Good morning and welcome. My name is Suneet Kamath. I am the U.S. life insurance analyst at UBS. Today, I have the pleasure of introducing our first company presentation, Ameriprise Financial. Representing Ameriprise are Chairman and CEO, Jim Cracchiolo. We also have Chief Financial Officer, Walter Berman, and Alicia Charity, Senior Vice President of Investor Relations. The format of this presentation is going to be, I guess, a fireside chat without the fire. Jim is going to kick us off with some prepared remarks, then we will spend the rest of the time on Q&A. Just by way of background, about four and a half years ago, I had the pleasure of introducing Ameriprise at another conference. The time was May 2009, and we were just starting to see some of the evidence of some of the recovery post the financial crisis.
At the time, in my intro, I made a statement that if we look back a few years from then, this is a company that is going to have a track record that is going to indicate that they did a lot of the right things at the right time. Based on where we sit today and with the benefit of hindsight, I think it is fair to say that was, in fact, the case. Over this period, the company has increased its earnings contribution from high multiple, high free cash flow segments to over 50%, close to 56% in the most recent periods.
Second, the EPS growth rate has been about 182%. The ROE of the company has increased dramatically to somewhere around 17%, which I would argue is one of the highest in the life insurance space, and relative to the broader financial services sector, quite attractive as well.
As a result, the stock price has increased by about 263%. That is versus 140% rise for the life sector, 54% for asset managers, and 81% for the overall S&P 500. Obviously, those are very impressive statistics. They are also backward-looking. I would argue that based on where we sit today, the stable of businesses that the company has assembled, as well as its strong capital position, there is quite a bit of runway left ahead of the company and the stock. Those are our thoughts. To get Ameriprise's perspective, I am going to turn things over to Jim. As I mentioned, we will have plenty of time for questions.
Thank you, Suneet. Good morning, everyone. I appreciate you taking the time to hear a bit more about Ameriprise. What I would like to do today is just give you a little bit of an introduction to the company, then really take some of Suneet's and your questions. Clearly, we feel that Ameriprise is well situated today as a retail financial services firm, a strong retail financial services firm, branded really against our consumer value proposition. We go to market two ways. First is in a wealth management and advice business. We are the leading financial planning company in the U.S. We have more advisors, approximately 10,000, that do financial planning, and focus around the client's entire needs, particularly the largest need of how they prepare and manage themselves in retirement. We think this is one believable growing opportunity in the U.S.
About 10,000 people every day are moving to retirement that are 65 years old. Clearly, they need someone to serve them and help them to achieve their retirement goals, manage their income, to achieve how they're going to live in 30 years in retirement. We today are a leader in the retirement market in that case. We are also a leader, and we want to continue to grow and expand the space in asset management. We are a global asset manager today. In the U.S. and the U.K. example, we have top 10 positions. We're a top 10 provider of mutual funds in the U.S. under the Columbia brand, and here in the U.K. on the Threadneedle. We're putting our asset managers together in a way that we can actually penetrate the global market more formally. We again see this as a unique opportunity.
We have good diversified platform, good investment performance. We have the capability to expand our distribution through multiple channels, and we've been growing our institutional business now, both here in the U.K. and the U.S., as well as in a number of regions around the world. We also feel very critically that we are a good solution provider. We provide solutions to our own channel. We have provided solutions as part of our makeup from our acquisition of Columbia from Bank of America for the U.S. private wealth channel, and we do it here in the U.K. for players such as Zurich. We really feel that we can be a larger solution provider to the marketplace, particularly for global institutions. We're continuing to invest and focus on that opportunity. When you put that together, as Suneet mentioned, we're able to derive very good, strong returns.
Now, as part of our makeup, we're a protection insurance provider. We only provide our protection annuity products to our own retail clients. That gives us a very good, strong profile, very good behavior. Our advisors are financial planners. As we look to complement our businesses for what we manufacture beyond our own wrap programs and asset management products, our solution set for our annuities and our protection products are actually part of a solution set. Therefore, our retention is very long. The behavior of our clients are very good. That's why through, whether it's the financial crisis or the change that has occurred in the industry, we have been able to generate very good, strong, consistent returns in this business. It's a great complement to our business. When you put the businesses together, we have a diversified financial services platform.
