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Ameriprise Financial, Inc. (NYSE:AMP)

Q3 2009 Earnings Call Transcript

October 22, 2009 9:00 am ET

Executives

Laura Gagnon – IR

Jim Cracchiolo – Chairman and CEO

Walter Berman – EVP and CFO

Analysts

Tom Gallagher – Credit Suisse Securities

Andrew Kligerman – UBS

Jeff Schuman – Keefe, Bruyette & Woods

Suneet Kamath – Sanford Bernstein

Eric Berg – Barclays Capital

Colin Devine – Citigroup

Laura Gagnon

Thank you, and welcome to the Ameriprise Financial’s third quarter earnings call. With me on the call today are Jim Cracchiolo, Chairman and CEO; and Walter Berman, Chief Financial Officer. After their remarks, we will take your questions.

During the call, you will hear references to various non-GAAP financial measures, which we believe provide insight into the underlying performance of the company’s operations. Reconciliations of non-GAAP numbers to the respective GAAP numbers can be found in today's materials available on our Web site. Some of the statements that we make on this call may be forward-looking statements, reflecting management's expectations about future events and operating plans and performance.

These forward-looking statements speak only as of today's date and involve a number of risks and uncertainties. A sample list of factors and risks that could cause actual results to be materially different from forward-looking statements can be found in today's earning release, our 2008 Annual Report to shareholders, and our 2008 10-K Report. We undertake no obligation to update publicly or revise these forward-looking statements.

With that, I would like to turn the call over to Jim.

Jim Cracchiolo

Good morning. Thanks for joining us for our third quarter earnings discussion and thank you for adjusting to this new time for our conference call. We thought we would give you a bit more time to understand the numbers so that we can focus our call on our strategy and progress.

As our results demonstrate, the company continues to emerge from a very difficult period in excellent condition. Throughout the financial crisis our balance sheet strength enabled us to continue to invest while others retrenched. Now with two quarters of stable and rising markets behind us, we are beginning to see improving traction in key business metrics and we are regaining the earnings power that our diversified model provides.

We are also seeing positive trend lines across our segments. Retail activity is beginning to improve as our clients are starting to gain confidence and beginning to reenter the equity market. We have not returned to the activity levels we had before the crisis but the progress we are seeing is positive. As a result of the stronger markets and increased flows, our asset levels are growing significantly which is providing increased earnings leverage. In fact our total owned, managed and administered assets increased to $440 billion at quarter end, an 11% increase over the sequential quarter. Just as important, our client and advisory retention both remained at very high levels and the core of our business, our client advisor relationships remained strong.

We are also making good progress in integrating the acquisitions we made last year. The Seligman integration is essentially complete and we are beginning to see improving asset flows in those funds along with solid growth in our hedge fund business. The H&R Block Financial Advisors integration is also proceeding according to plan and we are in the process of completing systems conversions. That acquisition has given us the opportunity to re-engineer our employee advisor platform and we believe that group will now have the ability to deliver stronger economics over time.

At the same time, our strong foundation and prudent operating principles continue to serve us well. The balance sheet remains in excellent condition. In fact, we swung to a net unrealized gain position during the quarter and because we pre-funded our acquisition we will be able to execute the Columbia Management transaction and still maintain significant capital flexibility with strong excess capital and liquidity positions. In addition, we are continuing to reduce expenses and we are on pace to exceed our goal of $350 million in re-engineering savings this year. Overall, I am comfortable with our earnings trends and I am confident in our ability to capitalize on the opportunities we have created for the company.

Now, before Walter gives you more detail on the numbers for the quarter, I would like to provide some insight into our operating segments. Importantly, all of our segments were profitable in the quarter. First in Advice and Wealth Management, our client assets increased 11% sequentially which was driven by rising markets and net flows. In terms of client activity as I said, we are seeing improvements and the pattern has been consistent with our expectations. We knew from past experience that it usually takes retail clients about six months to return to the markets after a market downturn and we are around that six-month point now. Given the severity of this crisis, we are not surprised that activity is coming back slowly. Over time as clients continue to gain confidence and redeploy cash into the equity markets, this shift will provide an additional earnings lever for us. As a result, the clients remain conservative.

Cash balances remain high in clients’ accounts. Because of very low short-term interest rates, the cash balances are not earning significant spreads and this has created a drag on earnings. If short rates begin to rise, we would see a nice benefit. When clients are accepting more risk, they are tending to look for products that give them diversity and flexibility.

