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Ameriprise Financial, Inc. (NYSE:AMP)

Q4 2009 Earnings Call

February 4, 2010 9:00 am ET

Executives

Laura Gagnon – IR

James M. Cracchiolo – Chairman and CEO

Walter S. Berman – Chief Financial Officer

Analysts

Andrew Kligerman – UBS

Suneet Kamath – Sanford Bernstein

Eric Berg – Barclays Capital

Tom Gallagher – Credit Suisse Securities

John Hall - Wells Fargo

Jason Walus (ph) - Sterne Agee

Colin Devine – Citigroup

Eric Berg - Barclays Capital

Operator

Good morning ladies and gentlemen and welcome to the Ameriprise Financial 2009 fourth quarter earnings 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 Ms. Laura Gagnon, Vice President, Investor Relations. Ms. Gagnon, you may begin.

Laura Gagnon

Thank you and welcome to the Ameriprise Financial fourth 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 operation. Reconciliations of non-GAAP numbers to the respective GAAP numbers can be found in today’s material, available on our website.

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 earnings release, our 2008 annual report to shareholders and our 2008 10K report. We undertake no obligation to update publicly or revise these forward looking statements.

With that I’d like to turn the call over to Jim.

James M. Cracchiolo

Good morning. Thanks for joining us for our fourth quarter earnings discussion. Today Walter and I will give you some insight into our performance for the quarter. We’ll provide an update on our acquisitions. And I’ll give you some thoughts on our positioning for 2010.

We generated solid results in the quarter and for the year. Now that market conditions have been stable and improving for three quarters our metrics are rebounding from their low points and we’re beginning to regain the earnings power of our diversified model.

As we begin to derive benefits from our acquisitions in other investments and with the continuing support of our strong balance sheet and expense control, I believe we’re in a good position for 2010 and beyond.

Clearly the nation still faces economic concerns. But we feel good about our ability to execute our agenda. We have emerged from 2009 stronger and with many opportunities ahead.

As our fourth quarter business results demonstrate, we’re driving positive trends across our segments. Our clients are continuing to gain confidence as they emerge from the long lasting paralysis brought on by the financial crisis.

During the quarter we drove improved client growth. Our advisor productivity increased nicely. And our asset flows were strong across product lines. As a result of the good flows and rising markets, our asset levels increased significantly. In fact, our total own managed and administered assets increased to $458 billion, a 23% increase over a year ago.

Just as important, our client and advisor retention continues to hold at very high levels. And the long lasting client relationships that defines our franchise remains strong.

We’re also making good progress on our recent acquisitions. The Seligman and H&R Block financial advisors integrations are essentially complete. And each is giving us additional leverage.

Seligman drove strong growth in our hedge fund business in 2009. And our employee advisor channel is now operating on a more efficient and productive model as a result of the H&R Block financial advisor acquisition.

During the fourth quarter we accomplished the last major phase of the H&R Block integration with a successful merging of our technology platforms. We also continue to feel good about our Columbia Management acquisition. And I’ll give you an update on that shortly.

Our strong financial foundation and prudent operating principles continue to serve us well. The balance sheet remains in excellent condition and we remain in a net unrealized gain position. We’re also maintaining our capital flexibility, with over $2 billion in excess capital, including the capital we raised to pre-fund the Columbia acquisition. And a strong liquidity pool of $1.8 billion in free cash.

In addition, we remain focused on expense control and reengineering. We accelerated our reengineering agenda in 2009 to offset the effects of weak operating conditions. And we achieved over $400 million in full year savings. With about 2/3 of those saving going to the bottom line.

Walter will give you some detail on our fourth quarter expenses shortly. But I want to emphasize that we fully intend to maintain this long term expense discipline even as conditions continue to improve.

So overall, I feel quite good about earning trends. And I’m pleased with both our positioning and the opportunities we’ve created.

Now, I would like to provide some insight into our segment performance. First in advice and world management we reported pretax income of $18 million. And our core earnings in the segment were $35 million. Retail client assets increased 22% over a year ago, which reflects both higher markets and incremental increases in client flows.

The positive trends in client activity are meeting our expectations. We knew from past downturns that retail clients would return to investing slowly and we expected the upswing to take longer this time around because of the depth and severity of the crisis.

So while client activity is improving it remains below pre crisis levels. At the same time we’re still earning very small spreads on our cash as a result of the near zero short term interest rates. And these two factors have compressed our margins in the segment.