We can generate good, strong, consistent returns. We can provide good liquidity overall to manage market and volatility situations and how we manage our balance sheet. We have good capital positions. In fact, based on our earnings, about 90+% of our earnings are free cash flow. Over the last number of years, we've been able to return significantly to shareholders through buybacks and increasing dividends. Still today, even after those strong returns to shareholders, we still have more than $2 billion of excess capital against our capital base of approximately $10 billion. From that perspective, we think our continued growth coming from our less capital-intensive businesses, our wealth management, our asset management business, we will continue to generate good free cash flow and earnings increases. Our return on equity is roughly, as at the end of the second quarter, hit 17.9%.
We feel that that return on equity could continue to grow, and we can continue to generate what we think will be good return to shareholders over time because we're focused both strategically on the right areas. We have the ability to expand our businesses, investing organically, and we also from our past, have been able to do acquisitions with the use of our capital. Threadneedle was an acquisition we did about 10 years ago. We did Seligman Asset Management, we did Columbia Asset Management, and we did H&R Block Financial Advisors. We've been able to generate very strong returns on those acquisitions. In complement to organic growth, we also know at the right time, with the right opportunity, we have the capital, we have the free cash that we can actually do complementary acquisitions that will even boost the organic growth.
Great. Thanks. We'll take as many questions as we can. We have a decent amount of time. I'll start, and then we'll see where it takes us. Maybe starting with the asset management business, if we could. The net flows at Columbia, particularly on the retail side, have been challenged in the past couple of quarters. Can you give us a sense of what specifically you're doing to turn the flow picture around there? Maybe when do you think we could move into a positive sort of flow situation on the retail side?
Great. Thanks. We'll take as many questions as we can. We have a decent amount of time. I'll start, and then we'll see where it takes us. Maybe starting with the asset management business, if we could. The net flows at Columbia, particularly on the retail side, have been challenged in the past couple of quarters. Can you give us a sense of what specifically you're doing to turn the flow picture around there? Maybe when do you think we could move into a positive sort of flow situation on the retail side?
We've been experienced two things. One is what you consistently see in the industry where there've been a level of outflows over the period from the retail consumer. Now it's moved from equity to fixed income. As you know, over the last number of years, there've been strong inflows into fixed income, and that market has backed up recently. We've been affected somewhat by that. In addition to that, I think what Suneet is referencing more so is since we did the Columbia acquisition from Bank America, as you would imagine, Columbia worked closely with Bank America. They were their in-house provider for the entire wealth management business, the U.S. Trust business, as well as institutionally in Merrill Lynch. With that, there were many of those relationships that were part of bank relationships who are part of the proprietary business.
Towards the end of the integration of those activities into now what is Ameriprise, you usually have a run on some of those assets. As U.S. Trust diversifies a little more, as they start to look at their overall portfolios as not having an in-house manager anymore, but an external manager, as well as those relationships with Bank America, with their institutional clients, you will suffer some of those outflows. We also, as part of that acquisition, picked up the distribution for what they had as one of their largest sub-advisors, which was Marsico. We have experienced outflows there. That is running its course, and that has affected our overall retail flows as well as our institutional. Today, our institutional pipeline is building strongly. We are starting to get good mandates and good funding.
As you would imagine, anytime you do an acquisition, you get put on hold by consultants. That we got taken off hold last year. That pipeline is building and we are starting to get good fundings there. In the retail business, we are also starting to establish ourselves more formally in the retail third-party channels. We see a strong pickup in some of our focused areas with our focus firms. At the same time, we have a large installed base with U.S. Trust that we have to manage, as well as with some of the Bank America institutional clients. We think that is starting to calm down, Suneet. Most recently, the effects have merely been a movement away from some of the fixed income product, particularly at U.S. Trust, rather than just the erosion of our share of the business.
It has been just the move of a cycle out of fixed income. We have experienced something very similar here in the U.K. When we purchased Threadneedle from Zurich was a large installed base. Even though we maintained very good relationships over the last decade with Zurich, we still experience a few billion GBP of outflows every year. We have diversified Threadneedle's business to third-party institution. We are getting very strong inflows in both of those categories in diversified product. Still based on an installed base of having the proprietary asset management business of a large provider, we suffer a few billions GBP of outflows every year just from closed books and rotation out of some of those assets. That is what we are going to still have as part of our makeup with Columbia, with U.S. Trust and Bank America.