During the quarter we introduced a new product Active Diversified Portfolios that is meeting this need. It is the second product in our Active Portfolios series and it has generated strong demand. In our Advisor group, we are beginning to derive benefits from our experienced advisory groups who are succeeding at bringing their books of business to Ameriprise. Clearly we were able to recruit a higher than expected number of advisors as we took advantage of the turmoil in the industry earlier this year. Now the conditions are calmer, recruiting has slowed.

We have also reduced the pipeline of advisors coming to Ameriprise as we rollout a new brokerage platform and complete the block acquisition. Once we have our employee advisor group fully integrated into one broker dealer, operating on one new brokerage platform, we think we will present an even more compelling value proposition to our experienced advisors.

Now I will turn to asset management where we have generated total net inflows of $2.3 billion. In domestic asset management sales of mutual funds are beginning to increase and redemptions have remained steady, which has allowed us to return to net inflows in domestic retail funds. We have also won some important institutional mandates and on third-party distribution, which has been slow, they are starting to gain traction again.

Overseas, Threadneedle continues to perform very well with strong net inflows across its businesses even with continued Zurich outflows. In terms of the investment performance, domestic performance continues its positive trend in the quarter with improvements across equities and fixed income and in both retail and institutional. Most of our funds remain positioned for a recovery and as a result all of our asset-related performance numbers improved versus the sequential quarter. At Threadneedle performance remained excellent with 90% of equity funds above their peer mediums for three years.

The quarter was highlighted of course by our announcement of the Columbia Management acquisition. We continue to feel very good about the financial and strategic possibilities Columbia will give us and about the cultural fit of the two organizations. Columbia’s employees and clients have received the combination very well and the business continues to perform at a high level. In fact, the long-term assets we will acquire have appreciated to $184 billion at quarter end. We remain confident that we will be able to execute the transaction efficiently and that we will be able to deliver on our financial projections for the deal.

Turning to annuities, we are continuing to drive strong results and I feel good about the direction of that business. In variable annuities asset balances increased 13% sequentially primarily from market appreciation. Net flows remained positive despite slow sales as clients remained reluctant to enter long dated contracts. We think sales will pick up as conditions continue to improve and as two new products launched during the quarter gained traction. The new secured source riders are designed to meet current client interest while preserving strong returns for the company. Our variable annuity hedging program continued to perform well in the quarter and DAC unlocking demonstrated the strong underlying fundamentals of the VA book.

In fixed annuities, our balances were up 25% compared to a year ago. During the quarter, we lowered our rates in response to the spread environment, which resulted in lower sales. On the other hand, the growth in fixed annuity balances that resulted from strong sales over the previous several quarters is now generating solid returns.

In the insurance business, sales continue to be a challenge for the industry. In general we are seeing clients still opting for fixed products rather than variable and sales are trending up but they are still below last year. Total VUL and UL sales increased by 22% sequentially but were down 4% compared to a year ago. Importantly our book of business in the protection segment remained solid.

We are also continuing to introduce innovative insurance products in response to current conditions. During the quarter we launched a new optional rider on permanent single life policies to help clients manage costs associated with chronic care and we are seeing good initial traction in this product. In addition our Auto & Home business continued to generate solid growth driven by 8% increase in policy count over a year ago. This business has generated very consistent growth and it continues to produce nice margins.

Overall, as I look across our businesses, I am starting to see improvements in client activity and along with that we are realizing improved asset flows and nice growth in asset balances from the rising market. At the same time, our solid financial foundation continues to support our model and our growth objectives. Because of our strong capital base and our continuing focus on expense control, the company is in an excellent position to navigate various market and economic conditions. If markets continue to improve, we have substantial flexibility to invest in future growth or to return capital to shareholders as appropriate. And we have a lower expense base to help us drive earnings growth.

To summarize, I feel quite good about the direction and positioning of Ameriprise Financial. We believe in the strong earnings power inherent in our model and we are confident that we can execute our agenda and bring that power to fruition.

Now I will turn it over to Walter for more details on the quarter and after that we will take your questions.

Walter Berman

Thanks Jim. We posted slides on our Web site again this quarter and they will be updated with my 12 points after the call.

