, would the 62 million amortization rate be a decent run rate, which would imply annuity earnings of 150 million-plus a quarter; or is it back to 2Q level? I just want to clarify that.

Walter Berman

Probably closer to the 2Q level.

Tom Gallagher – Credit Suisse Securities

Understood. Thank you.

Operator

Thank you. The next question is from John Nadel from Sterne Agee. Please go ahead.

John Nadel – Sterne Agee

Hey, good morning, everybody. If we go back to Slide 11 for a second, it indicates that you guys have year-to-date 47 million of synergies, or I guess I’d just call that cost saves, but whatever. If memory serves, at second quarter that synergy estimate was 14 million, so it looks like you got a pretty meaningful kicker incrementally of about $33 million. I guess my question is (1) am I doing that math right? And then if so, I guess I’m a little surprised that sequentially, or quarter-over-quarter, that asset management earnings didn’t actually come through even better despite the market drag with the average S&P down. So is there something else we should be thinking about there? Is it drag? Is it fee rates coming down, or anything like that, that we should be thinking about?

Walter Berman

No, I don’t think so. I think—listen, the pattern of that as we went in, it will slow a little and then build up in 2011; and as it relates to the quarter, certainly we had the impact of the quarter-over-quarter 4% drop, but there’s nothing that we see as problematic.

John Nadel – Sterne Agee

Okay. But the math is right, right? That’s an additional 33 million quarter-over-quarter?

Walter Berman

Approximately right, yes. That is approximately correct.

John Nadel – Sterne Agee

Okay. Second question is just on protection. In your remarks, Walter, I think you mentioned that about half of the quarter-over-quarter decline, or about $10 million, was related to low interest rates on the impact on UL and VUL reserves. Should we be thinking about that as a one-time item or is that a—if rates remain at around current levels, we’ve got to think about that as a sustainable, sort of higher level of benefit expense?

Walter Berman

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

John Nadel – Sterne Agee

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

Walter Berman

Well, basically you’re taking out—let me just say this. I think when we adjusted through with the elements, it’s moved from, like, 10—yeah, it’s down from 10, too. So the amount on that is, (inaudible), on the equity side is around 36 million, and that’s moving a point and a half. I’m guessing right now it may be 20 or something like that. But it’s a guess. It really is.

John Nadel – Sterne Agee

Okay. I’ll follow up with you afterwards.

Walter Berman

Because normally we wouldn’t take it below 8—below 9.

John Nadel – Sterne Agee

Got it. Thank you. I hope you’re right.

Operator

Thank you. The next question is from Andrew Kligerman from UBS. Please go ahead.

Andrew Kligerman – UBS

Hey, good morning. A couple of questions. First, around the asset management business. On the equity side, only 54% were in the top 2 quartiles. Last quarter I think it was over 70%. A little color on what’s going on there; and secondly, once you merge the funds—if you had merged the funds officially this quarter, what would that number look like? And then tied into that question is the outflows in U.S. mutual funds of about—or net outflows of about $3.2 billion. The question is how much of that would you say is related to the integration, and when does the integration of Columbia RiverSource become a non-event?

James Cracchiolo

Hi Andrew. First, I would say that in speaking to our investment professionals, they’ve had a bit more of a defensive position. They actually feel quite good about the make-ups of the portfolios and the type of securities they have in them; and so I think quarter to quarter you’re always going to experience a level of volatility. But we think we’ve got good three and five-year records. We think that the consistency of their performance over the last number of periods adds value to that, and so they feel very comfortable with it. So we don’t have a concern here that the overall performance is slipping in any fashion.

In regard to the—what your second question was around—

Andrew Kligerman – UBS

Yeah, just if you combined all the funds now and kind of dropped off the weaker ones, would that 54 be materially higher?

James Cracchiolo

Yeah, I think what you’ll find is that as we merge all the funds together, we will have a better lineup of performance. And we will be dropping off some of the underperforming records that we have in some of the smaller funds as well. But I would say overall we have a good lineup. I’m quite excited about what that looks like as a consolidated sort of lineup of funds, and I think once that starts to get communicated and consistently applied out through the distribution force, that should be good as a positive.

