Apr 23, 2008
Laura C. Gagnon
- VP of IR James M. Cracchiolo - Chairman and CEO Walter S.
Berman - EVP and CFO
Analysts
Suneet Kamath - Sanford Bernstein Andrew Kligerman - UBS Thomas Gallagher - Credit Suisse Jeffrey Schuman - Keefe, Bruyette & Woods Eric Berg - Lehman Brothers Tamara Kravec - Banc of America
Operator
Good afternoon ladies and gentlemen and welcome to the First Quarter 2008 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 turn the call over Ms. Laura Gagnon the Vice President of Investor Relations.
Ms. Gagnon you may begin.
Laura C. Gagnon - Vice President of Investor Relations
Thank you and welcome to the Ameriprise Financial first quarter earnings call. With me on call today are Jim Cracchiolo Chairman and CEO and Walter Berman Chief Financial Officer.
After their remarks, we would be happy to take your question. During the call would be your references to non-GAAP financial measures, which we believe provide inside into the underlying performance of the company's operation, reconciliations of non-GAAP numbers to the respective GAAP numbers can be found in today's material available on our website.
Some of the statements that we may 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 risk and uncertainties.
A sample list of factors and risks that could cause actual results to be materially different from forward-looking statements can be found in today's earnings release, our 2007 annual report to shareholders and our 2007 10-K report. We undertake no obligation to update publicly or revise these forward-looking statements.
With that I would like to turn the call over to Jim.
James M. Cracchiolo - Chairman and Chief Executive Officer
Good afternoon, everyone. And thanks for joining us for our first quarter earnings discussion.
I would like to begin by acknowledging that the markets were very challenging during the quarter and they did have significant impacts on our results. We are a market sensitive company and we derive a large portion of our revenues from fees.
So when we experience a 10% decline in the equity market, as we did in this quarter, our results suffer. In addition, as you know the credit markets were just as challenging.
However, we have always taken a conservative approach to managing risk. As a result we had minimal impairments and our asset qualities remained strong.
Our financial foundation is sound. While our earnings were not as high as we would have liked, we feel good about our business and our ability to grow the company.
We serve clients in long-term financial planning relationships, and our core client retention rate remains very high. Client activity has slowed along with the markets and clients have moved to higher cash positions.
Our advisors are working closely with their clients and we anticipate that they will reinvest when they see signs of stability. So, we remain very focused on executing our strategy in achieving our own average overtime growth goals.
We have been through tough markets before and we have merged from them stronger. So my message today is this, while the weak markets certainly hurt our earnings, we continue to feel good about our overall positioning.
For the quarter, net revenues were up 3% to $2.1 billion. Earnings per diluted share was $0.82, which was down $0.08 per share, compared to our adjusted earnings per diluted share for the first quarter of 2007.
And our adjusted ROE was 12.2%. We've included a table in the earning release to spell out several factors that impacted these results and Walter will take you through some details of this disclosure shortly.
We don't anticipate including this table every quarter, but we wanted to help you understand the market and other impacts, given that the environment was so turbulent. Now, I want to focus on the strength of our financial foundation and our operating performance.
Our balance sheet continues to perform well. We continue to hold very limited exposure to the most distressed asset classes, and we remain comfortable with our overall exposure, in the current environment.
In addition to our balance sheet strength, we continue to maintain over $1 billion in access capital. Since our spin-off, we returned 90% of our adjusted earnings to shareholders, through buy backs and dividends, and in 2007, we returned more than 100% of our adjusted earnings.
Despite that return we hold more excess capital now then we did a year ago. In addition, we announced today that our Board approved a new $1.5 billion buyback authorization over the next two years.
That follows a two year $1 billion authorization, announced last March, that we have nearly completed. We are also leveraging the flexibility we created to help us navigate through the market downturn.
We told you last quarter that we are in the process of implementing a program to reduce expenses. And that effort is now in place.
While you could see some initial traction from the program in our G&A expenses, the benefit has not been yet fully realized. And it's important to note that these savings are in addition to our normal re-engineering programs.
It is also important to note that, while we are managing expenses tightly so that we can maintain our margins, we continue to invest prudently in our growth prospects. We believe, our opportunity continues to be compelling and we expect to emerge from this downturn in a good position.
Now let me review our operating performance for the quarter. Our basic value proposition is that we serve the mass affluent and affluent in personal financial planning relationships, and financial planning remains important for our clients during all parts of the market cycle.
Even with the current challenges our financial plan activity remains solid, and we continue to achieve good advisor productivity. Clients' assets have decreased slightly, compared to a year ago, and compared to the sequential quarter.