Please turn to slide 3. We are beginning to see improved profitability trends. Reported net income was $260 million compared to a prior year loss of $70 million, while core operating earnings of $268 million were up 7%. Core earnings growth was the result of improving fundamental drivers.

Please turn to slide 4. This chart reconciles reported and core operating EPS. The differences were marginal this quarter but we have continued to show this table because of the very significant market impacts on earnings last year. In total excluding non-core items, operating EPS declined from $1.13 to $1.03. However excluding the 36 million shares issued to pre-fund the acquisition EPS was up $0.06 to $1.19. Regarding taxes in the 2009 quarter we increased our forecast of full year profits which raised the full year effective tax rate estimate to 22% from 20% at the end of the prior quarter. This catch-up is reflected in the higher 23.7% effective tax rate for the quarter.

Turning to slide 5, you can see the net revenue trends for the past five quarters adjusted for the impact of DAC unlocking in both years. On this basis, revenues increased by 7% compared with a year ago and by 17% compared with the low point of the first quarter of this year. These positive trends were driven by strong underlying factors. First growth in net investment income as spread product account values and earned spread rate both increased. These trends along with our consistent insurance premiums form a solid base for future revenues. Growth in management and distribution fees reflects the equity market increases as well as positive flows and acquisitions.

On slide 6 you can see our re-engineering progress. This slide shows the increasing ability of our re-engineering programs to offset the market impact. The estimated market impacts year over year are declining. As a result of both the recent equity market appreciation as well as lower comparisons from last year at current equity levels the fourth quarter 2009 daily average could actually exceed the current prior year quarter although there is still a material difference in yield available for our liquidity pool.

We have employed re-engineering to mitigate the market impacts on revenues and PTI with about two-thirds of our re-engineering savings falling to the bottom line. The remaining one third has been reinvested in the business to support longer term growth. In the third quarter re-engineering sales offset approximately 80% of the market impact. Given our intention to maintain our focus on expense management and at current equity levels, net re-engineering benefits are expected to exceed the market impacts in the fourth quarter.

On slide 7 you can see the drivers of our unlocking. The detailed line items impacted by our marketing are disclosed in our statistical supplement. Bottom line unlocking benefited core operating earnings by $0.33 per share compared to a $0.31 per share benefit last year. The unlocking benefit was driven by improvement in the following assumptions, spread, persistency, expenses and mortality.

If you will turn to slide 8, I would like to point out just a couple of things related to our VA hedging. You can see that our variable annuity hedging continues to be effective. As in the past quarters, non-performance risks and basis risks have continued to offset each other. While the non-performance risk impact was a negative $27 million, basis risk was a positive $25 million for a net expense of $2 million. The correlation is a result of the basis risk also being primarily driven by spread. Death benefits were a positive impact in the quarter as the equity market gains resulted in lower reserves. In total the variable annuity benefits impact was immaterial in the quarter.

Slide 9 shows the major components of our unrealized gain position. In total we believe the improvement reflects the higher quality of the portfolio as our (inaudible) spreads narrowed and risk rates declined during the quarter. The primary driver of the $1.4 billion improvement was investment grade corporate, the largest component of our available-for-sale portfolio with a fair value of over $15 billion. The second largest driver is the CMBS segment reflecting the overall high quality of that portfolio. On a percentage basis, increases in fair value as a (inaudible) the biggest positive movements were in the prime RMBS portfolio as well as the high-yield corporate portfolio.

Next, I would like to address our balance sheet strength on slide 10. We continued to maintain more than $2 billion in excess capital. Of that approximately $1 billion is expected to be deployed for the Columbia acquisition in Spring 2010. We do not anticipate any additional variable annuity capital requirements at year end. We will continue to maintain appropriate liquidity levels down from prior quarters but still above early 2007 levels. The target is somewhere between $1 billion to $1.5 billion in free cash for normal market conditions. We expect to continue to maintain strong capital ratios. Our debt to equity excluding non-recourse debt and with 75% equity credit for our hybrid is under 15% and we anticipate our variable annuity hedging will continue to perform well.

I conclude with slide 11 our outlook for the remainder of the year. We have a favorable view for the balance of 2009. Given current equity market flows and our spread product base, we expect continued favorable net revenue growth trends. We expect to end the year with re-engineering expense savings above plan with some operating expenses impacted by improved profitability namely taxes and compensation. As a result, the positive net revenue trends and continued re-engineering benefits, we expect to see positive profitability and returns.

