Jul 23, 2008
Executives
Kathryn C. Koessel - IR James M.
Cracchiolo - Chairman and CEO Walter S. Berman - EVP and CFO
Analysts
Andrew Kligerman - UBS Laura C. Gagnon - VP, IR Suneet Kamath - Sanford C.
Bernstein Jeffrey Schuman - Keefe, Bruyette & Woods Colin Devine - Citigroup Thomas Gallagher - Credit Suisse Securities John Hall - Wachovia Securities Eric Berg - Lehman Brothers
Operator
Good afternoon, ladies and gentlemen. And welcome to the Second 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 would now turn the call over to Kathryn Koessel.
Ms. Koessel, you may begin.
Kathryn C. Koessel - Investor Relations
Thank you. And welcome to the Ameriprise's second quarter earnings call.
With me on the call today, are Jim Cracchiolo, Chairman and CEO, and Walter Berman, Chief Financial Officer. After their remarks, we'll be happy to take your questions.
During the call, you may hear references to 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 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, 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'd like to turn the call over to Jim.
James M. Cracchiolo - Chairman and Chief Executive Officer
Good evening, everyone. And thanks for joining us for second quarter earnings call.
As you're well aware, the market and economic conditions continue to be very challenging. However, our business fundamentals remain solid, and we delivered respectable earnings for the quarter.
Of course, many of our earning streams are market-sensitive, and we've clearly been affected by the 13% decline in the S&P 500 during the first half of the year. Despite the conditions, I feel good about our position and outlook.
Our business is strong and well diversified, and we continue to invest for the future. We're focused on serving our clients, and emphasising the core strength of our financial planning model, which serves us well across market cycles.
In addition, we continue to realize benefits from our conservative approach to managing our balance sheet. Now, I'll give you some context for our second quarter results.
Net revenues were down 8% compared to a year ago, primarily, due to market impacts on asset balances and the large re-liquidation in last year's second quarter. In regard to our results, earnings per diluted share were $0.93.
Excluding capital gains and losses, as well as separation costs from the second quarter of last year, we earned $1.01 per share, a 3% increase. Our ROE for the trailing 12 months was 12.1%, excluding separation costs and investment gains and losses.
These results didn't meet our on average over-time goals, but given the strong headwinds that are pervasive across our industry, we're in good shape. Perhaps most important in this environment, our balance sheet continues to perform well.
Our strong position is enabling us to pursue opportunities when others in the industry are retrenching. We continue to hold very limited exposure to the most distressed asset classes, and we are comfortable with our overall asset mix.
Our asset quality remains strong, and we have had minimal balance sheet impairments, compared to the rest of the industry. We also remain in a very solid capital and liquidity position, and we're returning significant capital to our shareholders.
During the second quarter, we repurchased 5.2 million shares at a cost of $250 million, and we have returned more than 100% of our adjusted earnings over the past two and a half years. In addition, today we announced that our Board of Directors has authorized an increase of 13% in our quarterly dividend, to $0.17 per share.
As evidence of our strong balance sheet and liquidity, our counterparty credit rating was upgraded earlier this month. We also have the resources necessary to grow the company over the long term, as our agreement to acquire J.
& W. Seligman made clear.
This transaction is a very good fit for many reasons. Financially, the acquisition is expected to be accretive to earnings next year, and we will fund the deal with cash on hand.
The transaction will not impact our capital position significantly, and we expect to maintain our current shareholder repurchase agenda. We're also managing expenses tightly, and as you can see evidence of that in our general and administrative expense line, which was 13% lower than a year ago and 3% lower than last quarter.
We're seeing the results from the expense program we put in place earlier this year, while we continue to execute our re-engineering agenda and our investment plan. Our operating results for the quarter demonstrate the weak market environment, but also the strength of our foundation and strategy.
Our fundamental value proposition is serving the massive loan affluent clients in long-term, personal financial planning relationships, and these relationships endure across cycles. Even with the current challenges, our financial plan activity remained solid.
Financial planning net cash sales were up 8% over last year, and we continued to enter into planning relationships with more of our clients. In regard to our advisor force, we're continuing to grow the franchisee channel at a measured rate, even as we've been re-engineering the employee channel to focus on profitability.
This has resulted in a lower employee advisor count. However, we expect the decreases in employee advisors to slow in the second half of the year.
We continue to provide advisors with excellent support, and their satisfaction remains very high as a result. During the second quarter, we began the rollout of our new financial planning tools, and initial advisor feedback has been very positive.
The tools make the process of creating new financial plans much more efficient, which in turn encourages advisors to sell more plans and makes them more productive. Now I'll move on to the product areas.