We are diversifying who we provide to, the product stream, and the places to play in. We think over time that will overtake it just as it has at Threadneedle here.
It seems that the expansion into these new channels, third-party distribution channels, as you mentioned, is going to be key. Can you talk a little bit about what specifically you're doing to sort of increase your shelf space in those channels?
First and foremost, I think to be a player and be competitive, you have to have good investment performance. I think if you look at the makeup of our product set and the performance that we have, I think you'll find that in many categories, we have some very strong performance that we can compete. Second, it really is establishing the distribution capabilities in the key third-party channels. Since our acquisition, what we've done is re-established our wholesaling, re-established our relationships, and we've been working with many of these houses now to get established back onto their platforms and their capability, diversifying from some of the products that were once there as part of Columbia. I think we're making good headway. It just takes some time. That's the same thing with the institutional channels. Very clearly, we've gotten on the consultants' radars.
We've gotten approved. We have many more products in the portfolio, in the toolbox now to bring to market. The last thing we're doing is taking the complement of the efforts of Threadneedle and Columbia together and now coming out with global product. We're quite excited because we got some great talent and investment processes and some makeup of some of the core product capability that we're bringing together. As an example, we just recently launched some of our emerging market activities. We'll be launching global asset allocation, global bonds, and a number of other things over the next quarter or so.
I'll just keep looking up to see if any hands go up, I'm going to just keep going.
Yes.
Go ahead.
Can I just ask, how long did it take you to turn around the momentum at Threadneedle, and how long do you expect it to take in the U.S.?
Threadneedle, what we did really with Threadneedle is when we purchased Threadneedle, we knew we had an investment shop. However, they weren't invested in enough to really expand their distribution or their product set. What we did is over the first few years, help invest so that we can expand their product group. We can also bring in the right talent in these particular new areas, but then establish our distribution. Today, as an example, Threadneedle is probably the fourth largest U.K. provider, particularly with a strong emphasis on retail here in the U.K. market. We've been growing nicely in Europe and now the Middle East, and now we've just expanded our efforts and established regional activities out in Asia.
It does take a few years for you to start to penetrate the third party, establish the breadth and depth of the types of skills and the people that you need to do that. Columbia was a very large asset manager. The particular emphasis they have was really to support Bank of America's activities as they started to diversify into third party. What we're doing now is in combination to what we had as our own asset managers. We're accelerating that investment into the third-party scene, but maintaining the strong relationships that Columbia has with Bank of America, U.S. Trust, as well as with Ameriprise. Yes.
How important is the branding between Threadneedle and Columbia? Are you actually going to reconsider how you brand it all?
Well, we know very clearly, Threadneedle here in the U.K. has a good brand that's represented, and we know that Columbia is establishing a stronger brand in the U.S. What we're doing right now is really focused on that question. We're doing a lot of branding work right now to see how we'll combine the names of the as we make this a more formalized global asset manager. We'll probably make some adjustments as we go forward.
Okay.
Can you touch on the net investment income with yield curve steepening around the world and how it's going to impact it?
Okay. Well, I think what I would probably say is we're situated pretty well overall. Let's say rates continue to stay low, even in the long side and the short side. Next year would be a point at which that pressure that we've been facing, the headwinds, would actually turn around a bit. Now, as the long-term rates start to back up a little, it does offer us a longer-term opportunity. Walter, maybe I'll let you speak to that.
Yeah, this is two areas. If you go to on the fixed annuity side, we have a repricing of a fairly large block that was in the latter part of 2008, 2009. The block that was sold through the outside distribution channel has a 3% minimum guarantee, so obviously that would be priced in that range. The bulk of it was really on the inside channel, which has 1.5% minimum guarantee. The average rates on those are around 4%, 4.5%. We obviously are quite careful in making sure we're competitive when we adjust. We have formulas that do that. We will then pick up a margin situation, a spread situation from that standpoint and reprice it to be competitive. Again, we have to look at where the market's going to be at that particular junction.