If conditions remain stable we expect the slow improvement in client trends to continue. As that occurs and if interest rates begin to rise, we’ll have the opportunity to drive higher margins.

We also believe that our new advertising campaign, which launched two weeks ago, will help us reach more of our target market. The campaign is built around real Ameriprise advisors. And the tag, more within reach, which brings to life the values of our close advisor client relationships.

It’s a broad campaign that you will see on TV, in print and online. And we hope to expand on its multimedia possibilities going forward. Our advisors are enthusiastic about the new exposure from the brand, which they view as an important element of support we provide to help them grow their practices.

We’ve always been focused on advisor support. And over the past two years, in particular, we made great strides in the tools technology marketing and other support we provide, including the new brokerage platform we began rolling out in the fourth quarter.

As a result, that remains satisfied and engaged. And our advisory attention rate remains very high. At the same time, advisor productivity has begun to rebound with net revenue per advisor increasing 7% compared to the sequential quarter. And with a solid increased in financial planned sales in the fourth quarter.

The increase in productivity is also evident in our wrap net business where we had net inflows of $2.6 billion dollars. Total wrap assets were $95 billion at year end, a 30% increase over a year ago.

Our support per advisor is one of the reasons we’ve had success in ramping up our experienced advisor recruiting efforts. For all of (break in audio) with 500 experienced advisors. And while we slowed the pipeline in the fourth quarter as we completed the block integration and roll out the new brokerage platform, we still see good opportunity to bring in experienced people.

You’ll notice that our total advisor count decreased during the quarter. That’s a result of our continued force on productivity and the reengineering of our employee advisor group. We’ve been removing less productive advisors from our system and bringing in established and more productive advisors, a strategy that should generate stronger economics over time.

In the asset management segment, we generate a significant improvement in profitability, with pretax income of $70 million or $77 million excluding integration costs. The stronger earnings were driven by net inflows, market appreciation and hedge fund performance piece.

We drove total inflows of $1.4 billion for the quarter and $3.6 billion for the year. Which represents a dramatic turn around a significant out flows during 2008.

The inflows in the fourth quarter came from both the US and our international business. And from strong institutional net inflows.

Internationally, (inaudible) built on the strength of the third quarter and delivered solid results highlighted by strong sales and net inflows.

In terms of investment performance, domestic performance continued as positive trend in the quarter with 72% of equity funds and 80% of fixed income funds above their peer mediums on asset weighted basis for the year.

At (inaudible), while one year performance was down, 90% of equity funds were above a median for the three year performance. We firmly believe the Columbian management acquisition we announced in September will be an excellent addition to our asset management business. And we remain on track to close in the spring.

The assets we will acquire end of the year at $186 billion. A 13% increase since we announced the deal. Our planning for integration is proceeding according to the schedule and expectations with most personnel decisions made and communicated.

We remain confident that we will be able to execute the transaction and deliver on our financial projections for the deal.

The annuities segment reported pretax income for the quarter of $157 million. And I continue to feel good about both the results and direction of that business. Invariable annuities asset balances increased to $55 billion, a 27% increase over a year ago, and a $5 sequential increase. Net flows remain positive despite slower sales, as clients continue to be reluctant to enter long dated contracts.

In fixed annuities our balances were up 20% compared with a year ago. But flat compared with the third quarter. Following several months of very strong fixed annuity sales through the middle of the last year we lowered our rates in response to the changing spread environment.

While we have slowed the faucet on our fixed annuity sales, higher balances in the book are continuing to generate solid returns.

The protection segment generated pretax income of $129 for the quarter. Life insurance in force remained at $193 billion, which is flat compared with last year. Sales were weak for most of the year. But during the fourth quarter we saw early signs of improvement in variable universal life sales as well as continued strong sales in UL.

The overall book of insurance business remains very solid and it continues to generate strong returns.

I should point out, an ongoing strength in Auto & Home. This business continued its steady growth with another 9% year over year increase in policy count. And it continues to deliver solid margins.

In total, as I look across our businesses, I am seeing improvements in our key metrics with client activity, advisor productivity, and asset flows all pointing in the right direction.

To wrap up, as I think about the very volatile period that began in 2008, I feel good about where we stand today. It’s been a tough time but we’re emerging a stronger firm. And rather than having to fix problems we are focusing on realizing the opportunities we’ve created.

I believe we’re positioned well for 2010. We have solid and improving business fundamentals. A promising opportunity ahead through our Columbia acquisition. A strong balance sheet, including appropriate excess capital and liquidity. And an ongoing commitment to prudent expense management.