These declines were the result of market depreciation. In the advisor force, we are growing the franchisee channel at a measured pace and continue to have very strong franchisee advisor retention.
In fact the number moved higher this quarter to 94%. At the same time we are improving the profitability of our employee channel by bringing in fewer recruits, instead focusing on candidates who are more likely to succeed.
We expect the decreases in our employee advisor count to slow as this program is fully implemented. We continue to provide improved advice on marketing, support and technology tools, as well as the full range of products advisors need to serve their clients.
In fact, during quarter we announce the significant to our product mix, the new Ameriprise Financial Debit and Credit Master Cards. We also announced a new rewards and recognition program for our clients, which is designed to help advisors deepen relationships with their high value clients, As part of our commitment to advisors support, during the first quarter, we conducted our largest training program ever, bringing the majority of our advisors to Minneapolis to help them understand and implement the new tools and enhanced capabilities we are providing them.
The program was extremely well received and we are following the sessions with long-term reinforcement in order to deliver our ultimate goals, which are consistently compelling client experience, more productive advisor practices, and growth. Now, I'll move on to the product areas.
Owned, managed, and administered assets declined 5%, compared to a year ago, and 6% compared to the sequential quarter, due to market depreciation, and the continued outflows of low margins Zurich related assets at Threadneedle. We continue to generate strong performance in wrap accounts, with assets up 10% over year ago to $90 billion.
Wrap assets were down, compared to the sequential quarter, as market depreciation more then offset continued relative strength and flows. Overall RevirSource funds closed with negative $636 million, which we think is primarily the result of clients shying away from the current market volatility and moving to cash.
While our three and five year investment performance track records remain strong, short-term RevirSource performance has declined for both equities and fixed income. We have taken a general review that rates will rise as the flight to quality loses favor and inflation pressures increase.
The portfolios in general are positioned to benefit from a narrowing risk premiums and to realize the benefits from the recent fiscal and monetary stimulus actions. While this has hurt us in the short-term, we believe it will positively affect our performance over the medium and long term.
Threadneedle's results for quarter were highlighted by strong investment performance. In fact, Threadneedle over see to two important 2008, Lipper Awards for Best Overall Group and Best UK Equity Group.
In terms of flows the out flows of Zurich assets accounted for the bulk of Threadneedle's outflows. The variable annuity business generated net inflows of $851 million for the quarter, with total variable annuity ending balances of $54 billion.
At the same time, we continue to experience outflows in fixed annuities, as a result of the low interest rate environment. However, we think, we have an opportunity in the current market environment to offer clients some appealing fixed annuity products, while generating good returns on a capital which should help us slow outflows.
Our insurance businesses produced another solid quarter with life insurance in-force increasing 6% over a year ago and reaching $189 billion. Total protection segment premiums increase 5%, despite the generally slow growth in volume for these products.
Overall, our business metrics were truly affected by the very weak market conditions in the quarter, but it is also clear that our underlying business remains solid. We are confident that we have a completing long-term opportunity.
Our research clearly indicates that our target market, the mass affluent and affluent, one personalized financial planning and that's our strength. Since our spin-off 2.5 years ago, we have been building our brand strengthening our foundation and positioning the company for long-term prosperity.
We're here to serve our clients across market cycles. We are managing the company through this economic and market downturn.
The way we're encouraging our clients to manage their own financial plans, we have been prudent and we will stay in the course. We are investing in our brand product development, advisor support, and our client experience.
Why? Because we have a significant opportunity and we have demonstrated the effectiveness of our strategy.
We are committed to executing it for the long-term. So in total, I continue to feel good about our position and our future.
Now Walter will take you through some more details from the quarter and after that we will take your questions.
Walter S. Berman - Executive Vice President and Chief Financial Officer
Thanks Jim. As you heard from Jim, it was a difficult quarter, driven by the significant decrease in the equity markets, and compounded by the continued liquidity and credit market dislocation.
While we have instituted the appropriate actions to mitigate the impact, a 10% equity decline cannot be offset within the timeframe of a quarter. In my remarks, I am going to address the asset impairment, equity and credit market impacts within our results, the positive impact of our tax planning, insight into the implementation of our expense plans to improve margins, and finally, an overview of the quality of our balance sheet, liquidity, and strong capital position.
We are also providing supplemental information in our earnings release to give insight in to understanding the market driven underperformance in the quarter. So, let's begin with the asset impairment.
In the first quarter we booked a write-down due to the difficult credit environment. We had $24 million in pre-tax net investment losses, primarily due to other than temporary impairment, impairments of three AA rated, Alt A mortgage back securities, which impacted the EPS by $0.07.