We have completed the Seligman acquisition and will be focusing on the operation and consolidation of HRBFA as well as launching the Columbia integration activity. Finally, we expect to maintain strong balance sheet fundamentals. In summary, we expect to exit 2009 with accelerated earnings and a very strong foundation.

With that we will now open it up for questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Tom Gallagher with Credit Suisse Securities.

Tom Gallagher – Credit Suisse Securities

(inaudible) talk a bit about what is going on in international institutional within asset management that is really where you had the main delta in terms of net flow turnaround and I know you had mentioned that Zurich still had net outflows, can you talk about what has been driving that positively?

Jim Cracchiolo

Yes, the Threadneedle business is starting to experience some good wins in their institutional mandates for external clients and the stronger institutional offset some of the continued outflows in the Zurich book, but we are seeing some good wins there based on their investment performance both in fixed as well as equity and people are beginning to get back into the markets both in Europe as well as we are winning some mandates in Asia in the Middle East.

Tom Gallagher – Credit Suisse Securities

And Jim, would you say there were any jumbo type transactions or were these a type of wins that you think are going to be recurring sustainable so we can see this as more of a permanent level?

Jim Cracchiolo

Yes we cannot predict but I think there are a number of wins, there was not necessarily one or two big mandates but they are reasonable size mandates and we see our pipeline there looking pretty positive.

Tom Gallagher – Credit Suisse Securities

Got it, okay. Next question is can you just give an update on the incentive fee outlook for asset management relative to where you are versus (inaudible) on the assets you manage with incentive or performance fees?

Jim Cracchiolo

I think overall our performance has been coming back in a number of areas, I mean we still have some negative PIAs in some of our retail funds so that has been a little bit of a drag on us but as we looked at the performance coming back this year, it is quite positive particularly in the fixed income area. When I look at the hedge funds particularly around (inaudible) area that has been performing quite strongly and so that will be positive and we should be getting some performance fees that we will be booking in the fourth quarter there.

Tom Gallagher – Credit Suisse Securities

And you still do the one-time true-up in 4Q for performance fees?

Jim Cracchiolo

Yes.

Tom Gallagher – Credit Suisse Securities

Okay. And the last question I had is related to variable annuities, I was looking at page 19 of the supplement just looking at GAAP allocated equity to variable annuities and I noticed it has not increased yet last quarter you had said VA Carvum [ph] and CTE 98 would require another $600 million of capital related to that business. So my question is, should I not be looking at the GAAP allocated equity as being the actual capital required because the $600 million was more of a statutory concept or maybe you can help me reconcile that.

Walter Berman

Hi, this is Walter. So if you go back to quarter two, when we did mention that if you took the impacts that we are estimating for VA Carvum and CTE 98 that was in the $600 million and that obviously we had an offset as it came as we went to cash flow that is reflected, the VA Carvum is reflected in it but because we are now getting in the improving market. So it is our best circuit to get to the capital equivalent of risk base. So it is there on that basis.

Tom Gallagher – Credit Suisse Securities

But Walter if I look at it, and this is again just from your financial supplement, 1Q09 said $1.1 billion of allocated equity to VA, 2Q09 $800 million, 3Q09 $986 million, and if I go back to 4Q08 $1.3 billion. So actually on a GAAP allocated equity basis, it has come down, it has not gone up.

Walter Berman

That is correct. You are having the markets move through there, you are having basically the 157 [ph] moving there so you will have a lot of moving factors going through but the VA Carvum is within that calculation.

Tom Gallagher – Credit Suisse Securities

Okay, thanks.

Walter Berman

You are welcome.

Operator

Your next question comes from the line of Andrew Kligerman with UBS.

Andrew Kligerman – UBS

Good morning. First question and then two quick follow-ups, with your advisor, your Ameriprise advisor, so it fell sequentially by 224 to about (inaudible) and you mentioned a little earlier that you are moving on to one platform, could you give a sense of the timing when that gets completed and what type of advisor count growth objectives do you have over the next 12 months or so?

