Welcome to the Q4 year-end earnings call. My name is Vanessa, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded. I will now turn the call over to Alicia Charity. You may begin.
Thank you. Good morning. Welcome to Ameriprise Financial's fourth quarter earnings call. On the call with me today are James Cracchiolo, Chairman and Chief Executive Officer, and Walter Berman, Chief Financial Officer. Following their remarks, we'll be happy to take your questions. During the call, you will hear references to various non-GAAP financial measures, which we believe provide insight into the company's operations. Reconciliation of the non-GAAP numbers to the respective GAAP numbers can be found in today's materials on our website. Some 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 risk factors 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 2012 annual report to shareholders, and our 2012 10-K report. We take no obligation to update publicly or revise these forward-looking statements. With that, I'll turn it over to Jim.
Good morning, everyone. Thanks for joining us for our fourth quarter earnings discussion. I'll begin by giving you my perspective on the quarter, and Walter will cover more of the numbers. We'll take your questions. Let's get started. For the quarter, on an operating basis, net revenues were up 6% to $2.6 billion. Earnings were $367 million, up 19%, with earnings per share of $1.71, up 31%. Return on equity increased to 16.2%. Equity market appreciation and increased client activity drove top-line growth in the quarter and were managing interest rate headwinds through re-engineering initiatives and keeping expenses tight. I feel good about the underlying business fundamentals and our results overall. There are a few moving pieces impacting earnings that we highlighted, and Walter will cover in more detail. Results in our Advice and Wealth Management business led the way.
It was a very good quarter for the business. In asset management, we continue to make progress growing our earnings. While in annuities and protection, the businesses are performing in line with our expectations when you adjust for the items noted. We also continue to benefit from our balance sheet strength and capital management, key points of differentiation for Ameriprise. We devoted $446 million in the quarter to share repurchases and dividends. Now let's review our segment performance, starting with Advice and Wealth Management , where we're generating strong earnings growth and good profitability. For the quarter, revenues were up 11%, reflecting both higher asset levels and a pickup in client activity. Total retail client assets of $353 billion were a new high, aided by market appreciation and very strong client net inflows. Wrap net inflows of $2.1 billion, were up more than 50% from a year ago.
In each of the past four quarters, we generated strong wrap net inflows with $9.6 billion of total inflows for the year, which helped raise our wrap assets under management to $125 billion. Clients also added to their cash positions, which may have reflected the uncertainty in the marketplace with the election and potential tax changes. At year-end, brokerage cash balances reached $19 billion, up 20% from the third quarter. As clients gain confidence, I would expect they will reallocate a portion of these assets to other products in 2013. In addition to strong client flows, we continue to attract experienced and productive advisors to Ameriprise. In the quarter, 68 productive advisors joined the firm. In fact, the average productivity of the advisors who joined us in the quarter was about 40% higher than those who joined us in the first quarter of 2011.
In terms of total advisor productivity, operating net revenue per advisor increased by double digits from a year ago. We continued to invest in our brand in the fourth quarter. As we enter 2013, we just launched a new series of advertisements with Tommy Lee Jones that speak about Ameriprise and what consumers need to do to create a confident retirement. The expenses of our ad campaign are consistent with last year and are up a bit sequentially from the third quarter, as we told you. We offset the fourth quarter advertising expenses by reducing expenses as part of our conversion to our new brokerage platform, and that expense improvement will continue through the first part of the year. Overall, we're managing expenses tightly and will continue to do so.
In fact, I should note that the results we delivered in the quarter reflected lower revenue and earnings because of our decision to discontinue our banking operations. That work is now complete. In fact, I want to inform you that we learned yesterday afternoon that we have been granted regulatory approval to transition the bank to a national trust institution. In terms of segment profitability, pre-tax operating margin was strong at 11.8% compared to 9.2% a year ago. If you exclude the impact of the bank transition and the two months of lost earnings, segment operating margin would have been above 13% for the quarter, and that's including managing headwinds from low interest rates. All in all, it was a very good quarter for our advisory business. We have the right strategies in place, and we continue to make good progress. Now let's move to asset management.