While we obviously don’t know where the markets and the economy will head this year, especially considering the weak January, I feel comfortable in our ability to navigate the conditions.

Now I’ll turn it over to Walter. And later we’ll take your questions.

Walter S. Berman

Thanks, Jim. We post the slides on our website again this quarter. And they’ll be updated with my talking points after the call.

Please turn to Slide 3. As Jim mentioned, we’re pleased with the fundamental strength of our business and our improved financial performance. Let me take you through the highlights. Fourth quarter 2009 reported earnings per diluted share were $0.90, compared to a net loss last year. And core operating earnings were $0.91 in the quarter.

We generated double digit net revenue growth driven by strong fee and spread based businesses. G&A expenses remained well controlled. We made our fourth quarter and full year expense targets and remain committed to effective expense management. And our balance sheet remains strong.

Let me talk you through each of these points in more detail. Please turn to Slide 4. Net income in the fourth quarter of 2009 was $237 million, compared to a loss a year ago. Earnings per diluted share in the quarter were $0.90, compared to a loss of $1.69 last year.

I should note that the current year’s quarter EPS calculation included $36 million shares reissued to pre fund the Columbia acquisition. We will not capture the earnings from the acquisition until we close. So for year over year comparison we are showing you the adjusted EPS, excluding the shares issued for the acquisition, of $1.04.

As for core results, we established the core earnings concept to help segregate the impact of the market dislocations from the underlining business trends. And recently to provide transparency in year over year comparisons.

In 2010, we will transition to focus on reported earnings, excluding integration course, primarily for the Columbia acquisition. That said, we will continue to provide the same level of transparency in factors impacting earnings.

In summary, earnings growth was solid. The strong revenue growth driven by the business trends, federal market comparisons and expense controls.

On Slide 5, we show revenue growth trends. Year over year net revenue excluding realizing gains and losses increased 29%. Management and financial advise fees grew 41%, with about a third of the growth coming from market. The remainder was driven by business growth, positive flows in asset management and wrap accounts, and strong hedge fund performance.

Distribution fees grew 17%. While a portion of these fees are asset based and impacted by the market, the portion related to client activity is still below pre crisis levels. Net investment income, excluding realized gains and losses, was up 37%, driven by higher fixed annuity balances due to the strong fixed annuity flows in the first half of the year. As well as benefits from repositioning our portfolio and cash during 2009.

Net investment income growth does not reflect equity driven returns and hedge funds or alternative investments, but rather based revenues generated from the barn portfolio.

Please turn to Slide 6. Our improving revenue picture also reflects our growth in assets. Owned, managed and administered assets were $458 billion at year end, up 23% or $86 billion year over year. Owned assets grew $5 billion or 16% primarily due to the market’s impact on non prop separate account assets, as well as business growth.

Managed assets in both wrap accounts and the asset management segment grew 23% or $61 billion. Market appreciation drove a substantial portion of the increase. With $13 driven from net flows in 2009. This is a substantial improvement from the $23 billion in net outflows in 2008.

In administered assets, primarily brokerage accounts, grew 26% or $20 billion driven by both markets and retail inflows.

Let’s turn to the next slide. In spite of slower overall client activity, average per advisor productivity has seen a steady increase over the past several quarters. And is up 18% in the current quarter. This is primarily driven by market appreciation and improving some client activity. And the actions we’ve taken to improve our advisor productivity.

As a result of these actions, our overall advisor count is down 4% from a year ago, consistent with our efforts to reengineer our employee-advisor platform.

Advisors must meet productivity requirements and the vast majority of departing advisors had less than $50,000 in annual production.

However, we’ve also seen solid growth in experience advisor recruiting. As we’ve stated, more than 500 experienced advisors joined the firm last year. In fact, productivity of the new advisors is over four times the departing advisors, which is contributing to our productivity growth.

Let’s turn to page 8. I want to spend a few minutes on our general and administrative expense line. It is important that you understand the various movements to get a picture of the underlying trends. Core G&A, which excludes market and integration impacts increased $129 million year over year. However, on a fully normalized basis, G&A is down approximately 6% for the quarter and 10% for the full year.

I want to provide insight into the items we take out to get normalized trends. You saw that book strong hedge fund earnings in the fourth quarter of 2009. Which also includes the related compensation. In addition, the year over year increase in G&A is distorted by the decrease in performance based compensation in the fourth quarter of 2008 when our overall firm wide performance suffered due to the market. In 2009, we had the reverse impact due to the strong year end performance.