Jim Cracchiolo

Okay. There are two things happening right now. One is as we are migrating to one platform, we are also combining the field office activities in certain locations and realigning the employee base to one sort of network. So there are some adjustments occurring, some of the old P1 advisors that were more of the Ameriprise, some of them are deciding and they are migrating to our franchisee channel a bit. Second is we have slowed down the recruitment activities because we are in the process of conversions and so we are moving people from the old platform first the block platform over to the new and then our own advisors over to the new and that is taking place in the fourth quarter and so it is more difficult to bring people over and transfer the books during that time.

And third in the franchisee channel, we do have some attrition it is mainly in more of the advisors that are part of the franchisee teams that were under them in their team structure where they have tightened their reins a little bit based on levels of activity and so some of those lower level advisors in those team practices were let go or they moved on. So it is a combination of those things that we saw, the strong recruitment we did in the first part of the year before we migrated to the platforms and was happening in the industry, those people are onboard and we are getting them all situated and they are bringing over their books.

So what I would say is fourth quarter is going to be another slow quarter for us based on the changed that we are making and then we are hoping to get more into a stable flow next year and then as we migrate our franchisees over to the new platform, we could probably even open up recruitment more strongly in the franchisee channel next year as well which we are just starting to do.

Andrew Kligerman – UBS

Then just quickly on a follow-up to that one, is there anything particularly telling about the new platform that you did not already have, is there a major, major change there?

Jim Cracchiolo

Our platform previously we put in a great front-end system which is advisor plan of focus and we have all of the ways that you could work with clients for performance tracking, for goal tracking, for integrated activities regarding a broad product set which includes protections and annuities, etc. What we did not have is the latest in the features and functionality on the brokerage side and so this new platform will give us state-of-the-art of those capabilities combined with our front end we should then have one of the best technology infrastructures in the industry. And so we are quite excited about adding the new brokerage platform that would be a great complement to the front-end advisor workstations we have online.

Andrew Kligerman – UBS

Got it. In terms of the cost savings, if I add up the first three quarters of savings you got $290 million in the third quarter alone you got about $120 million and you are saying for the year you want to be doing more than $350 million, that would imply at least $60 million in the fourth quarter but I am assuming you would probably do at least the $120 you did in the third quarter, is that the right thinking? And then secondly as you are reinvesting the money from your savings, what is the primary focus for reinvestment?

Jim Cracchiolo

So on the first question, our run rate in re-engineering has continued to pick up, it is quite strong. It was $120 million in the third quarter, we see that run rate somewhat continuing. I will not give you an exact figure but it will be greater than the $60 million and we see it will definitely be above the $100 million mark as we get into the fourth quarter. In regard to how we think about reinvestment, this year alone we have been making investments, we have cut them down and scaled them. There are certain things that we would probably want to start picking up again next year but I think we are going to continue to keep a focus on expense control particularly in many of the areas where we have made the adjustments and re-engineered out the cause.

There are a few areas we might invest a bit more in again next year depending on the market situation things such as advertising media, things such as that but we have been making core investments in our architecture. We did commit to this new brokerage platform quality expenses, you will see it even AWN [ph] this quarter is because of that new platform we are putting in and that will continue as we go into the next year but that has all been counted as part of the investment strategy we already have. So investments may pick up a little if businesses continue to come back strong but I do believe we already have a base level of investments that we are still having in our plan this year, so it is not like we are going from scratch.

Andrew Kligerman – UBS

Perfect and then real quickly $2.1 billion of free cash you mentioned, do you put any of that to work or do you kind of keep that as sort of a buffer?

Jim Cracchiolo

I will let Walter speak.

Walter Berman

On the free cash, right now we are thinking in this environment looking at it we think it will be in the range between $1 billion and $1.5 billion and then we will adjust it as we see the situation but it seems like a pretty good range for us.

Andrew Kligerman – UBS

Perfect. Thanks a lot.

Jim Cracchiolo

Thank you.

Operator

Your next question comes from the line of Jeff Schuman with Keefe, Bruyette & Woods.

Jeff Schuman – Keefe, Bruyette & Woods

Good morning. A couple of follow-ups on the issues around the advisors in the platform, it sounds like the rollout of the platform is significant enough to influence your recruiting plans, I just want to be clear, is there a potential for this to actually be disrupted in terms of productivity for the existing advisors or is that not a concern?