Owned, managed and administered assets declined 8% compared with a year ago, due to market depreciation as well as outflows at both RiverSource and Threadneedle. The Threadneedle outflows continue to come primarily from lower-margin Zurich assets.
We continued to generate strong growth in wrap accounts, with assets up 3% over a year ago, to $91 billion. We generated $2.8 billion in wrap net inflows during the quarter Overall RiverSource Funds flows were a negative $1.2 billion, about half of which came out of money market funds, as clients sought to avoid negative real return against inflation.
And in turn, this outflow from cash products explains part of our strong inflows in wrap accounts. The outflows were partially offset by good initial traction from our investments in outside distribution.
Another factor contributing to the net outflows is that our overall investment performance is not where we would like it to be. Our performance records remain reasonably strong over the three and five-year periods in many categories, but our one and two-year performance numbers have been weak in a few of our investment strategies.
First, in Fixed Income, our portfolios have generally been overweight to credit spreads, especially in commercial mortgage-backed securities as well as non-agency, mortgage-backed securities. These spreads have widened, which, coupled with our portfolios generally being positioned for a faster rise in long-term interest rates, has resulted in weak performance.
And in equities, our emphasis on valuation in a number of our boutiques has led to performance weakness. Valuation as a selection factor has mattered little over the last 18 months, and investment performance has suffered accordingly.
We're committed to improving our performance, and we are confident that we can return to consistent, competitive performance over the long term. Threadneedle's retail sales and performance remained strong, while their results for the quarter were impacted by asset outflows.
In addition to the Zurich assets, Threadneedle experienced turnover in the management of some of its alternative assets, which resulted in some of the asset outflows. Threadneedle's culture promotes teamwork among investment professionals, and we have complete confidence in the teams in place.
Those teams are working to retain assets in their funds. While I'm on the topic of asset management, I'd like to highlight the business benefits of the pending Seligman acquisition.
The addition of Seligman will significantly increase our third-party distribution capabilities, and it brings us $18 billion in total assets, including over $3 billion in hedge fund assets. We will also bring in several top-performing funds, including the industry-leading Communications and Information Fund, as well as the Seligman Growth Fund, which was Number One in its Lipper category for the second quarter.
Overall, the acquisition is exactly what we've told you we've been looking for: financially attractive additions to our higher-margin businesses that are good strategic and cultural fits. In our other products areas, we continued to drive net inflows in variable annuities, with $800 million in inflows during the quarter.
We continued to experience outflows in the fixed annuities, but those outflows are slowing significantly as we have experienced lower redemptions, and we have begun to market more attractively priced product offerings. In the insurance businesses, life insurance in force increased 5% over a year ago, to $191 billion, while Auto and Home policies also increased by 5%.
Total Protection segment premiums increased 2% despite the generally slower growth environment for insurance products. In summary, our business metrics continue to be affected by the tough market conditions, but our underlying business and our strategy and foundation remain sound.
We are confident that our long-term opportunity is compelling, and we are continuing to invest in the business to deliver on our vision for growth. We're investing in business growth, advisor support, marketing, product development and our client experience.
Overall, of course, we would like all [ph] to have better markets, but that said, I feel good about our financial position, as well as our long-term opportunity and the way we're pursuing that. With that, I'll now turn it over to Walter, and then we will any questions that you have.
Walter?
Walter S. Berman - Executive Vice President and Chief Financial Officer
Thanks Jim. The external equity, short-term interest rate and credit market environment continued to negatively impact our performance in the second quarter.
As anticipated, the equity market P&L impact was less severe, but the negative impact of short-term interest rates increased from last quarter. Our reported $0.93 in EPS was down $0.05 from last year.
The second quarter reflected a year-over-year negative impact of $0.09 related to the following items: first, weakening credit markets contributed to the after-tax realized loss of $0.08 per diluted share, primarily from other-than-temporary impaireds this quarter related to three AAA rated, Alt-A securities; lower market levels resulted in $0.03 per diluted share, of impact from amortization of DAC and deferred sales inducement costs, compared to a $0.03 gain in the year ago quarter... for a swing of $0.06; and one time tax benefits of $0.12 per diluted share in the quarter, compared to a benefit of $0.07 in the prior-year period for a net change of $0.05.
In the quarter, we continued our focus on our ongoing reengineering program to help mitigate the effects of the markets. The first quarter savings accelerated in the current quarter, as evidenced by the 13% year-over-year decline in G&A costs.