This compared to $0.02 EPS benefit from net realized gained last year for a net swing of $0.09. Remember that this impairment is materially lower than the industry has experienced, and represents a small fraction of our overall balance sheet.
As we discussed in prior quarters, while we are subject to mark-to-market volatility, the quality of our portfolio still remains sound and has held up quite well. We continue to analyze and monitor it, and our comfortable with our exposures, which I'll cover in more detail shortly.
Next when we issued 2007 10-K, we outlined our company's sensitivity to equity market movements. This disclosure reflected a hypothetical 10% change in the S&P 500, that happens at one point in time and which remains the same for a one year period, pretty unlikely.
If this were to happen we would forecast a $141 million pre-tax impact to earnings for that one year period. The reality is, what happened in the first quarter of 2008, is almost as dramatic as a hypothetical case.
In the quarter, we experienced the 5% year-over-year decreased in S&P 500, with a 10% increase within the quarter. The FTSE 100 dropped 8% year-over-year and 12% within the quarter.
This real world scenario generates approximately $130 million in negative full year PTI earnings impact versus $141 million in our 10-K. Now because of the front-loading of the impact from DAC to amortization, we incurred almost $15 million in negative impact just within the first quarter, compared to $32 million if you use a simple average.
In addition not reflected into 10-K adjustment for full year impact, the $140 million was the market exposure of an additional $0.09 associated with equity market impacts to our seed money and owned tax performance, the negative impact of our variable annuity hedge program, and the year-over-year impact of yield declines on our $4 billion short-term liquidity [portfolio]. To summarize, the first quarter was impacted by $0.07 and after tax net realized investment losses; $0.14 related to declines in management fees and the impact of DAC amortization; and $0.09 related to market impacts on short-term investments, seed and owned hedge investments, and the net effect of our variable annuity hedge program.
The amount of this impact is $0.30 in quarter. Going forward, assuming a steady equity market, we would expect to recognize the remaining 80 million of the full year 130 million equity market impact, as well as approximately $45 million from lower short-term interest rate.
So under this scenario for the balance of the year, the pre-tax and earnings impact would be a negative $125 million non-accounting for any proactive actions to improve margins on our part. Now as if markets weren't enough, during the quarter we adopted FAS 157, which had positive $6 million impact.
Beginning in the first quarter of 2008 we are required to you use a credit spreads and discounting our VA rider liabilities. And given the current wide spreads, this new methodology could significantly increase the volatility of this liability evaluation.
Now let's turn to taxes. On the positive side in the quarter, we generated reduction in ongoing tax liability of $0.16 associated with exceptional tax adjustment relating to release of tax reserves.
All these significantly lowered our effective tax rate in the quarter, we expect our effective tax rate for the balance of 2008 and the full year 2009, will be in the 24% to 26% range. With regard to the expense management, we initiated additional expense management programs to supplement our planned re-engineering program.
These programs however contemplate a continuation of on ongoing investment in growth and infrastructure, while reducing certain G&A expenses in light of market conditions. Our G&A expense is under last year and down substantially sequentially.
Going forward, we expect to be very focused on managing expenses to boost the margins during this challenging period. This leads me to my final point about consistent balance sheet strength.
As I said, we continue to have a very high quality portfolio that has performed exceptionally well under these market stresses. We have no significant portfolio allocation change since we walked you through the details last quarter Despite historical dislocation in the fixed income markets, we remain comfortable with all our exposures including commercial real estate or excuse me commercial real estate mortgage, residential mortgages and asset back securities.
We've updated our websites with all the relevant information. Now, I would like to spend some time talking about Alt-A and sub-prime mortgages.
The amounts in this category are $1.1 billion and $247 million respectively. There have been material changes in the pricing of various components of these portfolios in the quarter, which we believe is primarily driven by liquidity and technical market issues and not fundamental credit deterioration.
For these securities, we have an internal risk assessment process. This risk evaluation considers various factors including long quality, structural protection, collateral enhancement, seasoning, geographic concentration, and our assessment of current and future trend lines.
In the first quarter we recorded other than [temporary] impairments of our securities in the highest risk category. As mentioned previously, those were three AA rated, Alt-A bonds.
The remaining book value is approximately $13 million. Our internal watch list the next level down consists primarily of AAA securities backed by Alt-A collateral with a book value of $135 million, and a market value of $90 million.
We did not take impairments in the first quarter based upon our assessment of the integrity of the underlying cash flows and the current market conditions, The remaining all Alt-A, sub-prime tax securities are primarily AAA rated securities with strong underlying cash flow integrity. These securities have a sound level of credit enhancement versus the collateral risk, which provides ample cushion even in the event that housing market conditions worsen from today's level.
