Jul 28, 2011
Executives
Alicia Charity – SVP, IR James Cracchiolo – Chairman and CEO Walter Berman – EVP and CFO
Analysts
Andrew Kligerman – UBS Securities LLC John Nadel – Sterne, Agee & Leach, Inc. Jay Gelb – Barclays Capital, Inc.
Alexander Blostein – Goldman Sachs & Co. Suneet Kamath – Sanford C.
Bernstein & Co., Inc. Eric Berg – RBC Capital Markets Thomas Gallagher – Credit Suisse
Operator
Welcome to the Second Quarter 2011 Earnings Call. My name is Sandra and I will be your operator for today’s call.
(Operator Instructions) Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.
I will now turn the call over to Miss Alicia Charity. Miss Charity, you may begin.
Alicia Charity
Thank you. And welcome to the Ameriprise Financial Second Quarter Earnings Call.
With me on the call today are Jim Cracchiolo, Chairman and CEO; and Walter Berman, Chief Financial Officer. Following their remarks, we’ll be glad to take your questions.
Some of the statements that we make on this call may be forward-looking, reflecting management’s expectations about future events and operating plans and performance. These forward-looking statements speak only as of today’s date and involve a number of risks and uncertainties.
A sample list of factors and risks that could cause actual results to be materially different from forward-looking statements can be found in today’s earnings release, our 2010 annual report to shareholders and our 2010 10-K report. We undertake no obligation to publicly update or revise these forward-looking statements.
In addition, during the call, you will hear reference to various non-GAAP financial measures, which we believe provide insight into the underlying performance of the company’s operations. Reconciliation of non-GAAP numbers to the respective GAAP numbers can be found in today’s materials available on our Web site.
And with that, I’d like to turn the call over to Jim.
James Cracchiolo
Good morning. Thanks for joining us for our second quarter earnings discussion.
I’ll start by giving you my high-level view of the business. Walter will discuss our financial results in more detail and then we’ll take your questions.
Let’s begin. Overall, this was another very good quarter for Ameriprise Financial.
In our Advisory and Asset Management businesses, we build on the momentum we’ve been generating over the past several quarters and delivered strong growth and profitability. In fact, for the first half of this year, Advice & Wealth Management and Asset Management contributed about half of our operating segment earnings, demonstrating our ongoing shift to earnings from our higher-returning businesses.
At the same time, our Annuity business delivered good earnings and our insurance fundamentals remain solid, despite higher claims, especially in auto and home. The good performance across our franchise drove our operating return on equity to 14.5%, which is an all-time high and continues to move us closer to our 2012 objective of 15%, which we outlined in 2009.
Our strong foundation presents opportunities and gives us flexibility. We are maintaining a large excess capital position, we are investing to accelerate business growth and we’re returning significant capital to shareholders.
During the quarter, we returned over $400 million through buyback and dividends. And so far this year, we returned well over 100% of our earnings to shareholders.
Now, I’d like to provide some commentary on our performance in each business. First in Advice & Wealth Management, we delivered strength in all of our key business metrics, as well as compelling profitability.
I’d like to take a step back here and reflect on the upward trajectory we put our Advice business on over the past two years. Since we started emerging from the financial crisis in the second quarter of 2009, operating earnings in this segment have increased by a factor of five and operating margins have increased dramatically.
At the same time quarterly revenue per advisor has grown from $65,000 to a record $99,000. And remember, we’re generating strong earnings, even in a continuing environment of very low interest rates.
While the market improvements of the past two years have certainly helped, I want you to understand the significant changes we’ve made to drive up the profitability of the Advisor business. Years ago, the Advisor business was regarded primarily as a distribution platform and not a profit center.
We brought in a large number of novice advisors and trained them from scratch with a field leadership and infrastructure to support them. As a result, the employee channel was a significant expense.
Today, we’ve transformed the business, both from an economic and operating perspective. Our 2008 acquisition of H&R Block financial advisors gave us a big boost in our efforts to re-engineer the employee platform.
Since then, we’ve put in place a much more efficient leadership model, lower producing advisors have left the firm and we instill the sharper focus on productivity. In addition of the more than 1,000 experienced advisors we recruited over the past few years, the majority of them have joined the employee channel.
As a result of all these improvements, our employee advisor productivity is at an all-time high and our retention rate for this group has increased by 16 percentage points in just two years. The franchise channel has always been highly productive with long-tenured advisors and very strong retention.
Those trends have continued throughout our time as a public company, but we haven’t rested on our laurels. We continue to enhance the platform and its leadership to ensure franchise advisors remain motivated and satisfied.
We made very significant investments in our advisors and we’re continuing to do so. We’ve consistently supported them with national and local marketing.
We’ve offered new products and enhanced existing options, and we’re delivering a number of important technology upgrades, including the new brokerage platform that we’re rolling out now. Overall, our advisor force and field leadership have undergone extensive positive change and the transformation has helped us deliver earnings growth and notable improvements in all of our important metrics.
To review, record advisor productivity, good experienced advisor recruiting, excellent advisor retention, and increasing client assets, including a record level of wrap assets. Just as important, the strong and efficient operating platform I just described gives us significant leverage for continued growth, especially as webegin to increase our advisor force.
Now, I’ll move on to Asset Management, which is also performing well, both in the U.S. and internationally.
We’re generating quarterly pre-tax operating earnings in the neighborhood of $150 million in this segment, and we have $467 billion of assets under management in the segment, which makes us one of the largest and most profitable asset managers. In the U.S., the Columbia integration is near complete with only final technology work left to do.
Columbia’s investment performance remains very strong with 52 four- and five-star funds, which is among the most of any fund family. At Threadneedle, investment performance remains exceptional and the firm is creating increased traction in Asia and the Middle East.
Overall, our asset flows are improving. Across the business, we recorded net inflows of $450 million in the quarter.
We generated $257 million in U.S. retail net inflows, which included re-invested dividends.
Retail sales and flows have improved across all distribution channels. Of course, June was challenging with the weak and volatile markets leading to a sizeable, industry-wide outflows from equity funds.