Both of these items are timing issues and are not expected to carry into the first quarter. We also had accelerated business investments, systems and marketing and other expenses included a legal settlement. Normalized for these impacts we achieved our expectations of the fourth quarter 6%-8% decline in G&A expenses, as well as full year 10% decline.

This brings us to our balance sheet discussion on Slide 9. We continue to maintain strong balance sheet fundamentals. Our excess capital position was over $2 billion. Where over $1 billion when factoring in the capital for the Columbia acquisition. RiverSource Life ended 2009 with an estimated RBC ratio of more than 400%.

Our investment portfolio remains well diversified and high quality. We reported a $700 million unrealized gain at year end.

Our capital ratios are strong. Our debt to capital ratio is 19.5% or 14.5% when excluding non recourse debt and the credit for the hybrids.

We continue to maintain a prudent liquidity position. We ended the year with $1.8 billion in free cash and over $900 million in cash at the holding company. In addition, we expect to take a material dividend from the Life company in the first quarter.

And financial, our variable annuity hedging continues to performance well.

In closing, we had a solid quarter. Our business metrics are headed in the right direction and our foundation remains strong. Our markets continue to evolve, we will monitor them closely to make sure we are managing prudently within the context of the environment. We are well positioned and focused on execution.

With that, I’ll turn it back to the operator so we can answer your questions. Operator

Question and Answer Session

Operator

Thank you. We will now begin the question and answer session. (Operator’s instructions) The first question comes from Andrew Kligerman from UBS. Please go ahead.

Andrew Kligerman – UBS

Couple of quick ones. First, the net realized gain after tax, $12 million. (Inaudible) Walter on, maybe some of the big gains or maybe some of the big losses or impairments that were behind that $12 million.

Walter S. Berman

Sure, Andy. Obviously a lot of the gains were generated by tenders and basically (inaudible). There was a gain that we had on an investment we had in the PNC company, was $12 million that came. But basically that was the only surprise that we had. The impairment side of it was around $7 million. And the actual realized loss is around $20. And then we strengthen reserves around $5.

Andrew Kligerman – UBS

And nothing too big there.

Walter S. Berman

No.

Andrew Kligerman – UBS

Walter, you mentioned that you might be taking a material dividend up from the Life company, a moment ago. Could you quantify that? And then sitting on a billion plus of excess capital right now, you see deals or how soon could you possibly get to a buy back?

Walter S. Berman

On the first part of the question, as you know when we look at excess we try and get that excess up to the parent. Where we believe it’s the most effective utilization point for it. We do have capacity, obviously the actuaries are finishing their work and everything they have to complete. But there clearly is a reasonable capacity that will allow us to potentially declare a dividend in the first quarter. And certainly when we have that sort of capacity that will probably the action we will take.

As far as your second part –

James M. Cracchiolo

Yes, Andrew. As far as the second part of the question, we do feel like we’re in a very good position and we have flexibility. Our primary focus is really closing the Columbia deal and getting that integrated. As we get through that and we see how the economic cycle market hold over the first part of the year we’ll have the flexibility to think about, (inaudible) buy backs as well as – if there are smaller things that make sense from a strategic opportunity for acquisition we can start to explore that as well. But we will be looking to see how we will use our capital moving forward if the market continues to be stable.

Andrew Kligerman – UBS

So you wouldn’t be inclined to necessarily sit on capital in excess of a billion dollars, say when we get to the end of the year you could indeed buy back if there weren’t deals?

Walter S. Berman

Yes. And again, it depends on if we’re continuing to be in stable markets verses – that there’s any other down turn. But if that holds, yes, we would have flexibility and we’d be looking to do some things.

Andrew Kligerman – UBS

Got it. Then just real quickly on the property causality business. Buying ratio kind of jumped up a little bit to $99.3 from $96.6, any concerns there? Are you feeling good going forward? What’s the outlook?

James M. Cracchiolo

No real concerns. I think the drop part was really attributed to weather and nothing more than that. It was really in line just a blip there on the weather situation. But no concerns.

Andrew Kligerman – UBS

Okay. Thanks a lot.

Operator

The next question comes from Suneet Kamath from Sanford Bernstein. Please go ahead.