We remain comfortable with the investment portfolio and will continue to closely monitor securities we hold. We have more than adequate liquidity to hold these securities to mature.
In fact in terms of our liquidity position, we maintain substantial liquid with close $4 billion in cash and cash equivalents on hand, up 60% from a year ago and essentially where we were last quarter. Our capital position remains strong.
Jim mentioned we have increased our access cap position even while we are repurchased our common stock. Our adjusted-to-capital ratio was 21%, 17% excluding non-recourse debt and with equity credit for our Hybrids.
In closing I'd like to reiterate, that while we have built a diversified business, we remain sensitive to equity market. It was a tough quarter for us dealing with 10% drop in the equity markets.
That said I'm comfortable for our risk management, our decision framer and our ability to manage through difficult environments. The strength of our balance sheet and capital position provide us with the unique positioning of flexibility whether the volatility of the market.
We will continue to be prudent in our approach to growing the business over the long term or diligently controlling our expense base and exposures. Thank you.
James M. Cracchiolo - Chairman and Chief Executive Officer
Okay. We are open for our questions.
Question And Answer
Operator
Thank you. We will now begin the question-and-answer session.
(Operator Instructions).Our first question comes from Suneet Kamath from Sanford Bernstein. Please go ahead.
Suneet Kamath - Sanford Bernstein
Great, thank you. Two questions please.
First in terms of the market, sensitively if I just look at your, I think it's page 2, you talk about a $0.23 per share impact on the market and then $0.09 per share expected to continue if markets remain at current levels. So, where is that mark-to-market?
In other words does that pay as of last week or as of the end of the first quarter, when you think current levels what specific level you are referring to? And then the second question is just on… we know that's out there.
On the excess capital, you've mentioned twice in your comments that the excess capital is higher than what it was recently after buying back stock, but you are still using this commentary of over billion dollars. So I am just trying to understand what that means.
Is that just the excess risk based capital, does it include debt capacity. I mean when you say the excess capital has gotten better, but you are kind of phrasing it the same way.
Why aren't you saying that it's actually higher than $1 billion, $1.5 billion or whatever it actually is? Thanks
James M. Cracchiolo - Chairman and Chief Executive Officer
Okay, tense question that was as of 3/31 that we did that calculation. As it relates to the access capital we are not counting debt capacity within that, and obviously the increase in our capital position relate to the capital generation we have and the capital that's required to managing the business, which as we've indicated is less, as we are growing our lower capital intense activities.
And when we deduct the amount that we've been using to repurchase the shares, it is growing, and yes we are still using in excess of $1 billion. But it has nothing to do with our debt capacity.
Suneet Kamath - Sanford Bernstein
Okay and again the 3/31 '08 is where you marked it, so the 4% market increase since then is not in that number?
James M. Cracchiolo - Chairman and Chief Executive Officer
That is correct.
Suneet Kamath - Sanford Bernstein
Okay, thank you,
James M. Cracchiolo - Chairman and Chief Executive Officer
Very well.
Operator
Our next question comes from Andrew Kligerman from UBS. Please go ahead.
Andrew Kligerman - UBS
Hey good evening. Couple of questions.
I guess the first one is to start off is, I was very interested in your general and admin year-over-year reduction of 5% to $32 million. Walter you just said that you were going to decrease certain G&A in light of the market conditions.
Could you give us a little more clarity around exactly what you are able to decrease, and what your plans are for that line item for the balance of the year? Can you keep it constant?
Sure enough [inaudible] the question?
Walter S. Berman - Executive Vice President and Chief Financial Officer
Sure what we've been doing as Jim has indicated we certainly have our regularly re-engineering program, and certainly looking at the market conditions. The things that we are looking at is the amount of advertising expenditures that we look… that really in evaluating the effectiveness in these markets and certainly we are prioritizing now some of our investment spend and even though we are continuing to invest in the activities, we are prioritizing in that and also looking at certain number of expenditures as it relates to staffing and non-core customer facing activities.
Andrew Kligerman - UBS
And Walter can you keep this expense level at sort of a flattish level from here out for the year on a quarterly basis. Is that the idea or is that possible?
Walter S. Berman - Executive Vice President and Chief Financial Officer
Yes, that's the idea.
Andrew Kligerman - UBS
Great. Now shifting over just real quickly on the Property Casualty business, the loss ratio at nearly 80% combined and 96.6, pretty elevated relative to prior quarters.
The thoughts on the rise in that number and your feeling about the outlook over the balance of the year?
James M. Cracchiolo - Chairman and Chief Executive Officer
Right now what has elevated, we certainly feel we have been able to maintain our… certainly our rates and our performance on the, our basic claims has been good. We anticipate that we'll be able to stay within our ranges during the year.