Total assets under management for the segment were $455 billion, up 5%, with Threadneedle and market appreciation driving asset growth. Revenues were up both from a year ago and sequentially, even when excluding performance fees from all periods. We're benefiting from revenue reengineering initiatives we have put in place. We're also generating solid profitability improvement. In terms of margin, adjusted net pre-tax operating margin was 33.6% for the quarter compared to 31.4% a year ago. We continued to deliver strong investment performance across one, three, and five-year time frames in asset-weighted and equal-weighted categories in both equities and fixed income. At quarter end, 51 Columbia Funds were rated four or five stars by Morningstar and 60 funds at Threadneedle. Overall, we experienced $3.9 billion of net outflows in the quarter, driven by outflows in institutional portfolios.
Retail flows were essentially flat, with strong flows at Threadneedle offset by outflows at Columbia. As we start the year, we're starting to see improved flows as consumers have started to come back into the market. While it's too early to characterize the quarter, we're seeing positive initial signs. We will remain focused on continuing to generate consistent competitive investment performance. In addition, we are bringing a very strong focus to execute against our plans to capture distribution opportunities for both retail and institutional. We're also continuing to develop new enhanced products. Columbia and Threadneedle are collaborating to take advantage of some of the larger global opportunities we see in the marketplace. Now I'll move on to annuities and protection. Let's start with annuities. We have a good book of business and continue to manage risk effectively.
As you know, we introduced a new variable annuity product in the second quarter of last year and has taken a number of months for our advisors to acclimate to the new product. In the quarter, variable annuity sales started to pick up to more normal levels. Overall, variable annuities were in net outflows due to our decision to close outside distribution. On the fixed side, we have a good block of business. That said, we're not adding to it given the current rate environment. Overall, the business is performing in line with our expectations, and we continue to focus on continuing to balance client benefits with attractive risk-adjusted returns consistent with our strategy. Now let's turn to protection, which you saw was impacted by weather-related losses. Life and health insurance earnings reflected good claims experience and lower expenses.
In terms of metrics, we're seeing good pickup in cash sales with our indexed universal life product as the main driver of the growth. We also enhanced our variable universal life product, and we're starting to see increased sales as people are becoming more confident in the equity markets. In auto and home, we continue to see good growth in policies and premiums. As I mentioned, we absorbed the loss related to Superstorm Sandy, and we also increased reserves related to higher auto claim severity, which is consistent with what others in the industry are experiencing. I feel good about the outlook for the business. I'd like to close by reinforcing the benefits of our ability to generate strong free cash flow, which gives us flexibility to return capital to shareholders and to drive ROE and EPS growth.
For example, for the year, we dedicated more than $1.3 billion to share repurchases and increased our dividends paid per common share by 64%, all while maintaining our excess capital position. In total, we returned more than 130% of our operating earnings to shareholders, and we're targeting to return the majority of our annual earnings and the capital we freed up from the bank to shareholders going forward. With that, I'll now turn it over to Walter to go through the quarter in more detail. Walter?
Thank you, Jim. Ameriprise had a solid fourth quarter with operating EPS of $1.71, up 31% versus last year. This was driven by growth in our core business and continued expense discipline. We also returned almost $450 million of capital to shareholders in the quarter, bringing our total return during the year to $1.7 billion. I would like to provide additional context relating to some unusual items we had in the quarter, which we detailed in our earnings release. Within the $1.71 of operating EPS, we had several favorable items totaling $0.25, including a Variable Annuity living benefit liability model revision that resulted in a reserve release, a settlement with a third-party service provider, and a review of our deferred tax balance that reduced our tax expense relating to prior periods.
In addition to these disclosed items, we had other non-repeating items which had a net negative impact of about $0.05 at the Ameriprise level. These included higher expenses related to an incremental year-end compensation true-up and elevated severance expenses, partially offset by lower taxes. Adjusting for those items, our normalized performance was $1.51 per share. Turning to slide five. Operating net revenues were $2.6 billion, up 6% from a year ago, led by 11% growth in Advice and Wealth Management with only one month of bank revenues and 5% growth in asset management. Revenue growth from protection and annuities was in line with our expectations as we continue to shift our earnings mix to lower capital-intense businesses. Turning to pre-tax operating earnings. We also had good growth of 8% over last year in the face of the low rate environment.
As with revenues, we had excellent 43% growth in Advice and Wealth Management , even with lower bank earnings, as well as good asset management profitability. This has driven a shift in our business mix to 50% of earnings coming from our less capital intense businesses versus 43% from those businesses in the fourth quarter last year. You saw elevated auto and home cat losses in the quarter from Sandy, which dampened otherwise good results in the protection segment. Let's move on to the segment discussions. Our Advice and Wealth Management business performed well in the period and throughout 2012 as we executed on our strategy to improve productivity, add experienced advisors, and invest in technology and our brand. Advisor productivity increased 11% to 103,000 in the quarter from high client transaction levels, which included increased sales of direct alternative investments and client net inflows.
