Ameriprise Financial, Inc. (AMP) Q3 2013 Earnings Report, Transcript and Summary

Welcome to the Ameriprise Financial Third Quarter 2013 Earnings Call. My name is Paulette, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Alicia Charity. You may begin.

Thank you, and good morning. Welcome to Ameriprise Financial's Third Quarter Earnings Call. On the call with me today are Jim Cracchiolo, Chairman and CEO; and Walter Berman, Chief Financial Officer. Following their remarks, we will be happy to take your questions. During the call, you will hear references to various non-GAAP financial measures, which we believe provides insight into the company's operations. Reconciliation of the non-GAAP numbers to the respective GAAP numbers can be found in today’s materials that are available 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 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 2012 annual report to shareholders, and our 2012 10-K report. We make no obligation to update publicly or revise these forward-looking statements. And with that, I'll turn it over to Jim.

Good morning and thanks for joining us for our third quarter earnings call. I'll begin with my perspective on what was a strong quarter for Ameriprise and share how I'm feeling about the business. Walter will discuss the numbers in more detail, and then we'll take your questions. As you saw yesterday, we reported record third quarter results with operating earnings at a strong 36%. I'm feeling good about how Ameriprise is positioned and the progress we're making. Activity is picking up, assets are up across the firm and we're maintaining expense levels as we continue to invest for growth. Our Wealth Management business had another terrific quarter. And our assets under management and administration increased 8% to $735 billion, reflecting good advisor client flows and market appreciation. Our capital and financial foundation, essential to our ability to grow and to navigate the environment remains in great shape. We have the capital strength, free cash flow and ability to return the majority of our operating earnings to shareholders annually, which we will continue to do. During the quarter, we returned $475 million to shareholders through share repurchases and dividends. Over the last 4 quarters, we returned 129% of our operating earnings to shareholders. With our strong earnings and capital return, we delivered a record high operating return on equity of 19.4% and we're moving forward on our path with purpose, executing the strategy we regularly discussed with you and achieving the returns that we've targeted. Let's talk about our segments beginning with Advice & Wealth Management. As I mentioned, our AWM business is performing very well. Our strategy is working. We're continuing the progress we've made in delivering excellent financial results with room to grow. Operating net revenue is up 12% to $1.1 billion, and that's including the weight of low interest rates in our decision to exit the banking business. Client and advisors are engaged and we're bringing in good client flows. As an example, this is the third consecutive quarter that we've seen at least $3 billion come in through our RAP program, which is on pace for a record year. Total client assets are up 13% to $389 billion. Our advisors are increasingly productive. Adjusting for the bank, per advisor productivity increased 16% from good asset growth and strong transactional activity. We continue to manage our overall expense base well. Margins grew nicely to 14.2%, close to a 200-basis-point improvement from a year ago, even after the loss of the bank earnings and lowest spread revenues on our large cash business. We're focused on what we believe are significant opportunities to strengthen our position, drive productivity and improve efficiencies as we help advisors use the resources and the capabilities that we have invested in for them. Our priority is to continue to bring in new clients and assets and we're energized about how our Confident Retirement approach can help do that. Our advisors are telling us how effective it is and simplifying the conversation with clients and prospects to help them better understand what they need to think about for a secure and confident retirement. We're seeing good results. Our latest surveys show very high levels of client and advisor satisfaction, confidence and value provided. Our goal is to engage even more of our advisors through field training to take advantage of the Confident Retirement approach in their practices. And we want to continue to attract new people, both clients and experienced advisors to Ameriprise. In terms of our brand and advertising, we're working with Tommy Lee Jones again, because we like the way he conveys our story and consumers and advisors have responded well. We're currently filming new ads that you'll see early next year. We're also helping advisors benefit from the investments we've made, included in technology with the brokerage platform and our e-tools and online. Our advisors are finding that our technology platform helps them increase efficiency and drive productivity. Overall, our advisor force is engaged and motivated. In terms of recruiting, we're bringing in good people as more advisors look to Ameriprise as a place to grow and engage more clients. Another 86 experienced advisors joined the firm in the third quarter and the pipeline looks good. External research has shown that Ameriprise is one of the most trusted financial firms in the industry. It was another excellent quarter for AWM. We're delivering good growth and profitability in both the employee and franchise channels. The business is consistently generating results we expected, and that we told you we could achieve. Our focus is to remain on the same path, execute well to maintain our momentum. In Asset Management, we're executing our stated strategy as we focus the business in