Andrew Kligerman - UBS
Ranges meaning like a…?
James M. Cracchiolo - Chairman and Chief Executive Officer
As we perform there.
Andrew Kligerman - UBS
Loss ratio so know… What range do you think you can keep the loss ratio inside, is there some number you can tell us?
Laura C. Gagnon - Vice President of Investor Relations
Andrew this is Laura. I don't think there is anything unusual going on an in the first quarter except for may be a small amount of storm.
So I think you can assume that where we are at today would continue barring any unusual event.
Andrew Kligerman - UBS
Okay, and then just lastly on the performance. I thought it was kind of an interesting comment that.
I guess Jim you were sort of talking, it sounded to me like your RiverSource division is taking or has taken a very bullish stance on the market and that's hurt the one year performance and its sound like they are maintaining that stance. I don't know what, are you concerned about this.
What are your thoughts on the outlook performance? Why would you expect it to turn around?
I mean, if the markets remain weak, we could be in a very difficult situation with their performance. So what is your confidence in this group?
James M. Cracchiolo - Chairman and Chief Executive Officer
Yes. I think we're monitoring the situation closely.
Of course our positioning and our view and economist view is that there will be inflationary pressures as we move further into the year. The economy would pick up a bit based upon the stimulus packages and so our portfolios have been set.
Now that has negatively affected us in the first quarter, but that was the reason and so we wanted to explain that. But they feel that they are monitoring the situation closely making some adjustment to the portfolio, but still feel that's their positioning at this point.
Andrew Kligerman - UBS
All right, Thanks a lot.
James M. Cracchiolo - Chairman and Chief Executive Officer
Thank you
Operator
Our next question comes from Tom Gallagher from Credit Suisse. Please go ahead.
Thomas Gallagher - Credit Suisse
Hi, let's see just two earnings questions. Let me just start with Asset Management, segment reported $18 million of earnings, and I know you highlighted some of the tax to the market.
I guess the first was seed investments, hurt you by $10 million and then management fees were down $10 million. So if we kind of go down that path, it would imply, if we assume that seed investments came back, that normalized earnings were closer to $8 million [ph].
Walter is that, is $28 million realistically a normal number or there any other big unusual pushing that number down, because there was a… from last quarter obviously a pretty big swing?
Walter S. Berman - Executive Vice President and Chief Financial Officer
Well, I think if you go to table I think actually we've taken it from $18 million to $38 million and then of course we are making investment outside distribution this year, which is substantially higher then last year, which we think is… and we continue to make that… we think it's a prudent investment.
Laura C. Gagnon - Vice President of Investor Relations
This is Laura. I would just also like to remind you that in the fourth quarter we record our hedge fund performance fees for Threadneedle, which would have some of the sequential impact.
Walter S. Berman - Executive Vice President and Chief Financial Officer
Yeah.
Thomas Gallagher - Credit Suisse
And I guess Walter I was just only adding back 10 because presumably the depressed management fees assuming the market remains were it is would be sustained.
Walter S. Berman - Executive Vice President and Chief Financial Officer
Yes, if that is the case you are correct in that assumption, but we are trying before the market, since we did this 331 it was already up 4.
Thomas Gallagher - Credit Suisse
Understood, but if we try and look at the variance in analysis of earning more than $100 million in 4Q to let's call it $38 million in this quarter. Does that imply that the combination of performance fees plus seed investments.
If you look that just from 4Q to 1Q added over $70 million to earnings. Was the number of that substantial in 4Q?
Walter S. Berman - Executive Vice President and Chief Financial Officer
Well, I think there's two things taking place. One, as Laura mentioned, obviously in 4Q we have the hedge fund.
The other thing is look at the market drop between the 4Q and that is fairly substantial and it will affect us, but it is a factor of the… management fees are subject to the market impacts.
Thomas Gallagher - Credit Suisse
Okay. The other question I've is on the annuity business.
There were several add backs there, one of the largest ones was DAC and DSIC and looks like the add back there was $25 million. At least that was described as being depressed due to the market being weak.
Now if I look at the actual amortization of DAC for the quarter. It was actually, the amortization rate was actually bound in 1Q versus 4Q from I guess what about $80 million to $79 million.
And I just want to get a sense for when you look out prospectively, is that amortization really going to drop by that much, because actually the DAC balance went up in the quarter, it actually wrote… it actually got written up a little bit, due to I guess...