Cash balances increased in the quarter with nearly $19 billion in brokerage cash. We are effectively positioned for rates eventually rising. We remain focused on managing expenses. The brokerage platform conversion is winding down, and we will determine how much of that will be reinvested in growth initiatives or fall to the bottom line. Pre-tax operations were up 43% to $119 million as we had a very strong quarter compared to last year. We also completed our bank transition in the quarter, ceased bank operations, and received deregistration approval. We delivered a good 11.8% margin in the quarter. We estimate the margin would have been over 13% if we had not exited the bank. Turning to asset management on the next slide. We had good earnings of $141 million, up 11% over last year. Last year's results included the favorable impact from a CDO liquidation.
Revenues were up 5% from market appreciation, revenue re-engineering, and performance fees, which were similar to third quarter levels. Offsetting this was pressure from prior period outflows. Expenses were up 4% from the impact of market appreciation on distribution and sub-advised fees, as well as performance fee-related compensation. In 2013, we will continue to focus on both revenue and expense re-engineering opportunities, as well as profitable net flow growth. Importantly, investment performance at both Columbia and Threadneedle continue to be strong. Looking more closely at flows on an aggregate basis, we had $3.9 billion of outflows this quarter. Overall, we had higher institutional outflows in the quarter. Retail was essentially flat on a global basis. Strong retail inflows of over $1 billion at Threadneedle were offset by outflows at Columbia.
In retail mutual funds, we saw similar trends to others in the industry, including activity in the last part of the quarter influenced by investors' desire to lock in capital gains in advance of anticipated tax changes. We also continued to see outflows in third party sub-advised assets and in the Value and Restructuring Fund. Lastly, we were impacted by portfolio rebalancing, which contributed to both retail and institutional outflows in the quarter. Institutional outflows of $3.3 billion were largely driven by low margin legacy insurance assets of $1.2 billion at Threadneedle and $400 million at Columbia, as well as the portfolio rebalancing and model changes I just mentioned. We are taking steps to add new products to these platforms to help us retain these assets if these trends continue. Looking into 2013, we have a good institutional pipeline and continue to win mandates.
I would like to mention that we expect to see about $900 million of additional outflows from Zurich in the first quarter associated with a mandate in Japan. Turning to annuities. Pre-tax operating earnings were $171 million, up 4%, which was in line with our expectations. Variable Annuity operating earnings were $129 million, including the $43 million favorable model adjustment I described earlier and a $14 million lower impact from mean reversion compared to a year ago. Earnings in the quarter were also impacted by higher DAC amortization and increased SOP reserve funding related to our third quarter unlocking, which was driven by the low interest rate environment. We expect these items will continue to impact Variable Annuity results in 2013 until we complete our annual unlocking process in the third quarter of 2013.
In the fourth quarter of 2011, results include the favorable impact of markets on reserve funding and model changes. As a reminder, we have taken multiple steps to de-risk the Variable Annuity book, including exiting third-party distribution several years ago, and more recently introducing a managed volatility product. In the quarter, we saw improving trends from a managed volatility product, and we are on schedule to launch additional investment options for it in the first half of this year. In Fixed Annuities, operating earnings declined $4 million, which includes a $17 million impact from low interest rates and an $8 million unfavorable reserve adjustment last year. The pressure from low interest rates will continue to impact the Fixed Annuity block into 2013. However, we have flexibility to reset rates on a large five-year guarantee block beginning at the end of 2013 and continuing into early 2014.
Operating pre-tax earnings Protection segment was $93 million, down $20 million from a year ago. The strong results in our life and health business were offset by the disclosed cat losses and reserve strengthening in auto and home. Life and health earnings increased 8%, driven by favorable claim experience, as well as a return to a more normalized loss ratio in Long-Term Care. In recent years, we, like the industry, experienced slower Variable Universal Life sales. However, we are now gaining good traction in sales of Indexed Universal Life and our refreshed Variable Universal Life product. Auto and home continue to have strong policy growth, but earnings were impacted by $20 million from Sandy, as well as higher reserves from our auto book due to increased severity trends in the industry. Given all the moving pieces in the corporate segment, I think it would be helpful to walk through results.