Jim Cracchiolo

No I think what it is, is there will be some disruption as we convert over but the conversion has been going smoothly. I mean, what you really have is people getting more familiar with the new system, so there is some additional training depending on what they are familiar with and where they came from. So it is a probably a bit less for the block advisors that were on inversion [ph] of this type of platform. It is probably a bit more for our advisors in a P1 channel but our P1 channel do not do a lot of transaction processing activities.

So a core of what they do is the same, it is just more of getting used to the functionality and how to process work, etc. We are rolling this out to the franchisees over time based upon their need. So that is going to be scheduled out over the course of next year so we do not look for any major impacts. The only reason we have to do a major conversion on the employee size because we are putting together two broker dealers with the acquisition of H&R Block and that is what caused us to do the migration all within a set timeframe so that we can move to one legal entity.

Jeff Schuman – Keefe, Bruyette & Woods

Thanks, that is helpful. And then when you get back to somewhat a higher level of recruiting, what is kind of the general plan, are you going to get back to more your historical strategy around recruiting sort of newer advisors or are you going to continue on with the more recent strategy of targeting experienced folks or how does that kind of roll forward?

Jim Cracchiolo

I think as we start moving forward we are going to continue to focus on a bit more on the experienced front. We are going to probably push a bit more an opening to bring in more people that want to also move to an independent in the franchisee channel and we will probably start sometime next year again bringing in more of focused career changes that are pretty well established in understanding how to sell, etc., from other different venues that they been in the careers but we would probably start that up again in a very focused way and so the complement in the employee channel will be through combination of experience and career changes and then in the franchisees we are bringing in more of those people either coming from independence or coming from people warehouses that want to be more independent. Next question?

Operator

Your next question comes from the line of Suneet Kamath with Sanford Bernstein.

Suneet Kamath – Sanford Bernstein

Great, thanks. Two questions please. First on the advice and wealth business, if I look at I guess it is page 11 of your supplement where you break out the pretax earnings from the certificates and banking fees [ph] as well as the wealth management and distribution, if I exclude the certificates and banking maybe give you some credit for the integration cost, it just seems like this business is still the period of wealth management and distribution part of the business is still break even maybe losing a little bit of money, so my question is what is the strategy in terms of turning that around and what are maybe a couple of the major leverage points that you have to get this business back into profitability?

Jim Cracchiolo

Okay let me start, there are a few things. First of all, our activity is as I said beginning to come back. What we are saying there are two parts of that activity, one is as you are well aware a large part of our business is fee based, and so as the markets pick up and the account balances pick up that will be flowing into a type of wrap fees and quarterly fees that the advisors get and we have seen a nice trend pick up of that over the last two quarters and so it is starting to get back to nice balances that will start to realize some of the annuity streams from that and since our advisors do not do a lot of the media transaction business, you have not seen that come back quickly into the distribution revenue yet.

The second part of that is activity levels for some of the other products like transactions, annuities, some of the longer term accounts and insurance as well as even transactions in regard to things like REITs, etc., has not come back as quickly. We are seeing signs that it is picking up but that if there is such a volatile market change, just in a normal down market it was six months before our clients normally came back to some of the more normalized activity levels.

And then the third on the revenue side is the brokerage spread on the cash. It is getting a few dips that we are earning on it. If you go back in normalized short-term rates, if you get them over 1% to 2%, you would find that that would be a very lucrative profit margin that us and many other firms including Schwabs and others of the world of retail brokerage would find is an important revenue stream for profitability. So that has really been a drag on us. On the expense side, if you net out the integration cost we are up to about $28 million but that includes some of the new things I mentioned, the new brokerage platform we got is part of operating expense.

We still operate with two old platforms what we have block on, we have the block operating environment plus our own continuing to go on until we merge the broker dealers. So some of those expenses are not in the integration expenses and so they are included into the operating and when the revenue compressed that really hurt the profit margin. So as we get through the fourth quarter, some of those expenses should be relieved and therefore hopefully with the pickups I had mentioned in some of the other categories of revenue will start getting back to much stronger profits hopefully in AWM if the markets continued to hold.

Suneet Kamath – Sanford Bernstein

That is helpful Jim. When you announced the Columbia deal, you kind of gave us some useful information in terms of the margin potential for the asset management business, I think you said something like 20% to 25% by 2012. Could you give us just a ballpark guess in terms of where you think the margins in the advice of wealth management business assuming kind of market trends are stable could be by 2012?