areas where we see strong opportunity for growth. We have more work to do. However, in the meantime, we're delivering good financial results and beginning to gain traction in key long-term growth drivers. Our assets under management reached $479 billion, up 4% for a year ago due to the positive equity markets in the U.S. and Europe and from the initial progress we're making. The resulting revenue growth is good and we continue to manage expenses tightly. Operating earnings are up 15% to $178 million and adjusted net operating margin is a competitive 40%. We continue to channel resources in the areas where we see traction. Overall, we're delivering competitive long-term investment performance. We're making steady progress establishing our global investment teams as Columbia and Threadneedle align resources and strength to drive profitable flows. During the quarter, we added to our presence in Asia. We hired an experience Asian equities team based in Singapore as we build our manufacturing distribution and capability in the region. In terms of flows, Walter will get into the numbers but the outflows in the quarter were consistent with sources we previously identified. Legacy insurance mandates, former parent affiliated distribution, a sub-advisor and share class changes in the RIA channel. Similar to the industry in the third quarter, we experienced high redemptions in fixed income portfolios. We've been able to largely offset that pressure with good traction in some key growth areas. We're generating very good U.K. and European retail net flows as we overcome ongoing outflows of legacy insurance assets. This is a core theme at Threadneedle, managing a pool of lower fee assets in transition while growing the higher fee wholesale business. And domestically, we're beginning to see some traction in the underlying third-party intermediary channel largely in equities. When you adjust for the drivers we've discussed, third-party intermediate equity flows have improved as we focused our wholesaling efforts and benefited from the market conditions. That said, we have a lot more work to do. In institutional, we're gaining good traction. The traditional institutional business is healthy. In addition to a good flow of U.S. equity and fixed income mandates, we're winning mandates on a more global basis. Our pipeline is quite good. Our win rate is high and we more than doubled our new assets won versus where we were a year ago. Overall, in Asset Management, we know that we need to execute well to strengthen our position in the marketplace. We're already getting good positive financial returns and we're beginning to gain some traction. There's a lot more work to do but we're moving in a positive direction. Let's move to Annuities and Protection. Businesses that are important to us because of our focus in meeting clients long-term financial needs and our Confident Retirement approach. Both Annuities and Protection are performing well and in line with our expectations given the rate environment and weather related factors. Our Annuities business is well-positioned and we're generating good returns with lower risk and volatility. Revenues were up modestly and earnings were up considerably given the year-over-year unlocking swing, which Walter will discuss. We've built a differentiated business that we're growing at a pace we want with focus on serving Ameriprise clients. In variable annuities, cash sales and Ameriprise grew 14% and sales of our managed volatility funds have continued to increase in recent months, with improved equity markets and good wholesaling. We've made strategic decisions to continue to de-risk the portfolio to lower volatility. We recently announced product feature and fee changes for some of our in force variable annuities with living benefit guarantees. These decisions reflect the market environment and our commitment to providing policyholders with additional investment options to help manage volatility. And in fixed annuities, we feel good about our existing book but aren't adding to it given the interest rate environment. As I look to next year, we're working through our decision to reprice a portion of the book that could help relieve some of the spread compression. In Protection, our financial results in the quarter reflected higher weather-related losses and an unfavorable, unlocking impact. That said, the underlying business is performing as we would expect. The growth of our Life business is directly aligned with the growth we're driving in Wealth Management. Our advisors offer our products to their clients as follow the Confident Retirement approach and we're seeing good growth in life insurance sales of 20% from last year. Index universal life sales continue to be strong and we're also experiencing improvement in variable universal life sales. In Auto and Home, earnings suffered because of the external environment where we had higher cap losses in the quarter from multiple storms. That said, our Auto and Home business metrics are good. We had steady policy growth of 10% from a year ago. We're working to deepen penetration with our affinity partners and with our own advisors and we're seeing nice progress. Auto and Home is rated one of the best for client satisfaction and retention also remains very high. To summarize, we had a strong third quarter to continue what is shaping up to be a very good year. Our business results and progress demonstrate that Ameriprise is on the right path. We're executing our strategy, serving more clients and growing as we drive improvements across the company. Overall, we're generating excellent return on equity and we're going to continue to focus on improving it. With strong earnings and our ability to generate significant free cash flow, we're able to continue to return to shareholders as we have in the past. With that, I'd like to hand things over to Walter for a detailed review of the numbers.