As you can see on slide 11, we had an $81 million net expense, driven by year-end compensation related true-ups and higher severance expenses, as well as lower investment income related to the bank transaction in the period. Partially offsetting this was the favorable impact from the $15 million settlement with a third-party service provider. Capital return has been a strong point of differentiation for Ameriprise. Our business mix shift to less capital-intense businesses, prudent risk management, and capital flexibility enable Ameriprise to consistently return capital to shareholders in a variety of interest rate and equity market environments. This lets us consistently grow EPS and return on equity in a variety of macro environments that could potentially pressure revenue growth, like sustained low interest rates. Looking ahead, we will continue to execute this strategy. In 2013, we expect to return approximately 100% of the earnings to shareholders.
In addition to that, we will return approximately $375 million of capital that was freed up from exiting the bank. During the fourth quarter, the holding company received $250 million from the bank transition, and we expect to receive the remaining $125 million of capital that is still at the bank this quarter. In closing, this quarter, our return on equity reached 16.2%, well within our targeted range, and we anticipate additional growth in ROE in 2013. With that, I will open up to your questions.
Thank you. We will now begin the question and answer session. If you have a question, please press star then one on your touch tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then one on your touch tone phone. We have our first question from John Nadel with Sterne Agee. Please go ahead.
Hey, thanks. Good morning, everybody. I have a question about the outlook for flows. In the first few weeks of this year, despite a big increase in retail equity fund flows for the industry, your flows, according to the industry data we track, remain negative. When I look at performance metrics, there's definitely continued improvement there. I know Ted spent a fair amount of time at the last Investor Day talking about some of the marketing initiatives. I was just wondering if you could update us on the progress there, because it seems like you're continuing to lose share. I'm not sure why, if your fund performance continues to improve the way it has.
Okay. John, we have seen a bit of improvement in the first few weeks in sort of the net flows on some of the funds. We did experience a allocation change in one of our portfolios based on changing some various pricing that we have on the platforms particularly. We knew that would occur. Having said that, we haven't seen as strong a pickup yet in the equity flows as I think you're alluding to in the industry. Our fixed income has come back a bit from the fourth quarter. We're hoping that there are some signs that this should start to pick up as our wholesalers and our institutional people have that focus. I would say we're still a little short of what we saw as an initial pickup in the industry.
Okay. I guess I have a more specific numbers question. I was just wondering whether you'd be willing to quantify for us what the total amount of higher compensation and severance and other sort of catch-up accruals were in the quarter. How much of that you think we should expect to see on a go-forward basis, because it does seem like some of that is permanent. Also related to that, just what effective tax rate you're using to normalize to $1.51?
Let me take the first part of that. Clearly, what happened as we saw the improvement that took place in the fourth quarter, both in our performance and some of that driven by the market, we trued up. That is really more of a concentration in the quarter as it relates to both the compensation at Columbia and compensation for the company. On that amount, as we talked about it in my slides, you had the two elements which netted down to about $0.05, and that included the tax benefit offset by around $0.11. The appreciable portion of that is really related to the compensation. Again, last year, in the year prior to that, we didn't see that effect because obviously the markets were not improving and we were pretty much spot on in our normal accrual.
This one, we had to accrue up in the quarter.
Walter, is it fair to assume that maybe a couple pennies of that $0.11 is something we ought to think about as an ongoing?
It's the spreading. We know actually it's above the normal that we would have, but there'll be some continuation of it spread throughout in 2013.
Okay. Thank you.
Remember, there was certainly an appreciable amount of severance as related to the actions that we took in the fourth quarter that was above our normal.
Okay. The tax rate on the $1.51, is that in that 26%-28% range?
The tax rate in the $1.51 is a normalized tax rate for us. When you look at it, that was the adjustments we were trying to give you as you looked at the tax rate we had, which we reported in the 17% range. As we normalize for the DRD and for the DTA discussion. The tax rate you should be getting into is on a normalized basis is in a range around 25%-26%.
Okay. Thank you very much.
You're welcome.
Our next question comes from Jay Gelb with Barclays. Please go ahead.
Thank you. I wanted to focus in on Jim's expense saving opportunity comment. How much of that should we be building in for 2013 on a gross basis? How much do you feel could fall to the bottom line? I have a separate follow-up.
On the expense saving, as we indicate, we have the expense saving. We certainly evaluate the opportunities with that. At this stage, we're assuming that some of that will fall to the bottom line, but the reality is it's there, and we are planning on certainly investing for growth. I can't give you the exact amounts because it really depends on the environment and how we see it.