We also have been on the short-end duration, we'll start picking up the benefits of it, and we just then have to gauge the lapsing and the other things. Right now, it's fairly competitive. That's the long end. On the short end, we actually have a substantial amount of sweep money that is in our brokerage account, close to $17 billion that is garnering only around 35 basis points. That is a huge potential for us. We're not anticipating that's going to be at a quick run right now, we have that opportunity. We have mostly played on the short side of duration, we're in pretty good shape there, and we'll start picking it up.
Back to asset management. You had mentioned in your comments potential acquisitions. I think with Columbia and Threadneedle, you have most of the style boxes checked off at this point. Can you talk a little bit about what you would be specifically looking for in an acquisition?
Yeah. Well, I think, again, to your point, we're not out there aggressively saying we're going to acquire, as we look around, there are always opportunities uniquely. I'll give you an example. We looked at some potential acquisitions out in Asia. We didn't see anything that really suit the bill. Now we're building our regional offices, we're setting up investment processes, et cetera, and we have the ability to do that. What we're saying is if things come along that would be complementary, that would expand some of our products in certain key areas or expand our distribution in areas, we'd be very open to do that. We're not looking just to do another large acquisition to merge that in.
Got it. Maybe shifting to advice and wealth management. I think the story there, as it relates to the margin, has been one of the positive surprises out of the company in the past couple of quarters. I think we're what, 14%-ish right now, at least in the second quarter. Can you talk a little bit about where you think that margin could go over time?
Yeah. One of the things we're very excited about is the growth of our advice and wealth management business, which has been growing by double digits. We actually feel there's a significant opportunity because we're a unique channel in the U.S. We're not part of any major owned banking institution. We're independent in that sense. We also have a culture very much focused on a client orientation around financial planning advice. Again, a little bit differentiated from just being a brokerage rep, let alone working in a discount house. In that regard, we feel there is opportunities for further growth, absolute from a revenue, but also from a margin perspective, twofold. First and foremost, is driving increased productivity for our advisors, continuing them focused on moving the upmarket and deepening their relationships through the financial advice proposition.
As an example, this year, we're going to market with what we call a Confident Retirement approach, and we'll be putting a lot of more marketing dollars going forward with a very focused conversation that we have with the consumer around how do they actually manage their activities for retirement, prepare themselves well. We believe we're perfectly suited for that. If you think about the number of people moving to retirement, you think about the wealth transfer that's occurring, and you think about that one in five people do not feel prepared to manage that in retirement, you can see the opportunity. First is driving the increased productivity. Second is recruiting more advisors. Over the last few years, we've always built our advisor network organically, trained people from scratch, young men and women coming out of college, career changes, et cetera.
What we've done over the last few years is continue to do that, but do that in a very, what I would call less of a large impact in the market, a little smaller in how we're going to focus on it, but more important, using our resources to recruit experienced people in with books of business. We've been very successful in doing that. We've added over probably close to now 1,500 to 2,000 advisors coming from the industry, and we continue to do that every quarter, adding more advisors. That in combination is building out our employee base of advisors, increasing productivity, and therefore moving more of the production to the bottom line. Then third is really how we've made our processes more efficient with the investments we've made in technology.
It makes the advisor more productive, it's less costly to do, we can move that. One of the things Walter mentioned, just so you know, is we're carrying a significant amount of cash that in normal circumstances you would be able to get a margin on that's north of 100 basis points. In fact, in normalized circumstances, more closer to between 100 and 150 basis points. Today, we're garnering about 35 basis points. If short-term rates over the next one, two, three years start to go up again, that's going to also boost the margins tremendously because that will flow right to the bottom line. We're not waiting for that. We think there's still opportunities for good margin expansion based on what we've been doing. In addition to that, there could be a significant boost in profitability just from short-term rates going up.
Without putting a specific number on it, maybe more of a range, what do you think the long-term margin opportunity is for this business?
With or without interest rates. In the short term, I would say without interest rates going up, I think we'll get into the mid-to-teens. With short-term rates going up, that you can just put a few % on top.
Right. Okay. You had mentioned the importance of adding advisors. Can you talk a little bit about that competitive market and sort of who do you look for, why do they come to Ameriprise, what are the costs associated with bringing on these advisors?