Thank you, Jim. Ameriprise delivered excellent financial results this quarter. Business fundamentals remain strong, top line growth was solid, expenses were well-managed and we had record profitability. Operating net revenue growth was strong at 7%, or 8%, excluding the impact from exiting the bank. This was driven by our targeted growth areas, Advice and Wealth Management and Asset Management. These 2 segments continue to deliver good growth and now represent over 60% of our total revenues. Growth in Advice & Wealth Management, excluding former bank operations, was 16%, which includes the impact of low interest rates. The growth in this segment was generated by solid business fundamentals, including growth in client assets, good transaction levels, as well as market appreciation. The year-over-year revenue growth was 6% and asset management was impacted by redemption driven hedge fund performance fees realized in the prior year. Adjusting for these performance fees, revenue growth was 9%, primarily from strong markets, the asset mix shift and revenue reengineering. In Protection and Annuities, revenue grew 3%, excluding the impact from unlocking, which is in line of our expectations, particularly in our continued low-interest rate environment. Let's turn to earnings on Slide 4. Ameriprise pretax operating earnings growth was 39%, with particularly strong growth in Advice & Wealth Management and Asset Management. Together, these segments represent almost 60% of pretax operating earnings. In Advice & Wealth Management, earnings grew 49% after adjusting for the bank exit despite the continued pressure from low-interest rates. Asset Management earnings increased 15%, supported by market appreciation. Adjusting for hedge fund performance fees in the prior year period, Asset Management earnings grew 20%. Annuities earnings growth was on target at 7%, excluding unlocking and the market impact of DAC and DSIC. The variable annuity earnings were good and fixed annuity earnings declined as expected given low-interest rates. In the Protection segment. Earnings in the quarter were impacted by higher CAT losses and the annual unlocking. Let's turn to EPS and return on equity on Slide 5. Operating earnings per share were $1.91, up a robust 45%, and operating return on equity hit an all-time high of 19.4%. Normalizing for items identified in the earnings release, these metrics are still quite strong with EPS growth of 17%, and return on equity of 18.8%. This performance has been quite strong given the low-interest rate environment, which impacted earnings by $39 million, compared to the prior year. The growth in EPS and return on equity reflect both solid business fundamentals and growth as well as our ability to redeploy capital, which we feel is a real strong point of differentiation for Ameriprise. Moving to the segments. Let's start with Advice & Wealth Management on Slide 6. We continue to deliver excellent results in Advice & Wealth Management across the board. Business growth metrics, revenue growth and expense discipline, all of which drove strong earnings and significant margin expansion. Pretax operating earnings, excluding former bank operations, grew 49%, from growth in client assets and advisor productivity. I will note that this growth was in the face of a negative impact of $18 million from lower spreads on cash sweep accounts and certificates. As a point of reference, brokerage cash sweep balances were $19 billion at the end of the quarter and the rate on a net basis was 15 basis points on average in the quarter, down from 38 basis points on average a year ago. Growth in client assets and strong activity levels, coupled with strong expense management have driven margins to a high of 14.2%, even with the bank exit and the lower interest rates. Turning to Asset Management on Slide 7. Revenue was $777 million, up 9%, primarily from market appreciation, offset by outflows. In the quarter, earnings were up 15% to $178 million. Excluding the redemption driven hedge fund performance fees, earnings were up 20%. Earnings growth was particularly strong due to well-managed expenses. While total expenses were up with the markets, G&A was fairly flat year-over-year. Adjusting for the expenses associated with the performance fees in the prior year, G&A was up only 3%. Adjusted operating margins improved to 40% from 37.6% a year ago, reflecting good revenue growth and tight expense management. Let's turn to flows in more detail on Slide 8. In the quarter, we had a total of $4.3 billion of net outflows. We had a total of $4.6 billion of outflows in the former parent-related and other areas we previously discussed. We had outflows of approximately $2 billion across retail and institutional associated with 1 large former parent affiliated distribution partner. As we've said, outflows will continue as our share in that distribution channel normalizes though this quarter was a bit high given the rotation out of fixed income experienced by the industry and us. In the U.S. retail, we had $900 million of outflows at a sub-advisor and $400 million of outflows resulting from the share class change we made in the RIA channel earlier this year. In the institutional business, we had $1.3 billion of outflows related to legacy insurance mandates at Threadneedle and former parent influence mandates at Columbia. Additionally, we experienced fixed income outflows similar to the industry. However, we are gaining some traction, including U.K. and European retail where we had good inflows, as well as in the U.S. third-party institutional where we have a very strong pipeline. Turning to Annuities on Slide 9. Pretax operating earnings were $219 million, which includes a $73 million favorable impact from unlocking and the market impact on DAC and DSIC. Our variable annuity business remains strong with a high-quality in-force block and good growth in attractive new businesses. We also announced several proactive change to a small portion of our variable annuity block with living benefit riders in the quarter, including providing additional fund offering for existing clients. Variable annuity pretax operating earnings was $185 million, including a favorable impact from unlocking and the market impact on DAC and DSIC. The unlocking was primarily related to higher interest rates and bond fund returns as well as changes in assumed policyholder behavior. In fixed annuities, pretax operating earnings were $34 million, with a minimal impact from unlocking. The results in the quarter included about $11 million of lower earnings from spread compression. However, the higher investment income from former bank assets transferred into this portfolio late last year offset the interest impact by $6 million. Operating return on allocated equity was over 20% for the Annuity segment, and it included $500 million of contingent capital allocated to variable annuities for stress scenarios. Moving to Protection on Slide 10. Pretax operating earnings was $75 million, which included an unfavorable impact from unlocking, elevated CAT losses and pressure from low-interest rates. Underlying Life & Health business remains solid. We had good sales of both variable, universal life and index universal life. Claims experience was good and well within our expectations. Auto and Home has continued strong new policy sales growth across market segments, from our affinity partnerships. Earnings in the quarter reflected an increase in reserves, primarily from $15 million in CAT losses and our normal quarterly actuarial experienced model uptick. Let's turn to capital on Slide 11. In the quarter, we returned $475 million to shareholders through dividends and share repurchases. As you can see, we have been able to consistently return more than 100% of earnings to shareholders due to our business mix shift, risk management capabilities and strong balance sheet fundamentals. Based on current market conditions, we expect to fully neutralize the EPS impact of exiting the bank by year end. We issued $600 million of senior debt in the quarter to retire existing debt. We have announced plans to execute a make-whole of $350 million of our outstanding senior debt that matures in November of 2015. We expect that this will result in approximately a $20 million loss in the fourth quarter, which will come through the corporate segment. Overall, we have successfully laddered out our debt maturities and reduced our ongoing debt expense. We ended the quarter with continued strong balance sheet fundamentals and over $2 billion of excess capital. And we expect that our approach to returning capital to shareholders will continue to make Ameriprise unique. With that, we'll take your questions.