Regarding the flows, I would just say it’s a combination of factors, as Walter and I have mentioned. Clearly you do have an industry-wide pullout of equity funds. I mean, redemptions are a bit up across the industry and new sales aren’t coming in there. I think a lot of flows in some of the fund families have really come into the fixed income. Over 60% of our funds are more in the equity base. That’s sort of the positioning that we’ve had out in the marketplace. The second thing, as you would imagine, is we’ve just announced the lineup of the new funds so people don’t want to put into funds that they may think closed. We also just got the new wholesaling force coordinated and they’re picking up the new products and the new territories, so that takes a bit of time. And we still are experiencing some outflows in some of the sub-advisor funds that have underperformed in the past, so I think the reason you see a bit of an increase is because we picked up three months of Columbia for the third quarter. We only had two in in the second quarter that was some of the outflows that we’re continuing to see. So I think that’s along the lines. You know, we would love for it to—hope to get it turned around, and that’s what we’re really focused on. But we did expect some of this based on a combination of the factors I just mentioned.

Andrew Kligerman – UBS

And then just a quick follow-on question on the protection segment with disability income and long-term care claims elevating. Can you reiterate – I think, Jim, you were saying it was about a $10 million impact, and what are you doing in those product lines to mitigate it? Are you repricing the DI and the LTCI, or do you just think things are going to revert to where results were?

Walter Berman

Okay, it’s Walter, Andrew. On the LTC, obviously we are in repricing and we’ve certainly filed for pricing. As relates to the DI, as we indicated, it looked like that was a spike-up in the quarter. On a year-to-date basis it’s actually on trend line where we are, so we’re feeling quite comfortable with no action. We have some of the lowest claim rates, probably, in the industry so we don’t really feel there’s a pattern change here at all at this stage.

Andrew Kligerman – UBS

And what’s the repricing on the LTCI?

Walter Berman

We’ve been filing for rate increases in various state venues as we—for the—

Andrew Kligerman – UBS

Like 10%? 12, 15?

Walter Berman

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

Andrew Kligerman – UBS

Yeah, I mean, but how much? Like, 10%? 15?

Walter Berman

It varies. It varies. Obviously there’s a whole set of tests that you go through with the state to demonstrate the profitability of it. It’s ranged all over depending on state. But it’s been a program we’ve been doing and we obviously valuate that relative to the current rate, so it’s a detailed review that goes on. But it’s—we constantly assess and we’re constantly filing.

Andrew Kligerman – UBS

All right. Thanks a lot.

Operator

Thank you. The next question is from Suneet Kamath from Sanford Bernstein. Please go ahead.

Suneet Kamath – Sanford Bernstein

Thank you and good morning. A couple questions on the advice and wealth business. The first question is if we think about that 21% lift in productivity from the third quarter of ’09, can you tell us how much of that was based on just markets being higher this quarter versus how much of it was from actual increases in real productivity, client activity, that sort of thing?

James Cracchiolo

We probably don’t have the exact, but the way I would probably think about it is your markets were up roughly 9% on equity, and so not all the assets are equity based; I mean, heavily they’re not. And so I think you get a piece of it from the equity markets, a piece of it from increased client activity, and then a piece from client inflows that we’ve experienced over the last year that has also moved into products like the wrap. So it was roughly 2 billion just for the quarter, but if you add up the total quarters over the year, you’ll find that it was a nice increase. So it’s a combination of those factors.

Suneet Kamath – Sanford Bernstein

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

James Cracchiolo

We’ll look at it and see what makes sense.

Suneet Kamath – Sanford Bernstein

All right. That’s great. Appreciate it. Second question on the business is the employee advisor retention at, I think, 78%. I think that’s probably one of the highest levels I’ve seen. Should we assume from that, that you’re sort of done with the productivity—minimum productivity standard implementation and perhaps now we can start to think about growing the employee advisor base over the next couple quarters; or do you still think that advisor count is going to be flat to down?

James Cracchiolo

I think, as you said, the retention rate is probably for our employees the highest that we have had it at, and we continue to see a slowing quarter to quarter. It’s not necessarily completely over because there are still people that we had added a year ago and two years ago that continue—just as you know, as they mature you always have an attrition rate because they can’t necessarily keep on taking the step up, and we still have advisors in the system such as that. But I think as it goes on, we’ll have it more normalized. As you see, the retention rate’s starting to pick up and we’re hoping to get that into the 80s. And so for the employee system and for the franchisee system, it’s quite strong.