Suneet Kamath – Sanford Bernstein

Thanks and good morning. I’d like to drill down into the advise and wealth business a little bit if we could. If I look at the pretax earnings in that business and I take out the certificates and the banking piece, just focusing on the wealth distribution, it was sort of minus $9 million. I think if you put back the integration costs, maybe around $5-$6 million. If I go back to 2007, that number was closer to, I think, $70 for the quarter. I think, Jim, you talked about some of the drivers in your prepared remarks, but I was hoping you could go into a little bit more detail. Maybe just put some details behind those drivers in terms of what really has to happen to get you back from say where you are, $5 million to something closer to that, that $70 or whatever you think is sort of a normalized quarterly earnings run rate would be.

James M. Cracchiolo

Okay. I’ll talk about some of the business aspects and Walter can comment a little bit on the numbers. First of all, I think as I said, we’re seeing very good trends in the AWM business, from an advisory perspective productivity. But one of the things that is hard to glean from the absolute numbers is we’ve gone through a pretty major transformation last year. I mean, we’ve moved from more of a novice employee network to an experienced. Both the integration of blockwood (ph) over 900 advisors, plus 500 experience recruits.

Now, during that cycle we’ve also had to change out from being in the novice business and all the costs around that and the real estate and how we’ve do that to recruitment of experienced people. We also had to deal with the integration of the block, and a very down market.

And so though revenues disappeared the last year, the expenses were still there in carrying two systems.

The fourth quarter, those two systems came together. We closed about 44 offices. We integrated the technology onto a brand new platform. We made change in a lot of the leadership and the organization there, in combining and putting a number of people laid off, in that regard. So I think we’ve come through that in a good way. We also had the hiring cost of bringing in those experienced people that hit last year.

So all those things are in bedded in our AWM P&L. In what I would call a reduced market. I mean, some of those fees started to come back in the fourth quarter. But we also had a lot of bed integration hitting as well in the fourth quarter. And carrying the two operating environment. So we’re through that now. And we’re coming out of that as we go into the first quarter. But I’ll have Walter talk a little more about the numbers.

Walter S. Berman

The only thing I would add to that is really, as I indicated, we looked at our G&A expense, a reasonable portion of that certainly is relates to the catch up and then basically the reduction last year. But more the catch up in 2009 took place in the AWM segment. We do have investments. We’re putting in a new platform. And that started up in the fourth quarter. And certainly advertising from that standpoint. But the big element as Jim said, is going to focus on the spread, the transactional side of it. And getting the expense benefits that we started to realize as we did the integration in the third quarter.

And obviously, if we get the improvement and transaction elements as we potentially see that will start taking us towards the objectives that we out right (ph).

Suneet Kamath – Sanford Bernstein

Okay. Just one quick follow up if I could. I think Walter, you had mentioned that the incoming experienced advisory productivity is four times greater than the folks that have left the company. Can you just talk about what the contribution to the bottom line is? I’m guessing you’re not going to get specific. But are the experienced advisors that you brought on covering the initial payouts that you have to make to them in contributing the bottom line. Or are they just still sort of not contributing the bottom line but they will once those initial payouts kind of roll off?

Walter S. Berman

Yeah. I think if you look at it from the standpoint, obviously, the payouts get advertised over a point. But what happens when you bring them on board, obviously you’re picking up expenses associated. The paybacks on these advisors as we indicated are in the two year, three year ranges so they’re a lot better than most. But obviously, we brought on a lot in 2009. So I would say that there are still not providing a payback in that year, in 2009. But they certainly are on target to meet our objects set of the two to three years.

James M. Cracchiolo

Yeah. I think the key there is anyone coming on board they have to transfer their book and get settled and then they start their productivity. And their productivity in the first year is always much lower. And so they ramp up again. And so we’ll start to see more of that productivity hit in 2010 as they try to – came in. But also the markets are pretty weak too. So they’re not as active, similar to our advisors initially.

Suneet Kamath – Sanford Bernstein

Okay. Thank you.

Operator

The next question comes from Eric Berg from Barclays Capital. Please go ahead.

Eric Berg – Barclays Capital

Thanks very much and good morning Jim, Walter and to your team. My first question regards some differential issues. You talk about free cash. Can you remind us exactly what you mean by free cash? And how, if at all, that term differs – that amount differs from excess capital?

James M. Cracchiolo

The free cash is the cash we keep from our standpoint for liquidity purposes that we have the ability to utilize in situations. And we are investing that at short, short situations. So if you look at the fourth quarter we’re earning in the area around 15 basis points. It’s available for any quarter prices or any sort of situation that we need on a stress situation.