If we were to isolate that in individual segments, where would we see most of it potentially?
It's throughout the company, but certainly as we indicated, Advice and Wealth Management has a reasonable portion of that, and so does the Asset Management activity, both on the revenue reengineering and on their expense reengineering. There are other parts as relates to the centralized services that spread throughout all of the segments.
I see. Okay. Separately on the personal lines, Property Casualty, P&C, policy in-force growth of 9%, that's probably the highest of any of the personal lines companies we're aware of. Can you talk about what is leading you to gain that share?
I think as we have seen strong results, certainly in the base activity and as they certainly, the Progressive activity has been gaining. There's been nothing unusual. It's certainly we've raised our prices, we've adjusted, as we told you. It is strong performance on the part of the affinity groups and their penetration of it.
Okay. Can you talk about any of the particular successes you're having in affinity at this point?
I think it's actually spread throughout, but I would say certainly as we are gaining more and more a share within Progressive, that is certainly one of the elements.
I'm sorry. Can you talk about that Progressive relationship then?
Oh, sure. That's a relationship that we entered with them to do the property side of it, certainly the home and rental, and that is something that has continued to build with them, and that is something that is achieving good growth and profitability elements within the auto and home. That was just something that started last year.
Okay. Homeowners and renters.
End of 2011. Not homeowners. It's homeowners. It's not auto. That's right. It's homeowners and rental.
For Progressive customers.
Yes.
All right. That's great. Thank you.
You're welcome.
Our next question comes from Alex Blostein of Goldman Sachs. Please go ahead.
Hey, good morning, everybody. Just to tackle the expense issue I guess one more time. Walter, would it be helpful maybe to think about it on a consolidated basis? Let's just, I guess, focus on the G&A line. It feels like there are a bunch of things kind of sprinkled across different segments. If you look at the, call it like the $745 reported operating number for this quarter in G&A. If you were to isolate these one time items, what do you think, I guess, is the run rate G&A number for you guys? Assuming market's flat, activity's flat without making any other assumptions from a revenue perspective, how should we think about G&A for 2013?
First, let me say, when you isolate out on the G&A line, we are actually versus last year, actually, a tad under. We have certainly managed the expenses quite well. As we indicated, we certainly have with the brokerage, and we have certainly momentum coming into 2000 to, as we reduce that expense line. We have to make the judgment. You can look at it, that is a pretty good run rate. We'll have the normal inflationary elements that come in and certainly the investment opportunities as we see the growth. That's the base that you should really be coming off. With, certainly the opportunity to reduce that a little as it relates to the brokerage. Again, we haven't made the decisions where we're going to deploy.
Okay. Sub 740 run rate.
It's 740, now we have inflation and other things coming in, and certainly different investment opportunities as it goes there. That's a reasonable base to start with. We have a tight focus on our expenses.
Alex, what I would say is that we're going to continue to maintain a very tight expense focus, we're continuing to invest. We will have volume increases as we grow certain businesses, adding advisors and doing such other things. We are continuing to upgrade some of our infrastructure and across the company. What I would say is, we're going to maintain a tight expense focus and depending on what happens in the year from a revenue perspective, would depend on how we would fluctuate that. Even if things picked up, we still don't want expenses to start to grow again at any accelerated rate.
I would say our go in is to maintain sort of the levels that we have, make investments, use some of the savings like we have from the brokerage platform, et cetera, to continue to invest in certain other things like in AWM, bringing in more advisors on and doing some things like that and some of the advertising work. I would say it's going to maintain the type of expense focus that we've had.
Gotcha. Helpful. Just another point I wanted to clarify. When you guys think about the buyback, and Walt, I appreciate your comments on, I guess the $375 being the extra, and that's the capital that's being kind of divvied up from bank. Is it fair to think about the quarterly pace being similar to what you've done? Kind of like $350-ish a quarter in buybacks. In addition to that, we should incorporate the $375 thinking for the full year?
Okay. As I said, not to get into exact forecasting, we said that we are going to target approximately 100% of our earnings in 2013 plus the $375. Last year, obviously, we were way beyond that. I don't want to get into forecasting what our earnings are, the issue is on that basis, I would think that the level that you saw in the quarter probably would be a reasonably good trend line.
Okay, helpful. When you guys talk about 100% of earnings, again, just to clarify, that's the buyback or the total payouts of the dividend and the buyback?
Okay. As related to the 100%, the 100% is really both the dividend and the buyback, then the 375 goes on top of that.