[Operator Instructions] And our first question comes from Alex Blostein from Goldman Sachs.

Great. You guys did a pretty good job kind of dissecting all the moving pieces in the flows for the Asset Management business. But I was hoping, like taking a step back, maybe you can tell us a little bit more on the fees for the stuff that's kind of parent-related and running off versus, I guess, the new assets that are coming in because we know Zurich is low fee, but I was wondering, if you can kind of tell us on some of the U.S. Trust pieces and some of the Marsical pieces as well?

Well, Alex, if you look at the overall fees versus our assets, we've been actually improving over the sequence. So, we are, as we explained, the basically, we're accreting on for the year-to-date on the assets that are coming in versus the assets that are leaving. So on that basis, we are mostly making up from a revenue standpoint. As you can see, our percentages have increased over the quarters. We don't get into the specifics as it relates to each one of the elements, but certainly, the elements are dealing with that in the way that we thought it would occur.

Just so, kind of steady markets and assuming these dynamic continues because you guys still do have a decent amount, I guess, that could be running off. I guess we should continue to see an improvement in the fee rate, overall, that's fair.

I think that's correct. That's a good observation.

Great. And then just real quick on AWM, I was hoping you could remind us given the good improvement you've seen in sort of both channels in the franchisee and the employee side, where the pretax margins are on each one of these sub-segments within AWM?

Well, okay. We really don't go -- as we said, the employees side of it is certainly moving into profitability as Jim has said and -- so that is making -- and that has the higher fix expense that we are getting into a positive margin there and we anticipate over time that we will certainly get to the levels of performance that we see in the franchise channel. Overall, you saw that we had a 14.2% and that takes into consideration, certainly, the bank last year was not there and that's a big impact and then the lower interest rates. So we do see the improvement in both of the -- in the 2 areas and you're going to see, I think, a greater improvement, obviously, coming from the employee channel.

Okay. So employee is profitable but not significantly profitable, right? So low-single digit margin is probably fair?