From a replacement perspective, as you know, when you have 11,000, 12,000 advisors, just to replace normal attrition – people leaving, succession planning, people retiring, et cetera – you have to make up for all of that. And what we’ve been doing is instead of looking at it as just a count of advisors, we’re trying to add to teams. We’re trying to give them greater support that they can build out their practices, not necessarily with new reps but with support staff and assistant advisors who are also recruiting in, we think, more experienced people that have books of business already. So we’re focused more on the productivity aspects.

Over time, I would say over the next number of quarters, yes, I would like to get that to be more of a flat first and then hopefully get it to rise to—slightly in the periods; but the focus will be on increased productivity and growth of practices in combination to the number of people that we have.

Suneet Kamath – Sanford Bernstein

Got it. Okay. And then the last question I have is just on the impact of low interest rates on the advice and wealth business. Walter, in your prepared comments you talked about that drag being significant. Can you help us quantify what that drag is right now? That would be helpful. Thanks.

Walter Berman

If you’re referring to the advice and wealth management, obviously the drag is continuing, so the change is really not an impact for us from that standpoint. It’s just staying at a lower rate, as we spoke to you about, that we were hoping and as we looked at the rates that they would increase, which would then generate profitability. But the quarter-over-quarter change is not significant at all from that standpoint. It is certainly just we’re looking for the uplift as the short-term rates go up.

Suneet Kamath – Sanford Bernstein

No, I got that; but just the absolute level of drag. I’m not talking about quarter-over-quarter. Just what are the cash balances, what do you normally earn on them, and what are you earning right now? Maybe that’s the way to do it.

Walter Berman

As we indicated last time, we’re earning in the 50 basis point range on the sweep accounts, and we continue to earn in that range; and that’s at the low end of the spectrum. And that’s what we see continuing until we start seeing short rates go up.

Suneet Kamath – Sanford Bernstein

Got it. And the sweep balance right now is how much?

Walter Berman

It’s about 11 still, I think. We’ll get back to you, but I think it’s about in the 11 range.

Suneet Kamath – Sanford Bernstein

Eleven billion?

Walter Berman

Yes.

Suneet Kamath – Sanford Bernstein

Okay. Thank you.

Operator

As a reminder, if you would like to ask a question, please press star, one on your phone. The next question is from Colin Devine from Citi. Please go ahead.

Colin Devine – Citigroup

Good morning. I have a couple questions. Walter, with respect to the changes made on the variable annuity line, which is on persistency, and then also benefit payment expectations. I was wondering if you could just expand on that a little bit. Now, in terms of your DAC policy, over how many years has that now changed? And then in terms of future benefits, what’s changed in your thinking as to what you’re going to be paying out? Is it death benefits? Is it lifetime benefits? And then how much did you add to reserves? I’m trying to make that out from the stat supplement, and I don’t know if it was actually a couple hundred million, but perhaps you could expand on that.

And then just changing gears, perhaps, for Jim, I know a big focus has been to bring in non-proprietary products and to get those sold through your system. Can you give us some update as to how that’s evolving, please?

Walter Berman

As relates to what’s changed, certainly we have observed that people that have living benefits tend to lapse less, and certainly people, as you have indicated, certainly in the money tend to lapse less also. And on that basis, we’ve gone in looking at the behavioral patterns and made the adjustment, and the number’s in the $200 million range. As it relates to the amortization period on variable annuities, it was looking and evaluating where we were. Basically it went up to, I believe—it doubled for—it went from 20 to 40 on fixed annuities—on variable annuities, and on fixed annuities it went up to 30 years, and that’s based upon the actuaries evaluating the performance characteristics. So—

Colin Devine – Citigroup

Walter, I’m sorry, did you say your DAC in your variable annuities is now over 40 years?

Walter Berman

That’s correct.

Colin Devin – Citigroup

Or did I misunderstand you?

Walter Berman

No, you did not misunderstand me.

Colin Devine - Citigroup

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

Walter Berman

I’m not following. Say it again?

Colin Devine – Citigroup

Do they have a trail commission on them or is it largely an upfront commission that you’re—

Walter Berman

Largely upfront.

Colin Devine – Citigroup

All upfront? Okay.