Jim Cracchiolo

I would say we would probably get back to margins between the 10% and 15% depending on where cash is and short-term rates.

Suneet Kamath – Sanford Bernstein

Great. And then the second question was for Walter on the risk-based capital, have you run your calculations for 09/30/09 [ph] in terms of where you think the RBC might be?

Walter Berman

Yes, obviously we do it once a year but we will take a rough shot at it, it is certainly in excess of 350.

Suneet Kamath – Sanford Bernstein

I would have thought it would be much higher than that.

Walter Berman

You get a combination if you look it on (inaudible) moving, you have seen the markets move around but it is clearly in excess of that, substantially in excess.

Suneet Kamath – Sanford Bernstein

Okay thanks.

Walter Berman

Thank you.

Operator

Your next question comes from the line of Eric Berg with Barclays Capital.

Eric Berg – Barclays Capital

Thanks and good morning to everyone. My first question actually returns us to page 11 of your supplement. Even though you are reporting profits on a pre-tax basis out of your certificates and banking business, it looks like in the September quarter the number was $37 million pretax, you are showing a net return on allocated equity. Help me understand how you could have positive earnings allocated equity but a negative pretax return on allocated equity? Is the figure calculated differently from how it sort of normally is?

Walter Berman

Obviously it bank regulatory equity, it is basically the way that is factored in on that basis. So I think it is totally consistent from that standpoint. So we are factoring in the bank regulatory equity into that calculation.

Eric Berg – Barclays Capital

So the calculation is based not on the – well, again, it will not have a difference.

Walter Berman

Eric, if you look at it, we are first coming out of de novo status now and we are in discussions with the OTS as it relates to dropping the capital requirement as it (inaudible) which is substantially higher than an ongoing banking situation that we believe. Again I do not want to go ahead of ourselves with the OTS but certainly we see there will – we are hoping for a reasonable drop in that.

Eric Berg – Barclays Capital

You have given a very helpful and comprehensive answer to my question but I am really asking a very simple one, irrespective of how much equity you have in the business, how could you be showing a negative return if your numerator namely your earnings are positive?

Walter Berman

Yes, I understand but Eric if you go through the calculations, the full quarter calculations, so you get the full effect of it trailing through. So it is not just the current quarter that you will have to do it over the trailing – and I think that will work, we can go (inaudible) but it should really resolve, it is a trailing capital.

Jim Cracchiolo

It had to do with some of the losses recognized in the fixed book previously.

Eric Berg – Barclays Capital

Got it. Now I feel I have the answer to the puzzle so to speak. Jim, in the September quarter it was striking by how much the performance improved at RiverSource in the equity fund compared to the June quarter performance. It seems as if there was really a leap upwards in the percentage of the assets being managed in the top half of the (inaudible) peers, help us understand how in one quarter you could see what would appear to be on page 14 of the supplement a dramatic improvement in performance and then I will just have one more question? Thank you.

Jim Cracchiolo

Yes I think as we were looking at the performance of the product there was a more including in the second quarter a gradual trend up. So part of the performance improved towards the latter part of the performance and some of the bad or weaker performance, the earlier vintages were rolling off and that is why it sort of blipped up because it just needed to hit certain thresholds to get it up to the next level and so we continue to feel very good about the performance trends coming back there and hopefully based on what our investment people are focused on that will continue.

Eric Berg – Barclays Capital

Okay, thank you. And then my last question, back to you Walter, on page 8 of your slides where you are comparing the 25 to the negative 27 and you are circling them, at least in my slide there is a circle this is to suggest you want us to look at those numbers together, I am just wondering whether it is coincidental purposeful that those numbers are so close to each other in the sense that I thought the basis risk arises from sort of a difference in the sensitivity to credit spreads of your hedge on the one hand and you GMWB liability on the other, sort of a difference in the sensitivity to credit spreads that is kind of the basis risk and that the FAS 157 credit spread number the negative 27 really has nothing to do with the basis risk but simply reflects uniquely on your own credit worthiness. So I am thinking –

Walter Berman

No, I did not mean to interrupt you, I thought you were finished –

Eric Berg – Barclays Capital

No I am just wondering whether the fact that the 25 and 27 are so close together and netting to a small number a negative 2, whether that is coincidental or purposeful.

Walter Berman

It is not, it is correlated.

Eric Berg – Barclays Capital

Okay.