Laura C. Gagnon - Vice President of Investor Relations
Yeah Tom, there is actually three things going on and the way to think about this, one is just a normal amortization of DAC. The other is the aspect where we are re-forecasting gross profits that's impacted by the market, which result in a higher DAC amortization in the period where you have the point-to-point market change.
And then the third is the DAC offset from the VA rider liability. So if you take… we disclosed in the supplement the change in the hedge asset.
Thomas Gallagher - Credit Suisse
Right.
Laura C. Gagnon - Vice President of Investor Relations
The difference between DAC and the change in those VA rider liabilities, about 50% of that difference is generally offset in DAC and so that's the positive you are seeing offset the negative this quarter. You have to look all three components to really understand those moments.
Walter S. Berman - Executive Vice President and Chief Financial Officer
And as it relates DAC main version, that is impacted from the January 1st to January 31st, which is a 10% impact which you get that effect in this quarter and if the rates stay this way, there should be minimal impact down to the year.
Thomas Gallagher - Credit Suisse
And I just simplified. When I think about this going forward, is it fair to say if the market does its normal up to 2% per quarter let say prospectively that you would only be amortizing the 79 minus 25, so you get closer like 54?
Walter S. Berman - Executive Vice President and Chief Financial Officer
Let me say my way. If the market went up you would obviously then have the reverse of the main reversion negatively to.
It was based among the percentage coming back.
Thomas Gallagher - Credit Suisse
Okay.
Laura C. Gagnon - Vice President of Investor Relations
Tom, I will be happy to walk you through some more details.
Thomas Gallagher - Credit Suisse
I will, yeah, I will follow-up thanks.
Walter S. Berman - Executive Vice President and Chief Financial Officer
But that's strictly subject to the market moment. So if the market improved you would get, you would obviously have the reverse effect.
Thomas Gallagher - Credit Suisse
Okay, thanks.
Walter S. Berman - Executive Vice President and Chief Financial Officer
You are welcome.
Operator
[Operator Instructions] Our next question comes from Jeff Schuman from KBW. Please go ahead.
Jeffrey Schuman - Keefe, Bruyette & Woods
Good afternoon. Wanted to come back to the issue of the VA rider hedge impact?
If I am looking on page 10 of the press release, I see a VA rider hedge impact of negative $7 million, but that is apparently negative… that's the net of the positive impact of implementing FAS-157. I go to page 19 of the supplement.
It looks like in the variable annuity business the cumulative effect of the accounting change associated with FAS-157 was $36 million to the positives. So would I be right in assuming that the VA rider hedge impact was $43 million gross and then net of the $36 million is how we get to $7 million.
Is that correct?
Laura C. Gagnon - Vice President of Investor Relations
Jeff, if you go to page 18 of the supplemental.
Jeffrey Schuman - Keefe, Bruyette & Woods
Yes.
Laura C. Gagnon - Vice President of Investor Relations
And I can walk you through this here, but we give you the change in hedge and the change in the mark-to-market for the liability. FAS-157 basically an implementation from January 1st to March 31st changed how you value those liabilities, so that impact is embedded in that change in liability for the derivatives.
Jeffrey Schuman - Keefe, Bruyette & Woods
Okay, I guess just may be just heading to the point. So what was the VA rider hedge impact in the quarter excluding this implementation of FAS-157?
Laura C. Gagnon - Vice President of Investor Relations
So you are asking us really to back out the change in how we value the liability, and how it would have looked if we valued it under the old methodology?
Jeffrey Schuman - Keefe, Bruyette & Woods
May be I am not understanding you.
Walter S. Berman - Executive Vice President and Chief Financial Officer
To our point as we put down on our schedule, the VA rider hedge impact was a minus seven and that's inclusive of the six.
Jeffrey Schuman - Keefe, Bruyette & Woods
I'm not sure, where the six comes from?
Laura C. Gagnon - Vice President of Investor Relations
It's on the foot note.
Walter S. Berman - Executive Vice President and Chief Financial Officer
It's on the foot note. Just take a look at the footnote where it says the DAC impact, included in there is the 157 impact which was a six positive and included in… if you take a look at the pretax and the VA rider impact.
Its says, it's seven inclusive of the six benefit.
Jeffrey Schuman - Keefe, Bruyette & Woods
Okay, I will ask the follow-up later, because I am still seeing a 36 impact… 19. Okay.
So, in other words the VA rider hedge impact was not terribly out of balance with what you have had in recent quarters?
James M. Cracchiolo - Chairman and Chief Executive Officer
That is correct and actually what reaffirms the way we evaluate this actually pretty spot on.
Jeffrey Schuman - Keefe, Bruyette & Woods
Okay. Next question you do have the substantial $4 billion exposure to short-term investments that seems to be costing you a bit given where rates are.