That trend seems to have stabilized in July. I feel good about the progress we’re making.
Our fund merges were essentially completed during the second quarter so our wholesalers no longer having to discuss pending merges. Now, they can discuss a very high-performing, very diverse fund family.
At the same time, we started promoting our investment performance in a new advertising campaign. And we entered a new and promising asset class during the quarter with the launch of absolute return funds.
In the Domestic Institutional business, we reported $256 million in net outflows, which is a significant improvement over both a year ago and sequential quarter. We’re winning important and attractive mandates and our pipeline of unfunded mandates continues to build.
Of course, the Institutional business is lumpy, so a single redemption can have a significant impact on net flows. But overall, we’re pleased with the trends we’re seeing in this business.
Threadneedle returned to strong retail net inflows of over $2 billion in the quarter with sales remaining strong and redemptions declining substantially. Flows turned around after one-quarter blip that was caused by the crisis in Japan and the Middle East.
The Institutional business at Threadneedle also generated good net inflows apart from the continuing and expected runoff of low-margin Zurich assets. Threadneedle won several nice mandates around the world, including its first ever Institutional win in Asia.
Now, I’ll move on to Annuities and Insurance. We generated another good quarter in the Annuities business.
The decision to focus our efforts on the Ameriprise channel where the risk and profitability are more attractive, and to exit outside distribution of variable annuities is working well. While total flows are impacted by the run-off in outside variable annuities, we drove $400 million in net inflows in the Ameriprise channel during the quarter.
The overall economics in the business, including its risks characteristics, are in very good shape. Fixed annuity sales remain slow due to the interest rate environment.
Both annuity books, variable and fixed, continue to generate strong returns. Like many other insurers, our Protection segment was impacted by increased claims from the storms that hit the Midwest and the South this spring.
Still, our second quarter catastrophic claims were manageable, just $15 million, and the claims in the auto business are improving nicely. Walter will provide more detail on this.
In the Life & Health Insurance businesses, sales are still challenging across the industry, but we’re seeing some improvement. Overall, our Life & Health Insurance business continues to provide reliable earnings and solid returns.
To summarize, Ameriprise is continuing to perform at a high level. We have transformed the Advisor business into a highly-profitable, efficient contributor to our earnings.
Our large and global Asset Manager is generating strong profits and performance, and our Insurance and Annuity businesses continue to deliver good returns. At the same time, we continue to manage our resources prudently.
Our balance sheet and capital are extremely strong and returning significant capital to shareholders. Overall, I feel very good about both this quarter and the trajectory of the company.
The business is generating record revenues and very strong earnings, and our returns have improved substantially as we’ve grown and shifted the mix of earnings through our higher-return businesses. In fact, our returns compare favorably by segment and overall against the industry.
I believe we have the right strategy and the right market positions and the right foundation to continue to drive growth and higher returns in the years ahead. Now, I’ll turn it over to Walter.
Walter Berman
Thank you, Jim. We generated strong earnings across all measures with operating EPS up $0.27.
As Jim covered, core business trends are strong, and as a result, we are delivering double-digit revenue growth. Earnings growth was very good across our businesses, with the exception of Protection.
I was pleased overall with the earnings in the quarter. There were a few non-reoccurring items, both positive and negative, which largely offset.
Importantly, our low capital-intense businesses, Advice & Wealth Management and Asset Management, continue to drive our growth and earnings mix shift. That shift, combined with prudent capital management, resulted in an operating ROE of 14.5% this quarter.
Now let’s look more deeply at the drivers for Ameriprise and each segment. We’re generating strong 14% revenue growth and driving a higher contribution from our less capital-demanding, fee-based businesses, where revenues increased 12% and 34%, respectfully.
We are seeing slow revenue growth in Annuities and Protection. In those businesses, we maintained our price discipline and focused on the Ameriprise channel where the economics and risk are more balanced.
Turning to Slide 5, we are seeing similar growth from an earnings perspective. In the second quarter, we generated strong 30% growth in the pre-tax operating earnings, and more than half of that was from low capital-intense businesses.
This is great progress towards our goal of approximately 60% over time. As we shift the business mix, we are generating significant excess capital.
In fact, about 90% of our operating earnings are available for capital redeployment, even though we are growing the company at a strong rate. Our excess capital has grown to over $2 billion, even after buying back 761 million of shares so far this year.
This change is the result of a number of factors, including the rate of shift in the business mix to low capital-intense lines, as well as the exit from selling variable annuities in the third-party channel. On the next slide, you’ll see a bit more detail on our capital position.
We continue to prudently manage our financial foundation, which has enabled us to return capital to shareholders. During the quarter, we repurchased 6.1 million shares for $366 million.
We recently announced an additional $2 billion repurchase authorization, bringing our total to $2.2 billion at the end of the quarter. At our Life companies, our risk-based capital ratio is over 585%, well in excess of the required level, even after paying a $400 million dividend to the holding company in the second quarter.
We intend to bring that ratio down by year-end to below 500%, which is still in excess of the required amount. The quality of our balance sheet is strong with good liquidity, $1.3 billion of free cash, and a low debt-to-capital level.
We ended the quarter with $1.7 billion of unrealized gains and our variable annuity hedging program continues to be quite effective. Now, let’s look at the performance of our business segments in more detail.
In Advice & Wealth Management, earnings were up 26%. Margins remained strong at 11.3%, up from 10.1% last year.
As Jim described, we are improving Ameriprise advisor productivity and growing assets under management. Client wrap assets were approximately $106 billion, with net inflows of $2.3 billion for the quarter.
Interest rates remain a headwind in this segment with over $13 billion of brokerage cash earning low spreads of about 44 basis points. Expenses continue to be well-managed.
As we invest in the Advisor business, we are also realizing the benefits of our re-engineering in the prior periods. Turning to Asset Management.
Asset Management had strong 40% operating growth in the second quarter. We had a full three months of Columbia results this quarter compared to last year’s quarter which only reflected two months, as the acquisition closed to May.
Normalizing for the extra months of Columbia’s results, earnings would have been up 25%. As Jim detailed, we had $450 million of net inflows and net revenue increase of 34%.