Then one business question for you guys. I know Ted talked in the past about getting more presence on different distribution networks. Understandably, it's probably a slower moving process, but can you give us an update on where you stand with major warehouses and how the product is being placed there? How the conversation is going with some of the gatekeepers, and when we could actually see some movement on that front?
We're gaining some traction in some of the intermediary platforms. There's two or three that we just got access to with certain accounts that we think will fund. There's a number of others in the pipeline. This will take a bit more time to build because it's a process to get reviewed and to look at those particular funds and see where they would fit in over time. I think the team is starting to gain some traction, but this is going to be a build over the course of the year.
Got it. Helpful. Thanks, guys.
Our next question comes from Jeff Schuman with KBW. Please go ahead.
Thanks. Good morning. Just wanted to follow up a bit more on the capital management. At your investor day, there was a fair amount of discussion about basically redeploying free cash flow, plus the capital from the bank, plus actually beginning to work off some of the $2 billion excess. I'm just trying to kind of reconcile that with the comments today. I guess if you do 100% of earnings, that's a bit north of the free cash flow, because free cash flow, I guess is 90% of earnings. Does that difference between 90% of earnings and 100% of earnings represent that sort of a down payment on using the excess capital, or how are you thinking about drawing down the excess at this point?
If I recall, we were indicating certainly as a company retaining on permanent basis, the excess was not in our strategy, and we would start then, as we look at different opportunities, start evaluating returning it. I think we said for 2013, specifically, we were targeting, at least at this stage, to do the 100%. You're correct, the 90%, you get that differential on the 90% based the free cash flow. Plus the $375 at least our thinking as of this moment, and then evaluating if there was going to be anything else based upon circumstances as we look at different situations. That, we want to give everybody at least that level that we're going to be going out with.
Okay.
It's not really, this is not like the start of the down payment, in my opinion. It was just consistent with what we said at the FCM.
Okay. You want to retain some flexibility that could be directed in a few places as you go forward. Okay. That's great. Thank you.
That's correct. Thank you. You're welcome.
We have our next question from Thomas Gallagher with Credit Suisse. Please go ahead.
Hi. First question on Advice and Wealth . Jim, you had mentioned a 20% cash balance build within the wrap accounts. Just curious how we should be thinking about that. Has that already constrained margins? Is there going to be a lag effect? Will we see some level of additional interest rate headwind from that? Any way you guys can frame how we should be thinking about that heading into 2013? That's my first question.
The increase we had was in our brokerage cash balances, we had some very good client inflows over the course of the latter part of last year overall. Initially, as those inflows come in, they go into brokerage cash, and then they get reallocated. We did see a bit of a pickup just from tax selling and other things at the end of the year. My belief is that, as people start to really think about where they are in the new year, that money will start to get reallocated. A part of it was what we got good client inflows, and part of it was from sort of the tax situation and the idea that people didn't know what exactly was going to happen due to tax situation from the fiscal cliff.
I would say that we're probably thinking that that will start to get reallocated into various portfolios as well as into certain products as we go into the new year here. There's nothing on a drag basis. It could probably be a positive as those assets are redeployed because, as you know, the cash spread is lower. Now, if the cash rates go up over time, meaning on a short-term basis, that would be a big upside for us, particularly with the size of the cash balances we have. I think that would be more of a positive depending on how you look at the interest rate, if it stayed there, environment. If it didn't, that would go back to work and that would be positive as well.
Okay, that's clear. More of a revenue and margin tailwind when you think about relative to 4Q going forward.
Yeah, we think as clients become a bit more confident, I mean, the confidence survey didn't come out that way, but I think we start to see, we saw some money going back into the markets in January. If that continues, yeah, we would see this. We did see a level of activity pick up in the fourth quarter. I don't think that was all due to tax selling, et cetera. People started to come back. We saw some of our variable annuities come back on stream as people got more familiar input. Even in our insurance sales and some of the equity product increased. I think we're probably seeing a tilt towards that, and I think that cash will be utilized.
Got it. Just a related question. Walter, any updated guidance for low interest rate sensitivity? Or is that, I think it was, what, $50 million-$55 million, was the drag expected for 2013? Is that still intact or has that changed at all?
It's actually changed a little. On that basis, you should figure it's about in the 70, using net after tax, around $75 million.
$75 million. Got it. Walter, just on the corporate segment, I think looking at this year, we were thinking the normalized loss rate was $60 million-$65 million. Can you just comment how we should be thinking about that into 2013?