Is there any possibility now of lengthening that portfolio and offsetting some of that impact?
James M. Cracchiolo - Chairman and Chief Executive Officer
Yes, as we said before, the answer is yes. And what we… the basic premise on that is we feel now we can be compensated for taking the risk and prudently now reinvesting that out, not all that obviously, but certainly a portion of it.
Jeffrey Schuman - Keefe, Bruyette & Woods
And that effort is underway currently?
James M. Cracchiolo - Chairman and Chief Executive Officer
That is correct.
Jeffrey Schuman - Keefe, Bruyette & Woods
Okay. And then lastly, just to be clear, it sounded like employee advisor retention was good and yet the number of advisors dropped, I think by a few hundred sequentially.
Is that all just due to lower recruiting? Is that the idea?
Walter S. Berman - Executive Vice President and Chief Financial Officer
Yes, it's really… the franchisee actually is net positive and the retention even there has gone up higher. It's really in the new advisor, the novice recruitment, where we've continued to scale back.
And so, the numbers that you are seeing is because we significant reduced the number of new hires there.
Jeffrey Schuman - Keefe, Bruyette & Woods
Okay, great. Thank you.
Operator
[Operator's Instructions] Our next question comes from Eric Berg from Lehman Brothers. Please go ahead.
Eric Berg - Lehman Brothers
Thanks very much. I was… if we could go back page 10 of the release, we were talking about the market impact in the quarter.
And if you could identify the specific line items that in turn comprise the $0.09 a share that you think will carry on depressing earnings if the market stays at current levels, at least if I read the narrative of the news release correctly.
Laura C. Gagnon - Vice President of Investor Relations
Yes, that's basically… this is Laura, Eric. That's basically the two components of the lower asset levels on the management fees.
Eric Berg - Lehman Brothers
$0.06 a share?
Laura C. Gagnon - Vice President of Investor Relations
And the investment… excuse me, the lower interest rate on the cash and short-term investments.
Eric Berg - Lehman Brothers
So, would that be the first line item in each of the two sort of panels of data caption market impact to $0.06 and the $0.03 a share?
Laura C. Gagnon - Vice President of Investor Relations
That's correct.
Eric Berg - Lehman Brothers
Okay. And then, Walter, I just want to make sure I understood.
In the sort of body of your prepared remarks, you were talking about, and perhaps this was relating to Suneet's comments… questions earlier on in our conversation, you were talking about the ongoing impact of the market and you were citing certain dollar figures. Can you go over again the thought that you were trying to get across and the numbers that you used to communicate that?
Do you know what I am talking about here?
Walter S. Berman - Executive Vice President and Chief Financial Officer
Yes, Eric, I do. What I was characterizing from that standpoint was that there was two components.
If you are talking about one, what we talked about in the 10-K, and what I was saying in the 10-K, we specifically went over that we would have an event and it will be a 10% drop. And that would drive $141 million PTI impact from day one for one year after.
Okay?
Eric Berg - Lehman Brothers
Yes.
Walter S. Berman - Executive Vice President and Chief Financial Officer
And what actually happened in the quarter was we had accommodation of pretty close to that with the S&P at 5% on a year-over-year. But as we indicate, the DAC is driven by the change in the quarter, which is 10% and then the footsey [ph] had an 8% average and a 12% in the quarter impact, which pretty much modeled that impact, which brought to state of $141 million that's in the 10-K.
It brought us around $130 million. And in the first quarter, as you can see taking a look on page 10 and looking at the $49 million of the… where it says market impacts items estimated in 10-K, we recurred $49 million of the $130 million.
And that was the point. So we… because of the DAC front-loading that we took the majority impact there.
Whereas if you just divide the 130 by 4… again, I am not saying you would, you would come to 32 or difference is 17 million. Is that clear?
Eric Berg - Lehman Brothers
Yes, it is. Thank you.
Walter S. Berman - Executive Vice President and Chief Financial Officer
Thanks, Eric.
Operator
Our next question comes from Tamara Kravec from Banc of America. Please go ahead.
Tamara Kravec - Banc of America
Thank you. I have a couple of questions.
First, I guess just a broader question about your hedging programs and just on terms of what we've seen in the first quarter, how do you think those are holding up? Would you make any changes?
Is there anything you're seeing in your program in light of having this test in the first quarter? And my second question is on VA sales and what you are seeing there more broadly?
Are your sales well above 2 billion, which seems pretty good? Your surrenders actually improved, which is interesting.
So, I am curious what you are seeing in terms of consumer activity, both on sales and withdrawals more broadly?