The 19.4 operating margin includes the impact of reporting transfer agent fees on a gross basis versus net and the impact of Portfolio Navigator program modification. As we discussed in the past, we show transfer agent revenues on a gross basis.
We have also modified our Portfolio Navigator program, which also grosses up revenues in this segment. We did not anticipate these changes when we originally provided the 25% margin target for 2012.
These non-economic changes reduce our margin by approximately 200 basis points, and therefore a more appropriate target operating margin would be 23%. The adjusted net operating margin, which nets out the impact of these gross-ups, increased from 33.8% to 34.9%.
The Columbia integration is progressing well with most of the fund merges complete and net expense synergies on track for our target of $130 million for 2011. We’re expecting net synergies in 2012 of approximately $145 million.
Now turning to Annuities. Operating pre-tax income increased 46% compared to last year.
As a reminder, last year’s earnings were impacted by about $17 million of unfavorable items, including mean reversion, DAC model updates and the Portfolio Navigating modifications. On an adjusted basis, earnings increased 23%.
The current level of earnings in the Annuities segment represents a good quality run rate for 2011. Of course, earnings will vary based upon DAC unlockings and mean reversions.
Since there was little impact from these factors this quarter, we wanted to ground you with a run rate. The Ameriprise channel continued to generate strong sales of our new variable annuity product, RAVA 5.
Net inflows in this channel were about $400 million. Overall growth of the variable annuity business will be lower given our decision to exit outside distribution, but profitability remains strong, reflecting the differentiated performance of business sold through our advisor network.
The fixed annuities book continues to experience net outflows reflecting low client demand in the current interest rate environment. Returns for fixed annuities remained strong with an operating ROE of 20.3% and a 250-basis-point spread this quarter.
Let’s move on to Protection. Operating pre-tax income was down 35% compared to last year.
Auto & Home continues to grow with revenues up 5% over last year. Results in the quarter were down $20 million and were impacted by severe storms in April and May.
Our catastrophic losses were $15 million, which is reasonably good given the severity of the storms and compares well to the industry. Our 91% reported loss ratio reflects these higher losses as well as the continuing higher reserve for auto policies.
We have seen improving trends and will closely monitor claims. In the Life & Health businesses, earnings declined $26 million on an operating basis.
Earnings in each quarter had several unusual items. So on a normalized basis, earnings were essentially flat year-over-year.
As we noted last year, we had about $9 million of favorable items, including mean reversion, DAC model updates and the Portfolio Navigator modifications, as well as unusually-low claims. This quarter, claims were $7 million higher and in line with expectations.
We also put up a $7 million higher reserve on a year-over-year basis for universal life guarantees, which we started in the third quarter of 2010 and will be ongoing. Looking ahead, this level of Life & Health earnings represents a reasonable quarterly run rate for 2011.
To wrap, we continue to drive a steady increase in operating ROE, reaching 14.5% this quarter. We generated strong earnings as a result of solid underlying business performance and the investments we have made to drive growth.
Our mix continues to shift to lower capital businesses, which is providing a strong source of excess capital. We are prudent capital managers and we’ll continue to return capital to shareholders.
Together, this is driving up return on equity toward our target of 15% in 2012 and we see further opportunity to increase ROE beyond that. Now, we’ll take your questions.
Operator
Thank you. We will now begin the question-and-answer session.
(Operator Instructions) The first question is from Andrew Kligerman from UBS. Please go ahead.
Andrew Kligerman – UBS Securities LLC
Great. Just a couple quick updates.
First, just the Securities America. Could you give us a quick update on whether that’s close to closing?
Or could we be waiting a while on that?
James Cracchiolo
Hi, Andrew. Jim here.
The Securities America process for the sale is actually proceeding well, and so we’re continuing to move that along. And in fact, yesterday, the court approved our class-action settlement on the Med Cap issues, and so that’s also something that was good to get completed.
So we’re making good progress and we’ll announce something in the near future based on continuing to move forward with the deal.
Andrew Kligerman – UBS Securities LLC
Great. Thanks.
I thought I heard Walter say he wants to get the RBC ratio down to 500%, which would be a pretty big move given that you’re kind of spending down the equivalent – you’re moving down earnings a fair amount each quarter with these buybacks. Do you expect to do it all with the buy back?
Or is there some M&A plans down the road?
James Cracchiolo
I’ll let Walter speak first to the dividends that we’re looking at for the Life company. And then I can come back on your last part of the question.
Walter Berman
Yes, Andrew. It’s Walter.
We are anticipating that we will bring that ratio down to under 500. That’s correct.
You heard it. And the amount is probably going to be in the area around $850 million as we work through it.
We just have to get the approval from the state, but we don’t see any problem.
James Cracchiolo
From a capital, overall capital position, Andrew, as you know, we’re continuing to buy back. And we’ve got a new buyback authorization approved and we’re continuing to execute there.
But we also have, as you know, some flexibility if a good or right opportunity that would fit in that we can get a good return or strategic capability from. But having said that, we’re going to continue to maintain some good flexibility but also return to shareholders.
We think our stock price is pretty low right now.
Andrew Kligerman – UBS Securities LLC
So M&A is is kind of quiet right now then? You don’t really see much?
James Cracchiolo
There are opportunities that are coming in about in the marketplace, so we’re going to continue to look and explore. But those things are – they come along now and then, so you have to be ready, and we have the ready capability if we need to.
Andrew Kligerman – UBS Securities LLC
Okay. And then just two last quick ones.
Are the synergies on Asset Management over with? No more of that effect on net closing retail with Columbia?
James Cracchiolo
Well as we announced, first of all, one of the big ones was really the mergers that occurred in the second quarter. So we haven’t seen any major – any disruptions actually from that, so we’ll see as it settles in if there’s any flow adjustments.
From that perspective, it gives us an actual opportunity now to really hit the ground a little harder and consistently, and that’s why we even stepped up our new advertising in the marketplace. I hope you saw the ads.
We think they’re pretty good and we really have something to talk about. So from that perspective, we think a large part of those – the synergies, there’s a few that will come about that we know about institutionally, et cetera.