In addition to our reengineering and cost saving initiatives, we remain focused on the strength of our capital position, maintaining adequate liquidity, preserving our strong balance sheet, and effective management of risk. We continue to generate capital through earnings and to benefit from our longer term strategy of shifting to more fee-based and less capital intensive products.
As a result, our capital position remains healthy as reflected by our recent announcement of an additional share repurchase authorization, our agreement to acquire Seligman and the 13% increase in our dividend. Our excess capital position remains strong.
Today, we have more than $1 billion in excess capital and anticipate that we will continue to have more than $1 billion even after the Seligman acquisition. In terms of liquidity, we remain well positioned.
We continue to have over $2 billion in uncommitted cash and cash equivalents, with more than $1 billion at the holding company. We have substantial dividend capacity from both our insurance and non-insurance subsidiaries.
Our leverage ratios remain strong. Our debt-to-capital ratio is 21% or 17.4% when excluding non-recourse debt and with equity credit for our hybrid securities.
And our financial strength was affirmed by a recent upgrade of our debt. Our ratio of earnings to fixed charges was 7.4 times at quarter end.
Our hedging and risk management processes are performing well. The variable annuity hedge impact after-tax, after DAC, was $6 million comprised of SFAS 157 valuation benefits and the benefit of hedge effectiveness.
Let me now turn to asset quality. We continue to have a very high-quality portfolio that has performed well under these market stresses.
However, we are not immune to market impacts. As I mentioned, we announced $18 million in after-tax security losses this quarter, primarily related to impairment of three AAA rated, Alt-A securities.
year-to-date, our after-tax realized losses are $33 million. Over the past four quarters, we've had after-tax realized security losses of about 4 basis points of total invested assets, compared to insurance peers who have announced a minimum of 17 basis points and a median of 40 basis points in realized losses through the first quarter of 2008.
This does not include second quarter losses as peers have not yet reported. While I'll highlight several points related to our asset quality, additional details are provided on our website, consistent with prior quarter practices.
Of our $33 billion balance sheet, our position remains largely unchanged from last quarter. Our exposure to financial guarantors modestly increased in the quarter to $734 million, and we continue to look to the integrity of the direct investment cash flows and generally do not rely solely on the guarantee.
Our exposure to the equity portion of CDOs that we manage for clients declined to $38 million from $42 million last quarter. There has been very little change in our residential mortgage-backed portfolio.
We continue to own $1.1 billion of Alt-A and $247 million of subprime-backed securities. Our evaluation considers various factors, including loan quality, structural protection, collateral enhancement, seasoning, geographic concentration, and our assessment of current and future trend lines and underlying cash flows, including delinquency and severity trends.
Based on our underlying cash flow analysis, the highest risk categories include Middle Mezzanine AAA rated Alt-A securities backed by option ARMs, and AA rated Alt-A securities. The Middle Mezzanine bonds have a current unrealized loss position of approximately $75 million.
Most of these securities continue to have more than 20% collateral enhancement. The AA rated Alt-A securities have an unrealized loss position of about $40 million.
These securities are more seasoned, all 2005 and earlier vintages, with collateral enhancements in the mid to high single digits. With regard to our commercial mortgage-backed securities, they continue to perform better than the overall market.
We've selectively added to our asset-backed portfolio, which continues to be primarily AAA-rated. Our real estate loan portfolio of $3 billion is of very high quality and continues to have no delinquencies.
Last, we continue to monitor our corporate credit exposures of $13.8 billion carefully. We are watching credit and market trends closely, and we remain comfortable with our exposures.
As I mentioned, during our last conference call, we saw an opportunity to be rewarded for taking appropriate and prudent risks. Therefore, we invested over $1 billion of our cash into investment grade corporates, non-agency mortgages and high yield bank loans that had attractive valuations relative to the risk.
Those investments slightly increased our percentage of below investment grade securities. When looking forward to the remainder of 2008, there are a few things to consider.
As I mentioned earlier, we continued to benefit from effective tax planning. While we received a net $0.05 benefit, which lowered our effective tax rate in the quarter, for the remaining two quarters of the year, we expect the tax rate to be between 24% to 26%.
We are in the process of upgrading our actuarial valuation system, which we expect to implement in the third or fourth quarter depending on when the new valuation system is fully operational. If implementation is in the fourth quarter, we intend to move DAC unlocking to the fourth quarter to allow us to use the new system.
In closing, I'd like to summarize my comments: While the market environment is impacting our results, we are taking a prudent approach to manage expenses and optimize our ongoing investment program. Our capital and liquidity position remain strong with a high quality balance sheet and strong capital base, supported by cash flows from our diversified operating model and our prudent decisioning process.