Walter Berman

Largely, yes.

Operator

Thank you. The next question is from John Hall from Wells Fargo. Please go ahead.

John Hall – Wells Fargo Securities

Great, thanks very much. When I look at the $1.5 billion of—or more than $1.5 billion of excess capital, and then I look at the amount of shares that were repurchased in the quarter of 150-some odd million, roughly half of income generated in the quarter. I just wonder about what’s driving the pace of share repurchase. At that rate, you’re not actually reducing your capital at all. You’re barely holding even with that $1.5 billion of excess. So I was wondering if you could just comment on how you think about the pace of share repurchases going forward?

Walter Berman

All right. The pace was established as we—we went out with authorization back in the second quarter. We established the 1.5 buyback and certainly that pace is looking at—and we look at a multitude of factors. We look at certainly the situation. We look at certainly as we shift to lower capital intense activities. So there’s a whole host of elements that go in. Right now with the 1.1 billion left, we intend over the period to certainly—depending on—if situations stay, that we will execute the share repurchase. You’re right; but the fact is the earnings are growing and they are generating a return, and factored into how we evaluate it is the generation of earnings, and we will reevaluate. As we generate the earnings, we look at the situation and we evaluate what the best way is to return to our shareholder. So we are—we still have 1.1 billion. We’ll evaluate it and intend to—just in light of the current environment, continue on the pace that we’ve seen, measuring the environment and measuring our capacity to return.

John Hall – Wells Fargo Securities

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

Walter Berman

I think the objective is twofold. Obviously saving the soundness of the organization to ensure at any given time as we look at the situation we have appropriate capital to meet the needs of the business. So that is a changing situation. Part of the formula that goes in there is the earning generation and the situation that we think we are. We don’t believe retaining excess capital is certainly in the best interest of shareholders so therefore we look at various ways to return that, and we are generating a lot and certainly our required capital is going down as we shift into the low capital intense. That will be taken into consideration as we evaluate how to best return to shareholders.

John Hall – Wells Fargo Securities

Okay. My next question has to do with the sales of the annuities. The new product, was this an entire—a full quarter of that new product being on the shelf, or are the sales reflective of some partial period of it being available?

Walter Berman

I think it’s more reflective of a partial as it builds up, as to the network. It takes time to get to a steady state.

John Cracchiolo

Yeah, it was launched towards the latter part of July, and so the sales were building up through the quarter. So it did not have a full quarter of activity.

I’d also like to just circle back to Colin’s last part of it—his third part of the question. We did add other annuity products to the shelf in the quarter at the same time we launched the new product. We have received some uptake but still a large part of the sales have gone to the new RiverSource product. In regard to what we’ve done over time is we have a pretty large group of funds in SMA accounts on our shelf over the years, thousands of them. But we’ve also added hundreds more as people have requested some different variety, or if people are joining us and had certain other fund activity or separate accounts that they wanted to bring over. So we’ve got a very wide and broad platform on the investment side. We started with the launch of some additional annuity products in the channel, as we said, in July. The architecture, even for our annuities, is all open architecture under it for investment. And then in the insurance, we have a wide range of products from different companies also on our shelf that our advisors can utilize for their client needs. And so we’ll continue to look to expand that over time, and we’re doing it in a very informed way so that we can get the right uptake and the right training and the right support.

John Hall – Wells Fargo Securities

Great. My final question has to do with—I guess, it’s a little bit more forward-looking into the fourth quarter and concerns performance fees potentially generated. Where do you stand on those types of assets and accounts where you would generate performance fees? Are you in a position where that is a net positive in your mind right now?

Walter Berman

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

John Hall – Wells Fargo Securities

Great. Thank you.

Walter Berman

You’re welcome.

Operator

Once again, if there are any questions, please press star, one on your phone. Standing by for questions.

At this time there are no further questions. I’ll turn the conference over to Ms. Laura Gagnon for final remarks.

Laura Gagnon

Thank you. Before we end the call, I’d like to remind you that we will be holding our annual Financial Community Meeting on November 11 at the New York Stock Exchange. At that meeting, we will provide some commentary on our progress and performance, and we’ll give you (audio interference) global asset management business with presentations from Ted Truscott and Crispin Henderson. We hope to see you there.

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

Operator

Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect.

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