Walter S. Berman - Executive Vice President and Chief Financial Officer
On the hedge program, we actually implemented a new model in first quarter and we're actually quite pleased with its performance. We are extending its scope as it relates to other indices other than S&P, which gave us boarder coverage.
So, we look quite comfortable with its performance in the quarter even despite the volatility. And obviously, we'll continue to perfect it.
But we feel very good with the current performance characteristic.
James M. Cracchiolo - Chairman and Chief Executive Officer
On the VA sales, sales have slowed from where we were a year ago based on again the equity markets and people's appetite at one level, but they are holding pretty good overall for us on a net basis as we highlighted in the quarter.
Tamara Kravec - Banc of America
And are you... I guess are you getting a general sense that despite the equity market volatility that you can sell into this market and consumers are not as apt to withdraw because of fees or surrenders or --?
Walter S. Berman - Executive Vice President and Chief Financial Officer
No, we are not seeing people withdraw at this point in time. As I said, I think the sales level has slowed at that from where we were a year ago because of the equity markets in the last two quarters.
But we do feel that that will come back again as markets either stabilize or improve. But overall, we think that the level of sales activity is still good for this market.
Tamara Kravec - Banc of America
Okay. And then on the hedge fund and seed loss that you had, how should we think about that in terms of the $0.09 recurring?
I guess what's really driving that and why would that not continue for the remaining quarters in sort of flat to down markets?
Walter S. Berman - Executive Vice President and Chief Financial Officer
Two events. One is we've actually brought down the amount of hedge and seed money we have.
And so, that would mitigate the exposure. And we've refocused our hedge programs on it.
And so, we think we have actually mitigated a reasonable portion of it.
Tamara Kravec - Banc of America
Okay. And just lastly on the investment portfolio, as you're looking at your portfolio in just more broadly in terms of the credit markets, are you seeing anything spreading into CMBS even the slightest bit, because I guess the Alt-A or the AAA, they are probably prime, right?
So are you seeing your balance sheet just much more resilient to what we are seeing more broadly in the market?
Walter S. Berman - Executive Vice President and Chief Financial Officer
Basically yes. We feel our portfolio continues to perform the way we… the underlying evaluation have been established.
And while it's all under pressure, as we talked about it, from the standpoint of the markets which we feel are most liquidity driven, the credit quality of it's remained.
Tamara Kravec - Banc of America
Okay. And are you are taking advantage… you say you have excess capital.
You have the ability that seems to take advantage of some of the dislocation. Is there anything that you were thinking about in terms of your strategy and your portfolio to move into some of these classes?
Walter S. Berman - Executive Vice President and Chief Financial Officer
Yes, we are looking selectively again. As we say, we are being awarded for looking at the short-time corporates.
We are looking at some of the Alt-A. We are looking at and very selectively again where there is enough collateral enhancement there that we feel comfortable with.
And we are again matching it just on our investment. We are matching it to our liability characteristics.
So, we have a complete valuation that's been performed and that we are executing against it.
Tamara Kravec - Banc of America
Okay. Thank you
Walter S. Berman - Executive Vice President and Chief Financial Officer
You're welcome.
Operator
You have a follow-up question from Suneet Kamath from Sanford Bernstein. Please go ahead.
Suneet Kamath - Sanford Bernstein
Thanks. Just… I am sorry I dwelled on this, but again on page 10 where you talk about the impact of the equity markets, when you say the $0.09 ongoing and you say $0.03 of that is related to short-term interest rate, is that the same issue that I believe you responded to, maybe it was Jeff Schuman's question about thinking about the short-term portfolio and perhaps investing that a little bit longer now that you are being compensated for taking on risk or is that a completely separate thing?
Walter S. Berman - Executive Vice President and Chief Financial Officer
No, that is the same. And obviously, this was taken as it is at this point in time.
So, if that's the rate play, if we invest more, that would then reduce that exposure, because you pick up the higher spread.
Suneet Kamath - Sanford Bernstein
Right. And then you obviously that you are in fact investing.
Walter S. Berman - Executive Vice President and Chief Financial Officer
Yes, we are.
Suneet Kamath - Sanford Bernstein
Okay, all right. Thanks.
Operator
[Operator Instructions] And I'm showing no further questions.
Laura C. Gagnon - Vice President of Investor Relations
Thank you very much for joining us on the call today. I will be in my office later this evening.
The number is 612-671-2080, and we'll be happy to answer any follow-up questions you have. Thank you.
Operator
Thank you.
James M. Cracchiolo - Chairman and Chief Executive Officer
Thank you, everyone, and goodbye.
Operator
Thank you, ladies and gentlemen. This concludes the first quarter 2008 earnings call.
Thank you participating. You may all disconnect