We believe that we are well positioned for the future both from a business and financial perspective. And with that, I'd like to open it up for questions.
Question And Answer
Operator
Thank you. We will now begin the question-and-answer session.
[Operator Instructions]. Our first question comes from Andrew Kligerman.
Please go ahead.
Andrew Kligerman - UBS
Hey, good afternoon or good evening. Couple of quick questions.
First one, just on the excess capital, Walter, you mentioned that, you still have a billion plus of excess capital even after the J. & W.
acquisition. Do you expect to continue at this quarter...
$1 billion for quarter buyback even given the very difficult credit market conditions?
Walter S. Berman - Executive Vice President and Chief Financial Officer
Obviously, we don't forecast the level but we certainly, as we indicated, intend to continue our share buyback program as we go forward.
Andrew Kligerman - UBS
Okay. And, then just on the expenses, it's indicated that, expenses are down 9% that's probably somewhere north of $15 million in the quarter alone versus the year ago period in expenses.
Going forward a) are those expense... lower expenses sustainable?
And b) would you be pushing to lower them even further in subsequent quarters, and how would you do that?
Walter S. Berman - Executive Vice President and Chief Financial Officer
Andy, we certainly believe, we can continue to effectively manage our expense base. And as we indicated, it's our important focus on how it matters [ph] from the expense standpoint but to continue to improve our processes.
And we will continue to evaluate the situation and make prudent moves. But certainly it is full attention of management and be cognizant of what investments and what expenses are effective in this sort of market.
Andrew Kligerman - UBS
So that would imply maybe flat or even lower going forward?
Walter S. Berman - Executive Vice President and Chief Financial Officer
Pretty much yes, fair observation.
Andrew Kligerman - UBS
Okay, and the below investment grade, I see that it came, it went from 5% of investments to 7% last quarter, Walter, mentioned high yield bank loans. Maybe just a little more color, because that would be what maybe $600 million of additional investments, maybe just a little more clarity around that?
Laura C. Gagnon - Vice President, Investor Relations
Andrew, this is Laura Gagnon. There were a couple of downgrades that affected that and then a couple $100 million of bank loans.
And I believe it went from six to seven, not five to seven.
Walter S. Berman - Executive Vice President and Chief Financial Officer
Yes, went pick up from six to seven.
Andrew Kligerman - UBS
Okay and then just lastly, the wrap net flows actually improved to something along the magnitude of $2.8 billion in the quarter sequentially. They were down materially year-over-year, but maybe just a little more colour on what's happening there and where you think wrap net flows will be over the next few quarters?
Walter S. Berman - Executive Vice President and Chief Financial Officer
Well I think a lot of that is impacted by clients' appetite and advisors' appetite based on the market. I think what you saw is some improvement coming back on the second quarter, as they initially saw some stabilization in the markets and some of that improving.
So again, I think it's contingent on the market volatility, but I think we are seeing some appetite back for equity product again. And that's what you saw in the wrap program but again it's all subject to the market volatility and activities.
Andrew Kligerman - UBS
Got it. Thanks a lot.
James M. Cracchiolo - Chairman and Chief Executive Officer
You're welcome Andrew.
Operator
Our next question comes from Suneet Kamath. Please go ahead.
Suneet Kamath - Sanford C. Bernstein
Thank you. Just two questions, first on the RiverSource flows, you'd mentioned $1.2 billion.
And I think you said about a half of that is in money market funds, and then I think you said a portion of that went into the wrap account business. I'm just wondering sort of the net fee impact of that.
Are the fees that you earn on the money market products significantly higher or lower than what you picked up in terms of wrap accounts? I'm just trying to understand the revenue impact of those assets flows.
And then separately, for Walter, on the DAC. You had mentioned that you're going through some, I guess, actuarial reviews and that it may delay your DAC unlocking.
Can you comment, are you changing the way that you think about DAC amortization on a quarterly basis to sort of bring it more in line with what your peer group is doing... what your peers are doing or is this just something separate, and because of it you are just delaying your regular DAC unlocking to fourth quarter?
Thanks.
Walter S. Berman - Executive Vice President and Chief Financial Officer
Let me take the second question first. When it is, we're...
as I indicated upgrading our technology and systems capability in that, and that will be the only element that potentially, potentially will delay. We're still targeting to try and get in the third quarter from that standpoint.
So we did not want to do the unlocking under our own capability. We're going to have the new capability up.
So I was just trying to align there and from the standpoint of we were in, not looking to make statement about changing our DAC line process [ph] but we certainly are evaluating, how we do it versus how the peers do it and to try and see from that standpoint what gets the best transparency.