Yes, that's fair, and again, it's building now because that has the high fixed and now we're making -- building in the volume and the activity level. So it's an, obviously, the lower pay outs that we will actually start to accrete our margin in that area as we build according to our plan.

Our next question comes from Bill Katz from Citi.

This is Steve in for Bill. Given the lower G&A in the quarter for Asset Management, should we look at 40% as a sustainable margin? And is there room for margin expansion, x outside the AUM growth?

Yes, I think on the expense side, and certainly, if you look at the trend line and the expenses that you saw in the third quarter is probably, a reasonably good run rate on that. And as far as expansion, certainly, we anticipate that we're at a pretty good level right now and, hopefully, as we get the AUM, getting the flow improvement, we would see that and the markets are certainly helping. But the expenses are pretty much in line where we anticipate.

Okay, great. And then the performance on asset allocation equity remains strong. How is that playing out in flows and when may you get credit for that solid performance?

Well, we feel that the longer-term track records are good. We had a little slippage in the 1 year numbers but we feel that those are larger quality portfolios that are more driven by dividend type of stocks, et cetera. So they've underperformed a little bit in the quarters. But I think our track records are strong, and I think they are playing well out there, and again, this is a focus area for us to improve our flows over time and we're gaining some traction in our institutional business in that way and retail is starting to pick up. So we do believe that it will hopefully pay some dividends as we move forward.

Our next question comes from Suneet Kamath from UBS.

I have a couple of questions. First on Advice & Wealth Management, the advisor productivity statistic that you have in your supplement, I think, 110,000 per advisor. Obviously, there's lots of moving parts that kind of going into that number market-related fees, interest rates et cetera. But maybe just a high-level, Jim, could you kind of give us a sense of where you think that productivity statistic could go over time? And again, not putting any specific timeframe on it, but just kind of where would you like to see that number?

Well. First of all, to a point reference of we've made some very good progress. Third quarter is usually -- seasonally a little slower period but we didn't see as a full out there, so actually on a relative basis, we'd say that we're continuing good momentum from the second quarter. And so we feel like that should continue. I think we have a lot of the pieces in place. Our advisors are focused. Client activity has come back. I -- We still have a good new inflow of assets. More assets have gone into our assets under management program. Our cash levels are still quite high. I mean, I think relatively good and strong, so it could be deployed even further over time. And we are much more focused on our Confident Retirement approach, which we think is actually helping as well to get even more clients engaged in our financial planning process and advice proposition. We are deploying a lot of the tools we invested in that are out there. The uptake is beginning to be very good and we know that the use of these tools and capabilities better engage clients and also frees up more time for the advisor and their teams, so that they can actually even become more productive. So we are very much focused on continuing this. I think one of the things we've always tried to do is continue the productivity, not just add new advisors but to continue productivity on our current base which we've been doing. So I look forward to that continuing and we are targeting that.

Got it. That's very helpful. In terms of the pieces. But just maybe stepping back, I mean, how -- we look at some of the benchmarking work that -- we've done some benchmarking work relative to other distribution systems and it seems like there's a pretty wide gap between where you are and where, say, Morgan Stanley is, or Bank of America is and I get that -- the disclosures are different and the models are different and I understand all of that. But assuming that there is a pretty sizable gap, how much of that gap do you think you could close on a go-forward basis?

Okay. So what we'd have -- what we look at it is that -- so when you compare us to the wire houses, their focus is really on a bit more of the higher affluent type client on average and so their productivity per person is driven a little more by that activity. Ours is a little more on the massive flow into affluent and so we get a deep more consistent revenue stream from the multiple ways that we deploy and deepen the relationship through our financial advice. Now, on a -- against the independents, remember our franchisee model is more of an independent model. We are the #1 house on the street. Our productivity is way above the large houses there, if you compare us to some of the independents. So if you look at the franchisee channel, which is our largest channel, we are highly productive against the industry. If you look at us against the wire house channel, based on the nature of the type of business and where their focus is, yes, we have room to grow. Now our growth and productivity has been pretty significant over the years and we see there's a lot opportunity to further grow that. So I actually think that we will be able to penetrate those higher ranks. We are -- our advisors are focused on bringing in more clients at the higher asset levels today and position themselves to have all the capability, they have all the knowledge. We have actually some of the best tools out there and our advice proposition is strong. So that's exactly, to your point, where we are focused.

Got it. So bottom line there, you see some decent upside to this $110,000 per advisor statistic that you guys reported in the third quarter?

Yes.