Walter Berman

I think we have been seeing a pretty close correlation with that and again it is different times to right now but it certainly has been closely correlated.

Eric Berg – Barclays Capital

Okay, thank you.

Jim Cracchiolo

Thank you.

Operator

Your next question comes from the line of Colin Devine with Citigroup.

Colin Devine – Citigroup

A couple of questions. First, Walter you mentioned with respect to the bank and the capital, I just wanted to clarify in your estimate as excess capital, is any of that include potential capital really from what you are holding for the bank assuming you get it out of the de novo status that is question one. Then question two, a little more detailed, if you could give us some more transparency on what really happened behind this (inaudible) I know you provided some numbers there but I would like to understand a little bit more given the declining long-term interest rates, the narrowing of credit spreads, as well as just what equity markets have done, why you did it but also what are your key assumptions then in terms of (inaudible), how long are you amortizing your DAC over? What sort of market returns are you assuming? What asset mix within the products are you assuming? That will be very helpful, thank you.

Walter Berman

As far as the excess capital, until we actually resolve and get clarity with the OTS about what the amount of capital is being required, we will not calculate it into our excess but if that comes to fruition, we would then count that and have the ability to give them that up if so it will become part of the capital.

Colin Devine – Citigroup

Do you have an estimate as to what that might be?

Walter Berman

We are in discussions right now. We are technically out of de novo and we are filing our three-year plan. We have to go through it. I do not want to be presumptuous and so I will let the process go to fruition. As far as basically looking at the assumptions, obviously you are aware that we go through a fairly extensive review by our actuaries looking at all aspects of this, I think we have a little different opinion about credit spreads, they have widened and we have seen the benefit of that reflected and that was calculated in from that standpoint. So we do see that is and has been certainly looked at and referral to an external accountant. And they looked at the persistency and the mortality we do – like I said we ensure 90% of it. So from that standpoint, we feel comfortable with those elements and looking at the expense benefits that we have predicated in.

So when we look at the market and the DAC, the DAC is matched to each product and how they evaluate it and look at it from that standpoint and the trends that they feel have developed and behavior patterns had developed. So we are comfortable from that standpoint. All the assumptions are very consistent with the actuarial test that go through. So as far as the markets right now on the DAC, we are basically assuming the way we have seen it and the way we look at it, before we had that it was going to be certainly be a little more lumpy, we smoothed it and we feel the rates narrowed in the 11% range and we are feeling comfortable there as we monitor the debt. As you are aware, we certainly adjust that on a quarterly basis as we see it.

Colin Devine – Citigroup

I am not sure if I caught that, did you say you are assuming in a 11% market return, now I did not catch in terms of – are you assuming and if it is a 11%, is that on the VA overall balances because I would have thought a third to half of them are in fixed income now so I would appreciate a clarification on that. And I do not think I caught where you mentioned what role a persistency change or how it is changed, what sort of persistency are you assuming and then also over what period are you docking in terms of –

Walter Berman

Like I said the docking goes over depending on the different products, the docking goes over the length of products. I do not have that, we can get them or I can get you the information on that particular issue. As it relates to the assumptions on the equity market obviously with dividends and everything, right now looking at it over the time horizon which we do quarterly, it is a $0.11 factor with the dividend and there is a factor built in obviously for the account guys to stay within the variable annuities which is much lower. So those assumptions like I said we feel quite comfortable and certainly coming back with the markets and everything is there. We basically brought down as we explained to you the assumptions on lumpiness and we have just smoothed it out.

Colin Devine – Citigroup

Okay but I guess I am still missing this, the 11% on the equity market fees, okay, and then you have got a portion of your VA of accounts in fixed, I assume it is lower bringing down the overall return assumptions or are you saying it is a 11% overall on your VA?

Walter Berman

No, it is 11% for the portion that relates to the equity and we use a lower amount as relates to the account value within the variable annuities.

Operator

There are no further questions at this time.

Jim Cracchiolo

Okay. Thank you very much for participating in our call today and if there are any other follow-ups you can give Laura a call, hopefully that has been informative for you and as I said I feel we had a good quarter and we feel like things are on the right track going forward and with that in mind we will continue to plough away. Thank you and have a great day.

Operator

This concludes today’s conference call. You may now disconnect.

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Source: Ameriprise Financial, Inc. Q3 2009 Earnings Call Transcript

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