James M. Cracchiolo - Chairman and Chief Executive Officer
As far as the flows into RiverSource, we have about $600 million was out of the money market. And then again, I think you'll see in and out-flows of the money market as cash is applied or as people will sit on the sidelines a bit.
The fees on the money marker are lower than the fees that you would get on a long term fund in our categories. In addition to that in regards to the wrap program, we do get an asset management fees, we get part distribution fees etcetera from that.
On a relative sense, I would probably say the fees that we get primarily for managing, in this case might be slightly higher from a net company perspective of the money just sitting in the money market, but again we are talking about $2.8 billion versus half a billion coming from the money market. So our net positive there because of the increase in total volume activity.
Suneet Kamath - Sanford C. Bernstein
Okay, thanks.
Operator
Our next question comes from Jeff Schuman, please go ahead.
Jeffrey Schuman - Keefe, Bruyette & Woods
Good evening. I was wondering if you could give us a little more background on the lost of all alternative assets at Threadneedle, the losses was pretty material relative to the side of that asset base.
Is there a particular performance issue or some talent turnover or what was the story there?
James M. Cracchiolo - Chairman and Chief Executive Officer
What we had was we lost two pence, one was in the running our UK hedge fund; the other one that was in our... their U.S.
hedge fund. Their team members have taken over but in that changeover some people did redeem and we lost about $0.5 billion of assets coming from those funds.
Jeffrey Schuman - Keefe, Bruyette & Woods
And do those redemptions continue or has that kind of play out, do you think?
James M. Cracchiolo - Chairman and Chief Executive Officer
One of them, which was the... one who left early in the first quarter, it looks like those redemptions are played out already.
The U.S. occurred in the second quarter, so there might be a few more redemptions coming from that account.
But I think some of that's already reflected there, there might be a few more coming.
Jeffrey Schuman - Keefe, Bruyette & Woods
Okay. And then next you mentioned gaining some third party distribution capabilities with the Seligman deal.
Can you flush that out a little bit for us? Is this just mostly the gain in wholesalers or are there some very specific distributors that you gain or what specifically do you gain?
James M. Cracchiolo - Chairman and Chief Executive Officer
I think there are a few things, first of all, just as the touch base, our third party distribution that we were organically building is actually working according to our plan. We were able to get some good ramp up in some flows in the second quarter according to what we had targeted for the year.
The Seligman deal gives us a significantly greater number of agreements already in place, wholesalers on the ground with relationship. So, hopefully that will help us accelerate our penetration in the third party channel.
In addition, we think that we can get more of the Seligman funds into our own channels through our wholesaling distribution. And that also will complement the activities in flows in to the Seligman part of the deal.
And it also helps us ramp up a little more on our institutional business that we started to grow the sales activity there and the alternative assets that Seligman has that we can feed into our channels. So it's a combination of things that we think will give us a greater jump start into the third party distribution using their capabilities some of their products and ours.
Jeffrey Schuman - Keefe, Bruyette & Woods
That's great. And lastly on the RiverSource performance issue, is there any thing that you're doing to maybe kind of accelerate the turn there?
Are you changing strategy, changing personnel or is it a matter of just kind of waiting for the market to come back your way?
James M. Cracchiolo - Chairman and Chief Executive Officer
I think, Ted is focused with his team on those things that they've been evaluated that they think they should change versus not. I think the investment professionals are very focused on what their performance and why.
So I think some of it may set change something as we see some of the markets, some of its specking to their strategies a little bit. And they believe on some of what they have invested in.
Jeffrey Schuman - Keefe, Bruyette & Woods
Great, thanks a lot.
Operator
Our next question comes from Colin Devine, please go ahead.
Colin Devine - Citigroup
Good evening. Just a couple of quick ones.
Walter, just with respect to Threadneedle and the professional turnover. What I have heard from my London I guess office is that okay, one of that individuals I guess is not SAC.
But the other one I'm not sure that it's been disclosed where they're going. So until that happens there's going to be a little tough to predict, how much of the assets are going to fall on, is one, and that maybe perhaps more than a little as we look at it this.
Secondly, just to clarify with the DAC issue, is it still going to be your intention that sort of true this up in the third quarter normally each year going forward and the fourth quarter this year just with the system change?
James M. Cracchiolo - Chairman and Chief Executive Officer
And...I am sorry.
Colin Devine - Citigroup
And than finally, if you can talk a little bit what you're seeing as we head into third quarter now with terrible annuity sales. And also what percentage of your commissions on VAs is going out of this C share level versus an upfront?