Okay, got it. And I guess, Jim, you had some comments, I think, in your prepared remarks about the Columbia retail business and how you're starting to see some third-party flows, I think, related to equities and I didn't quite get all the numbers. I am just wondering if you can maybe drill into that a little bit and give us some color in terms of what's going on there?

Yes, I think there are 3 aspects where we see positive momentum beginning and one strong. So of course, it was Walter mentioned and I did, Europe continues to be strong in both retail in the U.K. and Europe. It was a little slow on a net basis because we have 1 large mandated fixed income that left in the third quarter but that was sort of a larger blip that occurred. Other than that, the flows were quite strong and it would have been in a larger net inflows during the quarter adjusted for that one fixed income mandate on the platform. In the U.S., our institutional business has picked up nicely. So we recorded and booked a bit more wins but there is a large win -- wins that have not funded yet and the pipeline is actually the largest that's ever been for us and continues to grow and so we, hopefully, will see that come in over the next few quarters. And that offset some of the x-parent stuff that we experienced in that channel and that's beginning to slow to, as that base of assets has diminished a bit. And then the last piece is on the intermediary and the third-party. It's hard to see some of those inflows because we, just like the industry, got hit with in the third quarter a bit more of the outflows in fixed income, so if you adjust for some of the x-parent activity in that thing or the Marsico RIA type thing, we did see a pickup in retail equity flows but it was offset by the fixed income that got a little higher redemptions across the channel. But we see that being a bit more positive as we move into the fourth quarter as well and we think that the fixed income outflows will slow a bit as we've been saying more recently, and I think, some of the buckets that we've mentioned, the sub-advisor and the RIA will also slow on the outflow basis. So that's sort of an initial feel, but again, we got a lot of the quarter to go.

Got it. And then last question for Walter, I guess on the capital return. At some point, I guess we've been sitting here thinking that the $2 billion number would start to come down, especially as you're returning more than you're generating and earnings. But it seems like that excess capital is sort of staying at that $2 billion, slightly over $2 billion level. So I guess, at what point should we expect as we move into 2014 that, that feels sort of draw down some of that excess capital or how should we think about that going forward?

Yes. Okay. We certainly, as we look at it, it's a bit of a high-class problem because we are generating a lot of free cash flow and capital and also been improving our requirements on it. So it's our intention again, as we indicated not to certainly, hold onto $2 billion plus, and certainly, we're evaluating those options as it relates to both from a dividend standpoint and from shareholder repurchase. So it is -- we are on track, like I said, if you look at the numbers, repurchase, so far, over $1.1 billion and the dividends, certainly, $307 million. So we are on track to achieve what we said for the year and certainly as we evaluate 2014, we had the capacity and capability to certainly, assess. We certainly still feel that with this room to refer valuation that we -- it still make sense to us and we would expect that it's not our objective to hold onto $2 billion.

And I think, Walter, it's probably incumbent as much on is, again this year, as we've tightened and introduced various adjustments to our products and tightened our hedging and moved in some of the dynamics of some of our capital-intensive businesses, we've been able to free up a bit more capital and so that's the reason why we still have maintained a stronger capital days after returning the extra and part of that extra as you know, we did from the exit of the bank which will gives us a high returning overall company in the future. So I think over time, you'll start to see that adjust as we return -- continue to return well. But we also are generating more free cash flow because the type of the shift in the mix of the businesses.

[Operator Instructions] And our next question comes from Tom Gallagher from Credit Suisse.

This is David Motemaden on behalf of Tom Gallagher. Just have another question on the lower expenses in Asset Management. Just, really, was wondering what was behind that, mainly was it comp or non-comp expenses?

No. In the Asset Management, actually, it is -- if you looking sequentially, the expenses in the quarter were actually -- we had certainly, we're upped our comp but the net effect was pretty much a normal quarter for us. If you do on a sequential, we had basically the CDO element in that quarter, the prior year and the hedge funds in the prior year to date. So expenses are tracking. As we indicated, we are managing them quite well and certainly, we feel that we can continue on this track. So there was really no aberrations in the quarter at all.

Got it. And then I know, historically, there have been some higher performance fees from the alternative AUM. I'm just wondering how to think about that heading into the 4Q?

No. I think, again, on the alternative, is certainly, it's -- we don't just see a big impact into the fourth quarter.

Yes, that asset base has come down a lot as we've mentioned over the last number of quarters. So that should not be a major impact at all.

We have no further questions. This concludes today's conference. Thank you for participating. You may now disconnect.