Okay. I think people move for a whole variety of reasons. One is that they want or looking for a change because something has happened in their current company, the change of what the company is focused on, the culture of the company. What we've been able to do is attract advisors coming from a range of the wirehouses, and that's been the largest area of opportunity, but also from regional and independents. I think we're giving them two opportunities to associate. One is if they come from an employee channel and they want to continue to be employee, we have our employee network, and they like the culture of the network. They like the focus on the advice. They like the leadership they provide. We focus on advisors that really, if they're doing, let's say, $400,000 or $500,000 in production, they're important to us.
We value them. We help them develop. We're looking for them to give them the support to really prosper. Whereas in some of the places, people are really focused more on the million-dollar producer, and that's important to them. The same thing with people who want to be more independent. If you think about it, you hear about the move from people want to get into the RIA channel, they want an independence, they want to own their own practice. We have a unique situation at Ameriprise. We actually have a franchisee channel. Advisors can join us. They can own their practice, equity in their practice. They can run their business the way they want, but it's part of a branded, supported network.
We still provide them leadership, we still provide them the ability to market themselves and all the capabilities to do that, but they're independent, and they own their own practice, and they could administer it the way they see fit.
I guess on the cost side, what are the upfront costs associated with bringing these folks on?
There are two levels of cost. One is there is a transition package. Usually, if someone's leaving a firm, their production suffers during that period of time, and they need to reestablish themselves. We give them a transition package to help orchestrate that. Based upon their ability to actually produce more or get even more productive, there are some benefits and kickers there. On the other side, there's always the transition cost. You're moving clients' accounts, you're moving and bringing them on board when they're not being as productive because they're doing the transfers, et cetera. There is what we call onboarding cost. As we look at the economic cost of someone that we bring on with the type of package, we can get a payback in that in less than three years.
Got it.
Can you possibly touch on the corporate uses of cash to buy back versus dividends growing pretty aggressively recently and what more we see in the future?
Okay. One of the things that I believe in with Walter and the board is that we want to generate very strong returns to the shareholders. We really focus as part of our strategy of how we grow our businesses. We're very focused on a consumer value proposition, what really makes sense for our advisors and employees. We really focus on employee engagement, advisor engagement, and we rate very high in those categories. Same thing with client satisfaction. Now, in complement to that, as we build out our strategy, as we look to execute our investments, et cetera, we look at generating appropriate returns. Part of what we're going to continue to do is how do we drive up our return on equity from that, how do we maintain and get strong, good cash flow from what we're doing so that we can return to shareholders?
We're going to continue to focus on returning both through buyback and dividend increases. What we want to do on the dividend side is to have a dividend growth strategy consistent. There's only one year since we became public that we did not raise our dividend. We never cut it, but we didn't raise it. That was in 2009, and you could imagine why. Having said that, we never had to cut our dividend, and since that, we've actually been doing, in some years, two and three dividend increases a year. We think we're at a reasonably good yield compared to the financials in the universe we operate in. We'll continue to look at dividend as part of our makeup and the growth of that dividend over time. Okay.
Is there no sort of explicit policy between how the split between buyback and-
Well, what we said is that in total, we're going to return roughly 100% of our earnings through a combination of those factors, and in certain years, we'll return more. As an example, over the last two years, we returned roughly 130% of our earnings through dividends and buybacks. This year, we'll do something similar because we exited the banking institution. We got out of banking completely based on the regulatory change. We didn't want that extra capital requirement overlay. We're returning the capital from the bank to shareholders this year.
The only thing I'd probably just add is that there has been a shift as we were more concentrated initially at buyback than versus dividends, and we've moved that as a percentage. It's driven by certainly two factors that we felt there was a better balance for our shareholders, but also as we shift the business to more and more coming from capital light of the asset management and the wealth management. Certainly, we felt very comfortable in doing that. That is, as Suneet said, is the transition that we've been on as we've passed now into 56% of the earnings coming there gives us that capability, and we've always been very prudent and very focused on how to manage the exposure, even on the capital intense activity. We feel very comfortable with the ability.
We're about 30% on dividends right now, and we just evaluate as a total payback, and we've taken that up over the years.
Maybe just as a follow-up to that. We are hearing some companies talk about possibly pulling back from share repurchases just as their stock prices have gone up. How do you and the Board think about your sensitivity around the price of the stock versus your appetite for share repurchases?