Walter S. Berman - Executive Vice President and Chief Financial Officer
As it relates to DAC, it is our intention that we are... we will continue in our third quarter unlocking and the only elaboration to move into the fourth quarter, skipping the process system.
So if we do in the fourth quarter this year we will be back in the third quarter next. All right and I think I answered your question correctly.
Colin Devine - Citigroup
Yes.
Walter S. Berman - Executive Vice President and Chief Financial Officer
I don't if we have the...
Laura C. Gagnon - Vice President, Investor Relations
We don't have the VA sales breakdown.
Walter S. Berman - Executive Vice President and Chief Financial Officer
I don't have that, so we'll have to try and get back to you on that. And then as Jim said on the...
was the basic... on the hedge fund, we believed that is, will happen in the second quarter.
And there has been certainly redemptions that, a reasonable portion of that has occurred. But we're still monitoring right now, and the team is in place.
We're going there.
James M. Cracchiolo - Chairman and Chief Executive Officer
Well there are numbers of the team that have been, still part of that, that we're looking to retain assets as we saw in the first hedge fund where people left. We did lose a number of those assets, initially.
And the team is now showing decent performance. And so we think that we feel pretty good about that.
And the second one, as I said, occurred in the second quarter. So the point, I can't give you the exact of how much more will come.
But again we're using the same methods as part of the team to retain those assets, and we have good people there. So again it will be effective, but I think on the course of the total, we've lost so far, I am not sure, it's going to be as much.
Colin Devine - Citigroup
Okay. One final on the certificate and banking business how much of the loss that was driven by the investment losses?
Walter S. Berman - Executive Vice President and Chief Financial Officer
Well, actually... that's some 20s and some million, are you talking about the impairment?
Colin Devine - Citigroup
Well, now looking at pre-tax income for your certificate and banking business which... was the loss of 24 million, I believe?
Laura C. Gagnon - Vice President, Investor Relations
21 million of that impairment.
Walter S. Berman - Executive Vice President and Chief Financial Officer
Yes.
Colin Devine - Citigroup
Okay. That was the question.
Thank you.
Operator
Our next question comes from Tom Gallagher. Please go ahead.
Thomas Gallagher - Credit Suisse Securities
Hi, the first question is related incentive fees and asset management. I know last 4Q of '07 you had a nice pickup, which I believe was largely driven by Threadneedle alternative, if I'm tracing the numbers correctly.
Laura C. Gagnon - Vice President, Investor Relations
That's correct, Tom.
Walter S. Berman - Executive Vice President and Chief Financial Officer
That's correct.
Thomas Gallagher - Credit Suisse Securities
Okay. Given what's going on, both to net outflows, just as well as year-to-date performance, looks like you're sort of modestly positive.
I just looked at your disclosure. I assume you got to get to a hurdle rate to start earning performance fees there.
Is it fair to say, outlook for this year dramatically lower, in terms of potential performance fees or any kind of comment you can give us for that? Thanks.
That's my first question.
James M. Cracchiolo - Chairman and Chief Executive Officer
I think, clearly at this stage, we haven't really forecast that. But, certainly the elements are there, it is not unreasonable to assume that, it could be lower.
Thomas Gallagher - Credit Suisse Securities
Okay.
Walter S. Berman - Executive Vice President and Chief Financial Officer
Yes, I mean we don't have the second half of the year, but based on some of the flows being down, and also the performance being not as strong as last year so far, the performance fees will be down, unless, banks come back in the second half of the year.
James M. Cracchiolo - Chairman and Chief Executive Officer
And we have seen that come back. So, yes, different space, so it's certainly...
we'll keep on monitoring. And from that standpoint.
Walter S. Berman - Executive Vice President and Chief Financial Officer
And we always look at that as an incremental for us, at the end of the year. So, it's not in any of the reported number so far.
Thomas Gallagher - Credit Suisse Securities
Understood. And so, and is the...
kind of this rule of thumb to think about as it relates to earning those being... you need to earn a minimum of somewhere in the 8% to 10% range before, you start earning incentive fees, in the alternatives business?
Walter S. Berman - Executive Vice President and Chief Financial Officer
It is in that range. I don't have the exact number.
But, certainly that is in the appropriate ranging.
Thomas Gallagher - Credit Suisse Securities
Okay. The next question is, if we...
I don't know if you can give us some kind of range, to think about... if you fast forwarded the DAC review, and made some equity market assumptions, let's just say, remains where it is today.
Could you give us an idea of what kind of unlocking which I'd presume, would be a charge to space and where the equity markets are today, you'd have in 3Q or 4Q?