Okay. If you're looking coming off the fourth quarter, obviously the fourth quarter had the items reflected as it relates to severance, which is a corporate, and then some of the performance compensation true up is there. In that range, I would say, what was the number you used?
$60 million-$65 million.
I would say it's a little higher than $60-$65, but not much. It's in that range, $65-$70.
Got it. I guess lastly, the comment on the multi-year Fixed Annuity block that can get repriced in 2014. How big is that and how much of an earnings pickup can that potentially represent as you look out into 2014? I guess what I'm trying to get at is.
Yeah.
Could that fully stop the bleeding on an additional low rate earnings headwind heading into 2014? Can you give some color on that?
Sure. Okay. As you relate to, it's 2013 and 2014. It starts in the tail end of 2013 and 2014. It will have an appreciable impact on it. It will basically, I would say our impact would be probably cut by 70%-80%.
Okay.
That is something that obviously the fixed annuity block, I think, is about $4 billion that this will impact.
Got it. You're talking about maybe getting an extra $50 million-$60 million of margin back or something along those lines. Is that about right?
You can do the math on that. That's right, because if you're doing the $75 I told you and taking that, it'll leave like $15, so $60 will come back. That's approximately right. Yeah.
Okay, thanks.
On a rate base. On a straight rate, right.
Got it.
Now we have a question from John Hall with Wells Fargo Securities.
Great. Thanks very much, and good morning. I've got two questions. Real quickly on the bank, I was wondering who provided the approval for the deregistration, then just what was the timeframe between applying for the deregistration and actually receiving it?
Again, it's between the OCC and the Fed. I think they work in conjunction. I can't really give you the specific. I think it's probably the final came out of the Fed, but we'll verify that. The process on this one, we started in about, I think it was in the second quarter we got into all the filings and everything.
Okay, great. Thanks. Then just some questions about capital and the excess capital. Jim Walter, philosophically, what are your thoughts about using some of that excess capital maybe to segue your way out of underperforming insurance businesses like Long-Term Care?
Listen, we certainly have. That's an opportunity if we chose to do it. The block, as we said, is not strategically part of our go forward. We are evaluating. We are certainly increasing. At this stage, we are constantly evaluating in discussions, but it's nothing there really has gotten to the point where we feel we get the value for it. It's something we could use it for, but certainly we feel that we don't have to. We are continuing to evaluate. Certainly as the interest rates start improving, that will change the entire situation, which we indicated. At this stage, I think right now it's in the best shareholder interest to continue where it is because we've seen nothing that makes sense to us.
All right. Fair enough. If I look at the allocated capital distribution by business line on, I guess page eight in the supplement, there were some moving parts. You can see that the allocated capital on the Advice and Wealth went down . I assume that's the bank shutting down. It went up in the corporate line. It also went down in the annuity line. I was wondering if you could just offer a rationale as to why over the course of the year, there's less allocated capital to the annuity business.
The annuity, we were basically shifting. It was shifting and basically looking at our deferred tax assets. There was a couple adjustments. I think there was an adjustment of about $100 million coming through on that line. We are, I think as Alicia said, we are evaluating all aspects of that. As Rick says, there's a lot of moving parts. There's no strategic business change or any. It's really just adjustments coming through. In the first quarter, we'll come out with a more comprehensive look at it. It's directionally certainly valid, but there was nothing of any consequence that related to an underlying factor that drove it other than adjustments with DTA and some of the reserves that this came through. And you are correct. At AWM, it was clearly the bank adjustment there.
Thanks very much.
You're welcome.
Our next question comes from Ryan [audio distortion] with Citigroup. Please go ahead.
Given your excess capital, where your debt is trading, and the availability in the financing markets, have you considered options to lower your interest expense while extending maturities?
By attempting to tender? I'm not sure where your question was.
Just given where some of the coupons are and where the debt is trading. There's a variety of options that others in the market have used.
Okay. I got it. We looked at that. We don't feel really that's an effective use at this stage. Certainly, we have a very large debt maturity coming up in 2015. We have a small one in 2014. We feel that certainly the carrying costs are appropriate where it is, and to attempt to go in and actually go into market, it didn't make sense to us at this stage and look at the premiums and other things associated with that. The answer is, we're evaluating capital structure. We're due the interest rate situation, but we feel pretty comfortable where we are right now. I guess the answer to deploying our excess against that was something to evaluate, and we decided that it didn't make sense from a shareholder standpoint.