But other than that, I think that the large part of the front end of what we needed to do in the business is done and integrated. And so right now, we want to get really back to work and make sure that we can gain back our sales momentum and book some more business.
Andrew Kligerman – UBS Securities LLC
So if I’m understanding what you’re saying, Jim, then any net – any outflows would be very modest going forward with respect to the synergies?
James Cracchiolo
Yeah. I mean for what we might have caused from a disruption.
But as I said, there are some larger entity, parent legal entity type of business that we know will come up and do from these arrangements when we did the deal, but again, those things we know that we’re gaining new business in the Institutional channel with higher fees and mandates, as we did in the second quarter. And so we’re looking over the next number of quarters for that to be offset and start to grow again.
Andrew Kligerman – UBS Securities LLC
Got it. Like Bank of America or something.
All right. Thank you very much.
Bye.
Operator
Thank you. The next question is from John Nadel from Sterne, Agee.
Please go ahead.
John Nadel – Sterne, Agee & Leach, Inc.
Hey. Good morning, everybody.
A couple of quick ones for you. Walter, I think you mentioned in your opening remarks that one-time items in the quarter largely offset, but I guess I was wondering if we should really be characterizing all of the items that you guys mentioned this quarter as non-recurring.
This is the second quarter of higher Threadneedle comp expense. It’s the fourth quarter of higher UL reserving.
It’s the second or third quarter of higher auto liability reserving. I’m just wondering if you can help us understand where to think about all of those going from here.
Walter Berman
Hey, sure. John, as it relates to Threadneedle, the Threadneedle pattern is different than we’ve experienced because basically we’ve reconfigured the plan, working with the management at Threadneedle to allow it to not be mark-to-market, and you’ll see that impact in 2012.
But there were certain amortization accelerations that are taking place and also a higher amount was granted on the conversion of the older. So you’ll see that pattern continuing possibly for the next quarter and then it’ll go back.
And candidly, it’s not really resulted in appreciably-higher economic outlook; it’s just changed the characterization of it. On the bodily injury, the Auto & Home, yes, it’s continued.
And there, we are seeing encouraging signs, both in severity and in frequency, and we’re monitoring that situation. We are however still booking at the high loss rate, reserving at the level that was from 2010.
If this trend continues, we will obviously revisit that.
John Nadel – Sterne, Agee & Leach, Inc.
Okay.
Walter Berman
On the SOP, that is something – actually that is continuing, and we indicated that from that standpoint; it would continue. And the other factor, of course, was the cat losses which took place, which was way above what we thought, but again, certainly versus industry stands quite good.
John Nadel – Sterne, Agee & Leach, Inc.
Okay. So just a final one – so just a follow-up, on the UL reserving one, I mean we’re at the point where we’ve lapped that higher level of reserving, correct?
So from here, it’s just sort of a run rate.
Walter Berman
That’s right. It started in the third quarter (inaudible).
John Nadel – Sterne, Agee & Leach, Inc.
Okay. Then just a quick question.
I’m curious on the Annuities segment. It looks like your allocated equity to the VA business increased about 10%, maybe 11% quarter-over-quarter, but VA account balances increased less than 1% quarter-over-quarter.
I mean why the big disconnect there? Is that just a matter of retaining earnings and the timing of dividends?
James Cracchiolo
No, it’s more Med we’re adjust on the risk profile on the living benefits, and that was just the way the calculations ran when we did them this quarter. That was strictly based upon that.
John Nadel – Sterne, Agee & Leach, Inc.
Okay. And then the last one for you is just looking out to 2012, I realize you guys will have an Investor Day in a few months, but just an initial view.
If other than upside from the equity markets, if we were to think about upside relative to your 15% ROE objective, where should we be focusing?
James Cracchiolo
Well overall, as you said, we’re going to come forth in a few months and talk to you about how we’re going to move our strategy forward now that we’re going to be in 2012 shortly. And from that, as Walter mentioned in his opening comments, we do see the ability to grow our returns above 15% and we’ll be putting in place a plan that will show how we’ll look to do that.
But we see greater opportunity, as we would say, in the Advice & Wealth Management business. We think we have a good, strong capability overall in our Asset Management.
Our returns, as we de-risk some of our variable annuity business for the outside distribution, will start to reflect some of those opportunities as well as we move forward. And the business will be more, I think, refined.
So again, as you’ve seen in the quarter, we’re getting good growth – good net flows in the Ameriprise channel, but we’re in outflows. But as we reconfigure that business, it’s not going to be growing as quickly because we’re not going through third-party channels, but it will be growing more profitably.
And so there are things such as that as we continue to shift the companies mix. Hopefully, there we’ll also see some changes.
Interest over time will have to start to percolate if we have a growing economy and that will give us a lot of benefits. So we’re going to come back to you.
But we have an opportunity here to build the business, and clearly, based on what we’ve been able to accomplish and execute so far, we wanted to truly show you that we can get and we wanted to deliver to get to the 15% hurdle. As you can see this quarter, we’ve made some really good progress in executing against our plan.
And so the next plan I put together is going to take us into another level. Okay?
John Nadel – Sterne, Agee & Leach, Inc.
Okay. And if I could, one more quick one.
You guys are obviously gigantic money managers, both on the general account side and on the pure asset management side. Just wondering, Jim, yours or Ted’s perspective on what does it mean to Ameriprise if our folks in Washington don’t get it together and the U.S.
is downgraded?
James Cracchiolo
Well, I think first of all, we’re in uncharted territory as a country. When you have a risk-free rate of return that everyone benchmarks off of and we have some of the lowest rates here in the United States for government debt, as well as what that triggers off of around the world, I think we’re going to see some change, particularly if we went into default.
Now hopefully, what we’re talking about now which is not reasonable, even from those standards as I mentioned, is a downgrade. So I think if I apply that to Ameriprise, clearly, we have good liquidity situations as we look at the capital markets with debt, et cetera, we’re in a good situation.
That’s nothing that we have to fund on a short-term basis. We have good flexibility in our portfolios where necessary, if various clients are needing liquidity or get concerned.