James M. Cracchiolo - Chairman and Chief Executive Officer
That's interest, because it's a complex element because it deals with so many of factor lapses, markets and everything. Remember, markets we take on each quarter basis so we reflect that.
As in the DAC mean reversion. So that's not for us as big a deal as it's for some of our peers.
And we have not... that's the issue we will not start running the unlocking models until we'd adapt that timeframe when we have to make a decision.
So, it's really tough to even guesstimate it but there is nothing that we see that can even give a plus or minus short-term but, certainly the market factor is not the element within that.
Thomas Gallagher - Credit Suisse Securities
And Walter, is it fair to say that the... what's happened in the equity markets year-to-date, that impact on your DAC in terms of the under performance of the equity markets, is that fully factored into these many unlockings that we've seen every quarter?
Walter S. Berman - Executive Vice President and Chief Financial Officer
The DAC... it is factored...
we've reflected monthly, and quarterly also. And, I think, one of your colleagues ask a question that is one of the things that isn't...
that we do that maybe... that probably is not necessarily the industry standard.
Thomas Gallagher - Credit Suisse Securities
Okay. And that's potentially up to some type of review just in terms of how...
the methodology?
Walter S. Berman - Executive Vice President and Chief Financial Officer
Yes, basically. Yes.
Thomas Gallagher - Credit Suisse Securities
Okay. And last question, when you look at the asset weighted performance for, I guess, the one and two year numbers, and the fact that they've weakened a bit.
Does that... how does that affect your plans on third party distribution build-out, if it does at all?
Is that... does that make it a lot tougher at this stage?
Walter S. Berman - Executive Vice President and Chief Financial Officer
Yes, I think, what we do is we still have some really good performance and strong products, like in our value areas etcetera. That, there are products out there that we do have, that we'll sell and are selling.
So, we're feeling good about the sales that we're really ramping up as we were putting new wholesalers on the ground. So, we do feel that we have product to continue to sell that has good performance.
And so, yes, it'll be a great to have performance in all the categories. But, right now, we do have product to sell.
Thomas Gallagher - Credit Suisse Securities
Okay. Thanks.
Operator
Our next question comes from John Hall. Please go ahead.
John Hall - Wachovia Securities
Good evening. In the release, you mentioned that there were increased investment in distribution and the asset management segment.
I was wondering if you could just give an order of magnitude there and then offer the view whether that is essentially on hold as you bring in Seligman?
Walter S. Berman - Executive Vice President and Chief Financial Officer
The answer is no. It will...
as Jim said we are tracking towards our plan and certainly we'll labor the Seligman wholesalers and integrate in line with plan.
James M. Cracchiolo - Chairman and Chief Executive Officer
I think what it is, if you look at, we already added whole selling teams. And so those people we've been funding are...
those are in our expenses so far that will continue. What Seligman provides us is an additional number of team, so that we don't have to organically add to it right now.
We think that the complement of our teams and Seligman will actually get us through the next number of periods in a sense that we are not going to add to additional new whole selling teams. And so that does give us a big jump-start because are already on the ground with relationships that we can leverage more fully.
And so, that were the benefit, but we're not going to like scaling back the teams we've already put in because we think that we need a reasonable size wholesaling force and this gives us a good complement now.
Walter S. Berman - Executive Vice President and Chief Financial Officer
And we avoid the learning curve because these people are already on the ground.
John Hall - Wachovia Securities
So that's great, I guess I was going after whether there would be a delta from the investment in the second quarter into the third?
Walter S. Berman - Executive Vice President and Chief Financial Officer
I think it's just more of a run rate. I think we had most of the teams on board in the first quarter.
I think we added one or two in the second, so it shouldn't be materially different than the second.
John Hall - Wachovia Securities
Great. And then, are there going to be consolidation expenses as they were associated with bringing Seligman in?
James M. Cracchiolo - Chairman and Chief Executive Officer
There will be some deal costs as it relates to it. And as we indicated, the majority of synergy will be generated from expenses as we get the benefits of integration next year.
John Hall - Wachovia Securities
Okay. And with the Seligman transaction being pulled in, and the like, are you essentially on the sidelines for the moment as far as M&A and around distribution and AUMs?
Walter S. Berman - Executive Vice President and Chief Financial Officer
Yes.
John Hall - Wachovia Securities
So you are still on the game?
Walter S. Berman - Executive Vice President and Chief Financial Officer
Still on the game.
John Hall - Wachovia Securities
Fantastic, thank you.
Walter S. Berman - Executive Vice President and Chief Financial Officer
You're welcome.
Operator
[Operator Instructions] Our next question comes from Eric Berg, please go ahead.