Thank you.
We now have a question from Suneet Kamath with UBS. Please go ahead.
Thanks. Good morning. My first question is again on the capital. If I look at 2012, it looks like you did $1 billion and three of share repurchase. If I look at my 2013 number for earnings and I back out the dividend and then add in the bank capital, my base case would suggest that you're going to do another $1 billion and three in buyback in 2013. Basically flat year-on-year. I just want to reconcile that with what I thought you said at the FCM, which was given your capital position, you wanted to accelerate the pace of share repurchase in 2013 versus 2012.
I think directionally your numbers are right. Certainly on that basis, as you do the math, I believe that we were saying for 2013, we were giving that sort of guidance where we'd be, and that we would then reserve the right to start accelerating above that. As we talked about it for the quarter, for the year, that would be where you should think would be the amount of purchase going there. Certainly in 2012, we were way beyond the 100%, and we were just saying you should assume we'll go back to the original guidance we said on time we would do, which is 100, and then we would add the 375 onto it, and then evaluate the options to really see if we would want to accelerate it.
I personally think I'm consistent with the FCM, but that's the way I intended to come through.
All right. We should think about the one three based on my math as the minimum that you would do, and then as we move through the year, clearly there could be some upside to that.
Yeah, I think, Suneet, the way Walter conveyed it, which is consistent with the way we're thinking about it at the FCM, was that over time, we do not necessarily see a need to maintain the excess position the way we are. We would definitely view that some of that excess position would decrease. The reason it hasn't up to this point is because Walter and my business people have been doing a very good job of what I would call freeing up capital within the overall structure that we have. As an example, if we did not debank, we would still have the capital of the bank and probably increase capital in the bank. We would use the earnings and probably draw down some of the excess.
As we start this year, just like when we started last year and we got out of things like outside annuities, et cetera, we started to free up more capital, we returned that as part of an excess over the earnings. We're just starting this year in a similar vein. We'll see what happens, but I would say over the next number of years, I would say we would probably draw down unless we're able to even free up more capital and lower our capital requirements from either mix shift or some other things that we're able to do. That's the way we think about it, and that's why we've been able to return more than our earnings over the last few years.
If we weren't successful in actually de-risking our balance sheet, et cetera, you would probably have seen a drawdown of the excess now based on the amount that we did choose to return in the discussions that I have with my board.
Got it. Okay. My second question is on the Advice and Wealth business. If I go back to last quarter's earnings call, Jim, I think you mentioned that as it relates to the Experienced Advisor Recruits, that you track their progress based on vintages. I was very interested in that comment because I've been tracking your Experienced Advisor Recruits over the past couple of years. I guess what I'm wondering is, in terms of the productivity lift that we're seeing just from this cohort, from this Experienced Advisor Recruit component, is it fair to say that we're only really seeing the impact of the 2010 class, where I think you added 248 of these advisors, and then the 2011 and 2012 classes, which were in excess of 300, really haven't quite kicked in yet, and that sort of productivity lift that's on the come.
Is that the right way to think about it?
Yeah, what you have is for someone, let's say, added in 2012, they start to transfer their book over. It's not as though they take a little time to transfer the book, then they start to get active again. What you see is a build for each one of those vintages. If you go back to your point of 2010, in 2013, they should be probably fully ramped up. In 2012, they were probably maybe two-thirds ramped up. You see that build. The people who came on in 2012 would start to get ramped up in 2013, but more in 2014 and 2015. That's exactly what you would see as a vintage build. It does vary by advisor. It varies by the type of book they have and the type of clientele.
There's not sort of a one size fits all, but I think on a vintage basis, you sort of get to a full run rate by the third year, in the third year.
Okay. I guess that means that as we go forward, we should start to see this come through pretty nicely because you've been ramping up the EARs since 2010.
Yes, you will see that. I would also say that even last year, at the beginning part of the year, we did have some good advisor ramp-up in productivity from our EARs. I think what offset that was that there was a slower level of activity in our system, including with our change in our Variable Annuity product that slowed down a lot of our transaction volume. I think it's buried within there, but as we look at the vintages and we look at the advisors that come on board, we are seeing good, nice ramp-up in the productivity.
Got it. Okay. Thank you.
Our final question comes from John Nadel with Sterne Agee. Please go ahead, sir.
Suneet took the words out of my mouth in the follow-up on the capital return. I have no more questions. Thanks.