But our clients actually handled the financial crisis, which was much more we think was much more significant than that regard well, and we maintained strong asset flows and maintained stability. So we’re not expecting anything along those lines.
But you know what? We’ve made sure that some of our portfolios have moved a little to the shorter-term and the investment philosophies that Ted and his team, they’ve taken a conservative posture in the quality of assets that they’ve been investing in.
We feel good about the owned assets that we have. So we’re going to be like everyone else really monitoring the situation and adjusting when necessary.
But we don’t see anything significant, particularly as we see this unfolding right now. Longer-term I think is a larger issue for the country.
And that will depend on whether Congress and the President come together with something that’s meaningful rather than just lifting the ceiling. But I think that’s going to affect all of us, not just financial companies, but the overall economy.
And you know that from your own analysis and working with the industry.
John Nadel – Sterne, Agee & Leach, Inc.
I appreciate your views. Thanks very much, Jim.
Operator
Thank you. The next question is from Jay Gelb from Barclays Capital.
Please go ahead.
Jay Gelb – Barclays Capital, Inc.
Thanks. Good morning.
I was hoping you could talk about the sustainability of the net inflows in the Asset Management business. There was some benefits there from the reinvested dividends and you’d mentioned that the Threadneedle sales can be lumpy.
So just wanted to get your sense on that going forward.
James Cracchiolo
Okay. Well, one of the things – let me start a little with Threadneedle.
I know in the first quarter, we had to really comment on how that moved to a bit of outflows. There was some increased redemptions that we saw out of the European area, as well as holding on mandates for investment based on what was happening in Japan and the Middle East.
And so we had mentioned that we saw stability coming and we saw improvement as we moved out of the April timeframe. And so that’s what we’re seeing now.
And so Threadneedle continues I think to gather good mandates. We’ve got our first mandate in Asia this quarter.
We’re ramping up our activities there. We think there’s good opportunity.
Same thing with flows coming in now from the Middle East again. So the activity has increased.
Now third quarter’s always a little slower, as you would know, and but having said that, we didn’t see the volatility that we saw and Europe is settling a little more with what happened in Greece. So hopefully, that will be a bit better as well as we move forward.
Retail flows picked up strongly, and so you can never predict that because you’re working through intermediaries, et cetera of what that is, but that looked nicely as a turnaround from the first quarter. With Columbia, as we said, we were actually picking up sales nicely and sales were growing in June; became a bit more of a volatile period for equities and I think you saw that across the industry.
July looks like that stabilized again and improved. But you know, listen, we have some things going on right now in the economy and with the country, and so I can’t predict what the flows will be as we look over the next quarter or so.
But I feel good about the progress we’ve made with the fund families. We’re now putting the advertising, the wholesalers are to work with one set of group of funds.
Their clients don’t have to deal with the proxies and the mergers and et cetera. And we’ve got to be hard at work here.
So this is going to take some time to gain the ground that we want. So again, I can’t predict that we’re going to be in inflows and retail in the short-term, but I’m hoping that we’re going to show continued improvement quarter-to-quarter.
Institutional, I do feel good about the pipeline there. We know that we’re going to lose some mandates from what we had previously.
But we know that going in and so we’re really working on mandates that have good fees, mandates that we have strong investment performance. We have a much bigger and better lineup than we ever had with the combination of the two.
We have a stronger Institutional sales team on the ground now gaining traction. We’re off held – we’re out of the hold period on the consultants across the board, so we’re seeing things pick up, but those things continue to take time to build and get in front of people.
But so far, the tractions been pretty good and I think you saw that in the second quarter building from the first quarter. So I can’t sit here and tell you I can predict the flows; I can just tell you that I think what we have in place is great, great capability, terrific performance, a motivated team and we’ll deal with the economy and the markets as they unfolded.
But again, I think we are someone that could be successful in the marketplace.
Jay Gelb – Barclays Capital, Inc.
Okay, thank you. And then next issue, on the property casualty personalized insurance business, can you give us a sense of strategically why it make sense for Ameriprise to be in that business.
It appears to be subscale and has added some volatility in recent quarters.
James Cracchiolo
Okay. Well, I think you have to look at the components of – so this is a direct affinity-type model and asset level.
It is not subscale. And in fact, it’s come over the last few years into a scaled situation.
It’s actually one of the better and larger providers in that light and it’s a very attractive space. And if you look at many of the large companies, they’re starting to figure out whether they need to be there looking at Progressive and others.
We were just rated in the top five and that’s ahead of all the majors in Auto & Home in client satisfaction, which is pretty significant and there’s only a few names there that are more smaller and probably less visible to the broader public there. We actually have a very good model, a good underwriting model.
So even if you look at the major storms that hit the Midwest and the South and the billions that it cost the industry, we had $15 million in cat losses, so that’s again quite manageable through a very volatile period. In the Auto area, just so you know, in certain areas, you do get spikes in bodily injury or PIP, et cetera.
It’s across the industry. We’ve actually now put in rate increases in those areas and we’ve adjusted where we underwrite even a bit more.
But Walter said the claims have come down. That was sort of a quarter, quarter-plus blip, so we don’t know whether that’s – it didn’t look like or realize to be at this point based on the next two quarters.
So I wouldn’t say that one blip should be a big black mark because we had good earnings from this business over multiple periods. We scaled it up.
We’re getting good returns on capital there. We got good underwriting.
We save our clients as they take these policies on average $500 a year based on and we have very high satisfaction. And so we think it is a complement.
It’s not necessarily an integrated part of the court to point you reference. So strategically, we do have flexibility as we think about it, but we think it’s a nice complement.
It gives us some diversification and we think it does provide a good consumer benefit that we can gain relationships over time with. But as, of course, we’ll always evaluate it if things change, but outside of this sort of blip period, we got a good business here and I think one that as we continue to invest and scale up will be worth a lot – and it worth a lot of money today.
Jay Gelb – Barclays Capital, Inc.
Thank you for the answers.
Operator
Thank you. The next question is from Alex Blostein from Goldman Sachs.