Eric Berg - Lehman Brothers
Thanks and good evening to everyone. I'm still trying to understand a little about this whole DAC process at Ameriprise.
The concept of mean reversion is, I don't think it's a GAAP concept, as I recall it's just sort of a convention that was developed by some companies several years ago in response to big swings in the stock market. Can you review with us not in great detail but just in the very concise form, in summary form, what this mean reversion concept means that you referenced in your disclosed items?
And then I have a follow- question?
James M. Cracchiolo - Chairman and Chief Executive Officer
Sure, I think what happen... you are correct and as essential when markets were moving and from that standpoint, various conventions were established and which would allow a more timely recognition of the market movements and where some firms that leave a card order [ph] or delays the recognition.
We then shows... when that was discussed to actually reflect the calculations of what the impacts of the market would be in our future growths, estimated gross profits calculations.
So we have been under the more conservative approach to recognition of it on an immediate basis. And that's, I feel one or two firms I think do that and other several firms they don't.
So it is basically, on that basis that was something we discussed in reference, we evaluated and that was the basis we put in.
Eric Berg - Lehman Brothers
Okay. So what...
again at a... in a concise way, what is the main difference between what's happening each quarter with the DAC balance, the unlockings which are technically taking place reflecting, stronger than expected or poorer than expected stock market.
What's the difference between what's going on with the DAC on a quarterly basis and what will happen in the September or December quarter?
James M. Cracchiolo - Chairman and Chief Executive Officer
What happens here is, since we are current and basically and we true this up to the latest market, obviously if something takes place in the quarter that will be a part of the process. But then we look through all the other assumptions in actuaries, in evaluating the trend lines as it relates to the key assumptions last [ph] is that all the elements and seeing if those elements of drivers now would warrant a change in estimated growth profit calculations.
The market only becomes that core element that have taken place within it and which is we do every quarter. But they're then looking at the baseline driver trends as to what will affect the estimated gross profit, and seeing what has changed.
Obviously, as we told you, if there is any change that takes place in the quarter, as we are between the third quarter unlocking, we will obviously reflect it, we feel this is a strong enough trend line.
Eric Berg - Lehman Brothers
Great. And lastly, would you just remind...
would you just go over one more time please, sort of the summary reasons for the underperformance in your fixed income and equity business at RiverSource. You mentioned CMBS credit spreads, I thought they actually narrowed in the June quarter, rather than widened.
After the collapse of Bear, there seemed to have been a narrowing of credit spreads. And, you also mentioned in the same breath, something about valuation in common stock investing and how it...
just wasn't working out. Could you just go over that?
I didn't quite follow that whole thing.
Laura C. Gagnon - Vice President, Investor Relations
Eric, before we do that I just want to point out that we're talking about what drove the one month... the one year performance.
So, we're talking a lot about the spread widening that happened in the third and fourth quarter as well, is driving what's happening in our one year performance numbers.
Eric Berg - Lehman Brothers
Okay. So, spreads...
spread fair enough, that's a helpful reminder, Laura. So, the point is that we have this spread widening, and how were your managers positioned in fixed income?
James M. Cracchiolo - Chairman and Chief Executive Officer
Well, our managers were positioned, they thought that there'll be a faster rise in long-time interest rates, and that did not occur as well. And that's part of it.
In the equity side, many of our managers really focused on valuation, and a lot really hasn't been driven by valuation, it's been driven more by momentum these days. Particularly, as people move into whether materials stocks, or energy etcetera.
So, we've... our managers look at value, they look at intrinsic value there, and over time, the performance coming from good companies.
And so, they've put more in that category than others have, and that's where you see differences in performance.
Eric Berg - Lehman Brothers
Thank you, Jim. I'm all set.
Operator
[Operator Instructions].
Laura C. Gagnon - Vice President, Investor Relations
Okay. This is Laura Gagnon, Kathryn and I, will be around answering the follow up questions you have.
The number to call is 612-671-2080. And, thank you very much.
James M. Cracchiolo - Chairman and Chief Executive Officer
Thank you, everyone. I appreciate the time and effort.
And, we look forward to any other questions you have. And, hopefully markets will settle down.
But, we continue to be very focused on what we need to do to control our destiny. And, I think, we've been doing that so far in the first two quarters.
Walter S. Berman - Executive Vice President and Chief Financial Officer
This is Walter. [Indiscernible].
James M. Cracchiolo - Chairman and Chief Executive Officer
Take care. Bye bye.
Laura C. Gagnon - Vice President, Investor Relations
Good night.
Operator
Thank you ladies and gentlemen. This concludes today's conference.
Thank you for participating. You may all disconnect.