Obviously the excess capital element – all excess capital isn’t necessarily totally as liquid. It certainly has characteristics of it. And certainly from that standpoint you can achieve excess liquidity without having capital. So from that standpoint, there is a distinction. And the excess capital to us is driven what our required is and what our available is.

And there is an element of cross over. But certainly it isn’t dollar for dollar as you look at it. But the key thing is as we’ve always said, you need liquidity to be strong. You need the excess to be strong. But the first line of spending is on our liquidity.

Eric Berg – Barclays Capital

Thank you. I have two more quick ones. First, in thinking about expenses, I’m looking at your Slide 8, why would you adjust out our remove from the calculation the increase in hedge fund performance compensation. After all, that was a real expense to the company, to the shareholders. It’s going to recur if you have strong hedge fund performance again. So why would somehow be an adjustment?

Walter S. Berman

Let me characterize what we’re trying to explain. We’re trying to explain, we said that on normalized basis we would look at expenses, and we’re managing those expense. So what we’re saying, yes, we generated a profit for the hedge fund. Last year it was much lower. So we’re trying to explain the changes that have taken place between the ’08 and the ’09. We’re factoring – and obviously in 2010 well hopefully whatever expense we incur relating to that our profit will be factored in our run rates.

The same thing if you take a look at the elements on the performance. Last year we were in a situation where as we entered into our fourth quarter of last year, we had ecru sudden anticipated a higher pay out due to the dislocation that took place, we reversed those. And that created, certainly, the appropriate action. But reduced the expense for a normalized element. This year, we entered this quarter and we had a catch up because we continued to improve. So we’re just explaining the deters between it. We’re not saying that it’s not part of our expense base. (Inaudible) between last year and this year.

Eric Berg – Barclays Capital

That’s a helpful addition. And then my final question relates to productivity. I would think productivity would be a function of just what it sounds like, how many contracts, how many annuities, how many life insurance policies, how many reads, how many securities people are selling. You mentioned rising markets as driving productivity. Why do rising markets affect that productivity number? That’s it. Thank you.

James M. Cracchiolo

Because it’s based on our wrap we earn higher C on the market and that drives it. That’s the one element of it.

Eric Berg – Barclays Capital

Thank you. I’m all set.

James M. Cracchiolo

Thanks.

Operator

The next question comes from Tom Gallagher from Credit Suisse. Please go ahead.

Tom Gallagher – Credit Suisse Securities

Good morning. First just one follow up on the advice in wealth management. If you’re paying two to three year payouts our guarantees for the experienced advisors, help us think about how that’s going to effect the future margins? Does that tell us that if you’re hiring a considerable amount of them, is that likely to mean margins remain flat to down in a flat market? Or would you still expect to see a margin lift, all else equal in that segment if we had a flat type market over the next couple of years here? That’s my first question.

Walter S. Berman

Let me try and make sure there’s no misunderstanding. What I thought I said was that we have a targeted two to three year payback. Okay. When we basically provide a trans comp. The trans comp is a summer front trans com which gets advertised over a period. The rest of their compensation is based upon either production on bringing over assets or productions of bringing over GDC. So obviously if –

Tom Gallagher – Credit Suisse Securities

So, Walter, if I can cut you off for a second. So it’s not a two to three year guarantee, it’s a two to three year payback when they’ll become profitable?

Walter S. Berman

That was my answer to that question. Because they were asking me about the drag on the margin.

Tom Gallagher – Credit Suisse Securities

Sorry. Okay. Go ahead.

Walter S. Berman

No, that was it. I was just answering that part of the question.

Tom Gallagher – Credit Suisse Securities

Okay. So if we think about that as kind of the starting point, maybe you can frame a little bit how much of that, when we think about how much of a drag that actually is, and the volume of producers you’re actually hiring where there is that payback that we’re looking at. Is it a fairly small number relative to the total base which means you can get margins lifting or getting better even at a flat market? Or there enough of those new types of hires that in a flat market you would see a continual drag on that business?

James M. Cracchiolo

So, what really occurs is, you do pay some trans comp up front and the rest is paid based on them having their assets and their production over time. That trans comp up front part of it is expense, part of it is amortized over a number of years that the contract’s for. Which goes out more than three year, so five to seven years. So in that regard, when those people on board and they actually get productive again then it will add to our margin because they will be covering our overhead that’s in those offices already that that overhead in the past was covering their lower producers that will now be covering much higher producing advisors. And so, overall economically for us it will add to our margin over the next number of years. It’s not after the three years that it will just kick in.