Please go ahead.
Alexander Blostein – Goldman Sachs & Co.
Hey guys. Good morning.
So Walter, wanted to kind of go over some of the margin numbers for these one more time. So I think last quarter in Asset Management, you guys already had sort of the transfer agency arrangement in place as gross versus net, as well as the Portfolio Navigator change.
Yet, I think last quarter, you kind of stuck to the 25% operating margin goal for 2012. So what’s changed sequentially?
Walter Berman
I don’t think anything has changed. I think we just are making you aware of the impact factor of those two items.
And we’re just trying to – just recalibrate from that standpoint. Nothing has changed.
It’s just as these are big gross-ups and they have an impact on margin. That’s all we’re letting you know.
James Cracchiolo
One thing I’d just add to that. Walter’s 100% right.
If you look at the gross-ups, it’s in revenue and the same amount goes into expense. There’s no PTI.
But when you look at the margin, particularly off the business as it including grew from even last year, it actually squeezes the margin more because of that as an in and out. Columbia used to have that as a net.
And finally, as we looked across the industry, again, we adjusted it to be industry standard. But when we actually came out with a GAAP margin, we didn’t have that factored in.
We didn’t realize the significance of it. And the same thing as we adjusted the EPN.
Now having said that, as I mentioned to you and Walter, that’s why we’re starting to look at adjusted margin as the key number. And when we look at the adjusted margin, that comes out.
So as you said, like this quarter, we’re at 34.9. We have not adjusted the goal or anything that we want to get that to close to 40%, even though the GAAP margin.
But we noticed that many of you are tracking the GAAP margin against the 25. So we wanted to highlight that as the business grows, we would actually get more squeeze based on that gross-up of just revenue and expense.
And it’s just a net wash to zero margin. But on the adjusted, we haven’t changed anything, because that gets washed out and so we’re still striving to get to that 40% mark rather than where we are today at the 35%.
Does that help you?
Alexander Blostein – Goldman Sachs & Co.
Yeah. That’s very helpful.
Thanks. And then on Threadneedle, so I guess you guys eliminated the mark-to-market impact in comp?
And starting 2012, it’s going to be more of a fixed number? Is that higher or lower from the run rate this year?
Walter Berman
No. What’s going to happen, it’s going to take on the characterization, like options or anything of that nature.
It’s not going to be in a mark-to-market category. So it would be substantially muted.
And we’ll still have the amortization expense, but that has always been in there. But you’re not going to have that lumpiness as you saw back in 2010, 2011.
So that’s what we did. We just redesigned the program to allow us not to go to mark-to-market.
Alexander Blostein – Goldman Sachs & Co.
Got it. And maybe shifting gears a little bit, net interest income, it sounds like so obviously short-term rates is a big drag for you guys and a lot of other folks.
If you look sequentially, some of the bigger drags I guess came from AWM as well as Annuities business. If you think about the risk I think going forward, as long as the short-term rates don’t go up and the shape of the U-curve doesn’t change, how low do you think this could go?
What’s the risk over the next year-plus?
James Cracchiolo
Well, on the short-term side, on the sweep accounts, I believe we’re at a reasonable level where it’ll stay at that. And the long race is where the problem is on our asset earning rate.
Obviously, as we replace and redemptions take place and maturities take place, we’re investing at lower AURs. So that will continue and will build.
And again, if the U-curve does not change. So it’ll continue.
As we’ve indicated I think previously, we will have an impact that’s manageable, but we will have an impact. And you’re seeing some of that in this quarter.
Alexander Blostein – Goldman Sachs & Co.
Have you guys ever quantified it?
Walter Berman
Alex, we didn’t hear that.
Alexander Blostein – Goldman Sachs & Co.
Have you guys ever quantified the impact, so let’s say again, like knowing what you know about reinvestment and the rates going out, let’s say they stay the same, what would be the impact?
Walter Berman
I think – actually I don’t think we’ve quantified it, but as again, it depends on how long it goes and what level. But you would see, and I think we’ve talked about it in the $30 million, $40 million range.
James Cracchiolo
And we’ll update all of that based on what unfolds here over the next quarter. So definitely by the analyst meeting, but maybe probably by the next time on the third quarter.
Alexander Blostein – Goldman Sachs & Co.
Understood. And then last one for me –
Walter Berman
You know that’s an annual number I was giving you – I just wanted to – okay.
James Cracchiolo
That was an annual number Walter said, and that was done a while ago.
Alexander Blostein – Goldman Sachs & Co.
Got it, thanks. And then just a last one from me on capital management.
Jim, so you obviously think the stock is pretty attractive here. How do you think about the pace of deployment in the new $2 billion buyback?
Same run rate, kind of $300 million to $400 million a quarter? Or do you think there’s an opportunity for you guys to step up a little more?
James Cracchiolo
Well, what I would say is, you know, as you saw, we started when we started the program, and we started where we saw an opportunity. And then we slowed that down during the latter part of last year, and then we accelerate it again based on what we saw happening with the value of the company as well as the flexibility we have.
So I’m not going to pigeon hole it to a quarterly number. But what I would just say is the stock is attractive.
We have capital. We also will make sure that we look out for good opportunities.
But we have the flexibility to do what we think is appropriate to return to shareholders. So let me just leave it at that, not to be tied to anything that won’t give me the flexibility to operate.
Alexander Blostein – Goldman Sachs & Co.
Understood. Thanks, guys.
Operator
Thank you. The next question is from Suneet Kamath from Sanford Bernstein.
Please go ahead.
Suneet Kamath – Sanford C. Bernstein & Co., Inc.
Thanks and good morning. A couple of questions.
First, I just wanted to follow up on Alex’s question about the Asset Management margin. Clearly, the reason that a lot of us model to GAAP results is because that’s the way that you report it and that’s also the target that you’ve established.
So I’d just like to be clear, is the message that we’re getting today that because of these I guess changes, that the new 2012 Asset Management pre-tax margin target on a GAAP basis is 23%? Or are you saying that these changes are causing a 200-basis-point drag but you still think you can hit the 25%?