I think very clear. One of the things that we always want to monitor is, are we purchasing that would also give us an overall return as we think about it? Today, I would probably say that Walter and I still feel that our stock is undervalued as we look at the sum of the parts, the multiples out there, the growth of the business. We'll continue to use buyback as a way to actually generate the idea that we are buying back the stock a little cheaper than what it's really worth. From that perspective, clearly, if the stock gets even more undervalued, we have the ability to step up buybacks a bit more.
We'll look at it opportunistically, but we also think on a consistent basis that buyback is part of our philosophy at this point based on where the value of the stock is and the circumstances.
Yeah.
Again, the same thing as we evaluate dividends. If we feel like our dividend yield is appropriate, then we'll manage it accordingly, but where we see opportunities there as well.
I'll just add on. Again, as Jim indicated, we generate a substantial amount of free cash flow, and certainly as we shift the business, it certainly will stay or grow even higher. We feel very confident with the amount of capital that we generate. We evaluate this in the current environment. Certainly, it's an effective way of returning to our shareholders. We are very prudent, like I said, in having very effective enterprise risk management, so we don't feel velocity of impact coming in and changes in volume. These are constantly evaluated. This is a program that I think we feel comfortable with at this time. As the price earnings ratios improve, we'll still evaluate, but it still seems it's a pretty effective way.
Okay.
You mentioned you already had an enviable high 17.9% ROE level at the moment. Is that sort of the higher end of a range you would target? Is it sustainable or would you even say we've got more leeway to drive that even higher?
Initially when we came out, I guess two years ago or so, we raised it from, at the time, previously we had something like 13-15. We raised it from 15-18, and we'll probably be evaluating that again to adjust the targets going forward. It's probably a third of what you said in A, B, and C, that we feel good about the return we're generating. We think we can continue to generate it, and it can go higher.
As we grow the asset management and the wealth management at a greater rate than the protection and the annuity business, even though that will be growing, it certainly gives you the capability to generate a higher return.
I would ask you to evaluate those type of returns where you're in the high teens getting into 20 against any of the cohorts out there in any of the segments that we play in, let alone the larger banking segment, based on capital requirements. This is a fully loaded return, so includes acquisition costs and amortization, et cetera, goodwill. It's not one that just sits on a cash basis.
I guess on that same point, if 20% of the equity is sitting in excess capital, that's a drag on that ROE, because presumably it's not invested in anything that's generating a high return. What is the outlook for actually dipping into that $2 billion-plus number that always seems to be the case, and over what sort of time frame?
Okay. We've given up hoping for rates to go up now. Having said that, no. I think what Walter and clearly and I've said is this, the reason we're returning more than 100% of our earnings is because we do feel we're sitting with a strong capital position, and it's not earning much on our balance sheet. Having said that, we're not going to do a one-time dividend or just one buyback, et cetera. What we'll do is consistently buy back, consistently look continuing for other opportunities out there to deploy it if appropriate. If not, it will be returned to shareholders over time.
Clearly, the reason we've been able to return over 130% a year and still have the type of excess capital position that hasn't gone down, has actually gone up, is because we continue to actually free up capital based on how we're managing the company, the shift in the businesses, the way we've hedged the portfolio, the way we've actually generated our returns on our investments. Very clearly, we continue to do aggressive work to manage our balance sheet. At the same time, we still have a good capital position.
Right. Last year, we announced, actually beginning of this year, that that excludes because we put into the variable annuities block that contingent capital base. Certainly, we're sitting in pretty good position from having the excess.
I would just mention one other thing. The reason we actually own the bank, we kind of come under Fed guidelines for the bank. There are many institutions in the U.S. that will either still fall under federal guidelines or since they own banking institutions, including in the broker-dealer world, will be subject to those type of capital requirements. We are not. It gives us the ability to manage our dividends, our buybacks, make the investments we need, and be in the businesses consistently.
Since Walter brought up the four-letter word that is variable annuities, I want to maybe ask him the next question.
Four-letter word, huh.
It just seems like a lot of companies have gone through great lengths to talk about this business. They've had a lot of issues with it. The return that you guys are producing in the VA business is among the highest, I think, in the space. Obviously, there's an approach to the business that Ameriprise is taking that differs. Can you talk a little bit about how you're able to generate such strong returns?
You want me to?
Sure.