But as I said, there’s always a ramp up time. They don’t come in and automatically day one produce like they were producing from when they left. And in addition to that, the comment was really around, this is a market bed even our current advisors as we know are slowly ramping up again. It’s not as though everyone’s fully productive to where they were prior to the cycle.

So it’s a combination of those factors. But this will give us much better economics over time then when we had a few thousand novices in our system. And it will add to our margins and absorb more of our fixed overhead.

Tom Gallagher – Credit Suisse Securities

And so, Jim, if you look at the difference in the old strategy versus the new strategy, I presume there’s a much quicker payback, breakeven, profitability time frame if you look at the employee advisors versus the experience. Is there any way to frame that, how that differs?

James M. Cracchiolo

It is significantly better. As Walter said, the payback here is probably two to three years. The other one was probably more five to seven years.

Tom Gallagher – Credit Suisse Securities

Okay. That’s helpful. And then my other question is just, I recall, I think it was within the last year or so you used to talk about how the very high RBC, you were maintaining in the insurance operations, which at the time I think was north of 500, was a bit distorted in that because of your veritable annuity business your target RBC, I thought, needed to be north of 400. If I remember that correctly. But now you’re saying you’re going to take a big dividend out so that seems to have changed. Can you just elaborate exactly what’s going on? What in fact is your target RBC to maintain your current ratings? Thanks.

Walter S. Berman

We are not changing our approach on RBC and certainly any potential dividend or (inaudible) due to that dividend we’ll take that into consideration. So you should assume that if a dividend did come out, we will still be in an RBC ratio that would be consistent with the 350-400 ranges.

Tom Gallagher – Credit Suisse Securities

And Walter, am I correct that, is it correct though that you used to talk about maintaining a 400 plus RBC because it was some conversion to the rating agency standards that would require you to hold that level of RBC or is that not accurate?

Walter S. Berman

No, no, you’re correct. It was RBC was the fact and then we looked at constraints where it was coming from different agencies which took it to a higher factor where they were assigning capital elements associated facets and things like that. And obviously that is still the case. But it’s changed because the components within those calculations change but we still look at the ultimate constraining factor relating to (inaudible) and RBCs and any dividend that we would ever do was certainly be in discussion with regulators and with the radiants.

Tom Gallagher – Credit Suisse Securities

Okay. Thanks.

Operator

The next question comes from Jason Hall from Wells Fargo. Please go ahead.

John Hall - Wells Fargo

Great. John Hall here. I was wondering if you could offer a little bit of commentary around the assets that Columbia? You mentioned that they (break in audio) for some (inaudible) discussion over the quarter and whether the transaction is impacting fund flows one way or another, either at Columbia or on the RiverSource?

James M. Cracchiolo

Overall, Columbia is experienced appreciation in the assets over the last two quarters from when we did the deal. And they’ve been, I think, relatively – we don’t have all their numbers in yet. But I think they’ve been relatively flat on their flows overall. We don’t see any material outflows driven by the transaction in that regard. I think the people have settled in. I think we’ve gone out to all institutions and they actually feel pretty good about where we are. And I think Columbia is back to work again now of getting their people focused on driving their business again.

We’ve gone through a lot of the deaccessioning and the alignment between RiverSource and Columbia. In addition as you saw with RiverSource, our institutional flows have picked up again. And so we actually don’t see any material change from the last quarter in regard to Columbia. I think things are actually more settling in today. And we feel pretty good about the asset base that we’re going to be buying here. And hopefully in the first quarter as we complete this, we’ll be up to putting them together in a very rapid way.

John Hall - Wells Fargo

Any color on the RiverSource retail funds which after being positive last quarter when negative this one?

James M. Cracchiolo

Really, in the third quarter we based on certain of our accounts, wrap accounts, etcetera, there was some recycling and some pick up in some of the reallocations to some of those funds. And I think that’s all you saw the difference between the third and the fourth quarter. From that, we’re starting to see strengthening in our sales flows. The performance overall of the funds haven’t continued to improve. So we feel positively about where we’re positioned in 2010 versus where we were going into 2009, based on the pickup and performance, and the focus back now that the deal is done.

John Hall - Wells Fargo

Great. And on the advertising front, you emphasized a new campaign that’s underway. I was wondering if you could contrast the cost this year from an advertising standpoint versus last year. Is that a big delta?