Thanks.
James Cracchiolo
So I’ll start, Walter wants to complement. Based on this extent of the gross-up that we’re doing with the TA, which is pretty significant, and I don’t think we realize that impact against the margin target when they made this adjustment to tell you.
It is a 200-basis-points change against that goal from 25% to 23%. So if you look at it now, if you pull that out and we’re doing it the way when we set up the goal even last year, you would find that the 19.4 number would go up adjusted just by pulling out the gross revenue and the expense based on making that change.
So the goal in itself hasn’t changed. The accounting based upon what we made the change has caused the GAAP margin to get compressed.
But the range of improvement from when we started, if you pull out that accounting change, would still get you to 25%. So we can look at it one of two ways.
We can report to you every quarter what that gross-up is and adjust for it so that we can say 19.4 becomes 20 some, 21-plus percent against the 25, or we can say to you that’s the way we’re going to report it and the 25 is really 23. Now over time, what I would hope we would do is talk about the adjusted margin number and I would hope to say to you that 35% I want to get to 40%.
But you can see the difference even there on a grosser net is due to that in and out. So I would say, Suneet, if it was helpful, we would say to you if you want to track it based on reported, that the 25% is 23%.
But again, I have no problem, or Walter has no problem, if you want to stick to the 25% that we try to identify what that gross-up is every quarter and report it to you. So it’s one of two ways, but –
Walter Berman
The only thing I can really at this end point, is when we did set that up and we disclosed it all, those programs were not in – understood certainly EPN was not there. So when we evaluate it, and while we are tracking, and certainly we are beginning to see the drag of that.
And as Jim said, we’re going to certainly try and go from the 34.9% up to 40% and certainly increase our margins, but if the EPN program is quite a large program, and the transfer agency we announced, we made the alignment last quarter. But the EPN is the larger of the issue, and that is large.
And as it’s large, it certainly is very beneficial for the company, but it does have an impact on the margins. So we’re just giving that information.
James Cracchiolo
I just want to be clear for someone. If it’s not clear, maybe we have to do a little spreadsheet on it.
We have not changed the goal from when we started against the base business as it was done when we acquired Columbia. EPN came in last year, and when we actually acquired Columbia, we realized that their accounting was not including it on a gross basis the way it is that we want to adjust it like we used to do it.
So that’s really what occurred after we set the target. Remember, we set the target before we ever closed on Columbia.
And so we’re just trying to be clear with you, but the goal and the improvement over what was the core of the business has not changed.
Suneet Kamath – Sanford C. Bernstein & Co., Inc.
Okay. I guess I’d vote for more detail just until we get to maybe the Investor Day this year, and then you just give us the adjusted margin target so we can all kind of talk about what I think you guys are referring to as the more important measures.
That would be kind of my advice.
James Cracchiolo
Well we’ll be happy to do that. We understand that this is something we’re introducing.
So we’ll wait for the financial community, we’ll show you what everything looks like there, but we’ll continue to report with the adjustments that we’ll provide you as commentary.
Suneet Kamath – Sanford C. Bernstein & Co., Inc.
Okay. Excellent.
And then I guess on the capital side of the picture, I think the prepared comments – in your prepared comments, Walter, you talked about 90% of your I think operating earnings being sort of re-deployable capital. I guess should we view that as sustainable?
Presumably, what that would imply is that all of your Asset Management and Advice & Wealth earnings are re-deployable and a pretty good chunk of your other business earnings I think maybe upwards around 75% for the Protection Annuity business is re-deployable. I mean is that really sustainable?
Or should we expect that 90% to come down because you think at some point, you’ll start to reinvigorate some of the sales growth?
Walter Berman
All right, okay. Let me answer the question this way.
I do believe it is sustainable and what drives it is the shift that we are seeing as we continue to generate substantial earnings growth in our AWM and our Asset Management business. We also are gaining the benefit the markets being where they are, are certainly lowering the requirement for the Annuities business.
And so from that standpoint, if the current trend line stay was the market staying in these ranges, I believe that is sustainable with the shifts we’ve seen in our mix. And that’s why we report it that way because we used to talk you about as new business is actually a lot of activity going on, the total business which creates that 90/10 situation.
So I do believe that it is sustainable in the current external environment.
Suneet Kamath – Sanford C. Bernstein & Co., Inc.
Okay. My last question for Jim is, so given the pieces that we’re talking about here, significant amount of excess capital generation every quarter, a significant amount of excess capital on the balance sheet, even with the capital re-deployment that you’ve done, and then a stock price that’s obviously a lot lower than where it has been earlier.
Would you consider doing something like an accelerated buyback on the assumption that you still have debt capacity if you came across an acquisition opportunity, given where your debt-to-capital ratio is? Thanks.
James Cracchiolo
Excellent question. We, as we said, we’re continuing to analyze our situation.
I mean the stock has pulled back a lot in the period. We’re looking at the market environment, looking at opportunities and these are the things that we have cross-discussed with our Board to make sure that we’re taking everything into account for the best overall return over time to the shareholders.
So, Suneet, your hypothesis, your evaluation, is right on. Those are the things we think about and those are the things that we’ll continue to have discussion on.
So I’d like to probably leave it at that at this point in time knowing that I’ve received good input from people such as yourself.
Suneet Kamath – Sanford C. Bernstein & Co., Inc.
Okay, thanks.
Operator
Thank you. The next question is from Eric Berg from RBC Capital Markets.
Please go ahead
Eric Berg – RBC Capital Markets
Thanks very much, good morning. I have just one question.
I think earlier, Jay was mentioning that, and I noticed this too, that the Columbia close on the retail side were helped in a very big way by this reinvestment of dividends, a level of reinvestment that was much higher than what we saw I think in most of the other quarters, certainly than in the year-ago quarter. Now I understand that this is something to do with again VPN, VP – variable annuity product, as well as with the timing of dividends.
Two questions. What is really going on here?
And can we suspect – can we anticipate that this will be sustainable? Thank you.