Listen, right now in this environment, and I think you know this better than I do, you can generate very strong returns in variable annuities because the equity markets are so. When you do your required calculations, it really does not require a substantial amount of capital. The issue with variable annuities, of course, is the change in the environment and then the volatility that takes place both on the earnings and then on capital. Our business model has always been about selling our variable annuities as a solution to our clients. While they have features that certainly meet the needs of our clients, we have never been in this arms race, so to speak, to giving away benefits that one could not really be able to justify, and in some cases, even hedge effectively. We've always had very balanced features.
Our behavior cap pattern of our clientele is certainly more modeled to what our actuaries have built in because it's a solution. It's not just a churn. We have features that are good and balanced, and we also have a clientele that's quite stable because it's built into a solution set. We've also had a hedge strategy that has been built on hedging it to its logical term. We were not chasing dynamic hedging. When that situation occurred, we did not have a situation of that nature. We also have a very large block within our variable annuities that have no living benefits. It's been there because people hold it and everything. Even with the block that came out with variable annuities, it was very measured on how we did.
About 40% of the block has no variable annuities, and therefore, its exposure profile is different. The variable annuities, when we came out with the living benefits, again, as I explained, were balanced to have good appropriate terms and product features for it, and we hedged it. That is being managed in a way. We converted to the managed volatility product, which really rebalances the exposure with our clients and with us. That is competitive with anybody out in the industry. The whole profile of this is really been one of the way we manage the business prudently and trying to get good returns for our shareholders and meeting our client's need in a very effective way.
We recently, when we analyze our exposure profile, we have detailed models that look at us at various, what I call bookends, where markets can really shift on you. We also add two of the Fed tests to make sure. We evaluated that, and we said at any given time, we feel that amount of a contingent capital could be about half a billion dollars. That has now been put into the calculation, so our returns actually face that. The other thing that we've not done is have captives that really have, I'll say it in a way, that certainly seem to have a different required capital characteristic.
We've always basically just had facing it from the standpoint of looking at it from a U.S. perspective, with our regulators that had their capital that did not leverage it in a way that, or mirror it in a way that would come under stress in an environment. I think it's every point of the product, the approach to hedging the product, and how we manage it and change the futures to adjust to ensure we have that balance for shareholder in turn. I think it's served us quite well, both from a client standpoint and from a shareholder standpoint. I'm not saying we're totally unique, but we're certainly in a pretty good space. I think the test of time has been there and it's demonstrated.
We've been through every agency review and every discussion. Certainly, they've felt quite comfortable with the hedging and the management, the capital, and the way it fits into our model.
Suneet, to your point, within the returns that you see on the annuity business includes an amount of contingent capital so that if the markets really backed up, if the S&P went down tremendously, et cetera, the capital that would be required there, just if you look at a rating agency, is already there sitting on the side, and it's not in the excess.
That's right. About a half a billion dollars, we call it.
Okay.
Is that
No, that's helpful. There was actually an article about captives overnight that came out.
Yes.
Is that a consistent approach to not using captives across all of your products, so universal life, et cetera?
The only captive we've have is for our own internal management of our property. Our normal needs that you would have for our own insurance, for buildings and things of that nature.
Okay.
That's it.
Got it.
Which is small. That's all.
Maybe one last question. Just as you think about your business mix, the one business that never really gets asked about is the property casualty business, which uses some amount of capital. Just given the whole strategy of the company, I'm just wondering, does it make sense to still have capital allocated to that business, or can you just outsource it to someone which would still allow you to provide a product to your advisors, but then you wouldn't have the cat risk and all the other stuff that go along with it?
Yeah. I think the reason we own that business today is not so much that we couldn't provide a product to our advisors. I actually believe that we're investing to grow a nice business. It's a direct affinity-oriented business. As you can see, those businesses are selling at very nice multiples today. They're higher PE-oriented once, if you attribute to the firms that you look at in the P&C industry. We've actually built a nice business. We're growing it nicely. We do believe that we will show some nice returns, and it's a diversification. Now, having said that, no, it's not so intricate and core that we couldn't sell it. We feel like investing in it right now and getting it up to even further scale will pay our shareholder dividends in the end.
It could be at one point we think of a different strategy, but right now we think that we'll be adding to shareholder value just based on what we're doing.
I think that's it for time. Please join me in thanking Jim and Walter.