James Cracchiolo
Well, Eric, I’ll start, then Walter. I think on the dividend side, it is sustainable based on many of our clients have reinvestment plans appropriate, particularly as we look at the VIP funds in the Annuity area, et cetera.
And you know we have a very good business there. So that’s a real positive versus the industry that there is a higher level on those distributions that come out.
And so that’s one thing. As far as the number by quarter, I’ll ask Walter because he can probably answer that a little better from what we’re tracking.
Walter Berman
Yeah, the majority of that is the variable annuities and it is concentrated more in the second quarter. And that is pretty much an automatic from that standpoint, so certainly is sustainable.
And as you’re aware, we actually do earn money on this, so it – but it is something that we anticipate. The other – the ones coming from a non-VPO spread, but again, the concentration is in the second quarter and a little bit in the fourth quarter.
Eric Berg – RBC Capital Markets
So, Walt, are you saying in other words, if I could just check my understanding of the response, are you saying that we will see it in the future but it is, let’s call it, seasonal meanings tied to the quarters two and four?
Walter Berman
Yes.
Eric Berg – RBC Capital Markets
Thank you.
Walter Berman
Thank you.
Operator
Thank you. The last question is from Tom Gallagher from Credit Suisse.
Please go ahead.
Thomas Gallagher – Credit Suisse
Good morning. Just a few Asset Management questions.
The – so Walter, I just want to make sure I got the margin numbers straight in terms of the 23% target. So the corresponding number this quarter would have been the 19.4% margin, which then if we normalize the Threadneedle unusually-high expenses, would have been 20.4%?
So you’re expecting 20.4% this quarter to get to 23% by the end – is it by the end of 2012 or is that the average of2012? I just want to make sure I have that math correct?
Walter Berman
All right. So obviously on the math, the 19.4% is the start point.
And then we talked about the 200 basis points that is relating to the gross-up, which if that wasn’t there, would have been 200 basis points higher. The Threadneedle, I haven’t actually done the calculation on the seven, I’ll be candid.
But it looks approximately right from that standpoint. As I indicated, we’ll get a little bit of carryover into the third quarter on the Threadneedle again.
And then it will dissipate and go into a normal pattern. So if the math is right on the seven, yeah, I guess you can take it and add it to that point.
Thomas Gallagher – Credit Suisse
And when would you expect to get the 23% by? Just from a timing standpoint?
Walter Berman
The 23% was, we were going to achieve that in – if we’re using 23% now versus 25%, we said we would achieve that in 2012 timeframe.
Thomas Gallagher – Credit Suisse
Would that be the average in 2012?
Walter Berman
It’ll be the annual return in 2012 on the PTI margin.
Thomas Gallagher – Credit Suisse
Okay. And just to clarify, the change that we’re seeing here, that’s resulting in higher revenues but not lower profitability?
So the profits are the same as you thought, but the reported GAAP revenues are higher? Is that the main difference in terms of the (inaudible) accounting?
Walter Berman
That’s exactly – we grossed it up. That’s right.
We grossed it at revenue; PTIs did not change at all.
Thomas Gallagher – Credit Suisse
Okay. And then just on the flows.
Jim, you had mentioned in July things had gotten a bit worse in June, but then you saw it stabilize in July. By stabilize, do you mean things have improved from a net flow standpoint from June into July?
Or are they running at the same level? And also just wanted to clarify, was that a comment on just the U.S.
or was that broader? Because I’d be curious if you’re seeing any changes in Threadneedle just because of what’s going in in Europe particularly into July.
Thanks.
James Cracchiolo
Great. So thank you for asking for the clarification.
Yeah, I guess it could be misinterpreted, as you actually just said it. When we meant it went back to the way it was prior to June.
So it was improving again and not getting that ratchet effect of what we saw in June. And that was really talking domestic.
From an international perspective, in July, we don’t – I don’t have a lot of that information yet. But it looked like it continued good flows through the June period.
It didn’t look like June had the effect that we had in the U.S. And so I can’t tell you what July looks like in Europe, but I’m not expecting any radical change.
And hopefully based on things settling down in Europe with Greece, hopefully that will become a little more stable.
Thomas Gallagher – Credit Suisse
Okay. Thanks a lot.
James Cracchiolo
Thank you.
Operator
Mr. Cracchiolo, I’ll turn the call back over to you for final remarks.
James Cracchiolo
I want to thank everyone. I know we had adjusted the time today.
We know that there was a number of other earnings releases coming out, so we wanted to give you an opportunity in case that you were double booked. And we hope that we’ve been clear with the information we’re providing.
We’re trying to give you more. You can look at what we’ve given you in the supplements so that you can do your analysis.
Alicia is going to be around working with you if you have any other questions or comments. I will leave you with this thought.
I know it’s always hard quarter-to-quarter and there’s a lot of ins and outs last year. So for you to crack some of those against this year, I can understand some of the questions and some of the differences.
So we’re going to try to get better and be clearer. Last year, there wasn’t a lot of going on with the DAC unlockings and the mean reversions and the market changes.
But we feel like we’re getting to a more normalized period now. We feel the business is operating quite well.
As I said, you can’t market-to-market, day-to-day. There’s always going to be variations in the businesses that we’re in, but the trend line if you look over the quarters, if you look at what we said we wanted to do and how we’re doing it, we are executing.
We are getting good results. The profitability in these segment, whether even at the margins were at, et cetera, are quite good compared to the industry, quite good compared to generating and the type of scale businesses we now have.
And so we feel good, and as we’ve said, we try to communicate to you that we have good flexibility. We’re one of the few people buying back stock at this level if you look at our cap level and look at our capital, and having the flexibility that we have today, though the environment has proved out there.
So we’ll continue to look at the best ways to deploy that, the best ways to continue to invest for growth. We don’t want to stop at where we are.
We feel we are on a good trajectory. We want to continue that, given markets are reasonable and hopefully our government will do their work as we’re all trying to do so that we can get back to a good step.
So thank you and if there’s anything else, please let us know and we’ll continue to try to communicate as best we can. Have a great day.
Operator
Thank you. Ladies and gentlemen, this concludes today’s conference.
Thank you for participating. You may now disconnect.