James M. Cracchiolo

Well, last year as you know we stopped our advertising after the first part of the year, first quarter of last year when we did some of the advertising. So we were pretty dark through the rest of the year. In the fourth quarter of this year we started to pick up to get our campaign launched and some the expense was in the fourth quarter. And we’re now lights on as we go into 2010. So there will be a pick up in the advertising differential year to year. But we’ve also made some other adjustments in some of our marketing and some of the reengineering last year. So we think that it will be incremental cost of cost because we weren’t as advertising last year. But it’s something that is factored into our plans and that we feel we can cover based on the environment and the improvements that we’re seeing.

John Hall - Wells Fargo

Great. And then finically on the experienced advisors, 500 came in the doors last year. Is there a number that you’re targeting for this year?

James M. Cracchiolo

Well, what we (inaudible) benefit last year of major dislocation that occurred in the first part of the year with a number of firms. And then we had to actually slow our pipe because of the integration that we had to. Because many of those advisors were joining our employee channel.

This year as we’re actually installing the system and rolling that out, we’ll actually have the ability to start to recruit again, in the employee channel. And we have now set that up throughout our system, so versus in pockets where we were last year. And then second, is we’ll also be recruiting into our franchise E channel in a more appropriate pace as well as we introduce our Thompson platform in that system.

And so, I think it’ll take time for us to ramp it back up. But we still see that we should be able to do pretty well over the course of the year, as we focus our attention both for the employee and the franchise E side.

John Hall - Wells Fargo

Well, I mean, match last year or exceed?

James M. Cracchiolo

We’re not giving out targets. But I would just say that they recruitment will be an important part of our continued focus as we move forward to this year versus employee novices.

John Hall - Wells Fargo

Great. Thank you.

Operator

(Operator’s instruction). The next question comes from Jason Walus from Sterne Agee. Please go ahead.

Jason Walus (ph) - Sterne Agee

Thanks. I’m on for John Nadel. Our question is around the expected tax rate move to 28%-30% in 2010. Is it fair to assume that the marginal tax rate on each incremental dollar of earnings is roughly 35%? And if so, can you give us approximate with the incremental amount of pretax earnings necessary to bump the tax rate by one percentage point from the 2009 levels? Thanks.

James M. Cracchiolo

I’ll go for the first part of it. The 35% of is right. As far as – I’m not forecasting where we’re going for 2010.

Jason Walus - Sterne Agee

Fair enough. Thank you.

Operator

The next question comes from Suneet Kamath from Sanford Bernstein. Please go ahead.

Suneet Kamath – Sanford Bernstein

Hi, thanks. Just a separate question also related to taxes. Just wondering if you thought though or can quantify the benefits that you’re getting from the DRD. And in your 10K, I think you discussed the issue and you talk about your view that any change to the DRD would likely be applied on a prospective basis only. Just wondering where that’s coming from? Is that from your folks in Washington that are talking to members of Congress or what gives you confidence in taking that view? Thanks.

James M. Cracchiolo

As I indicate, the benefit we derive from DRD is around $60 million. I believe, the DRD has been brought back in. So I think whoever is going to – certainly that was our view, before it was prospective. I think we’ll just have to evaluate where it’s going at this particular stage as it comes back in.

Suneet Kamath – Sanford Bernstein

Okay. But the $60 million has been what the benefit’s been running at?

James M. Cracchiolo

Yes. That’s correct.

Suneet Kamath – Sanford Bernstein

Okay. Thanks.

Operator

The final question today comes from Colin Devine from Citigroup. Please go ahead.

Colin Devine – Citigroup

Good morning. Just a couple of quick ones. First, for Walter and Jim, as you’re growing the advisor channel, the concern that we have is we saw again this quarter a settlement for a client dispute in Kendelay (ph), there’s been a bunch of these since you’ve been public. Do you really feel that you’ve got in place the compliance systems so this starts to go away because they started to add up to a fairly significant numbers. Second, if I can get just a bit more detail on what the charge and protection for claim reserves. What those related.

James M. Cracchiolo

On the first, let me try and answer the first. The claims that we had in the past and we looked at, primarily focused that SAI and we have spent an exorbitant amount of investment and time on improving the capabilities there. And we feel they are at benchmark-able standards.

Walter S. Berman

Yeah. But the settlement expenses you see has nothing to do with the AWM business, those last few quarter settlements. So it’s not related to the AWM nor the advisor base.

James M. Cracchiolo

Okay. Colin, does that answer it. That part of it?

Colin Devine – Citigroup

Yeah. That’s fine. And then on the claim reserves?

James M. Cracchiolo

Yeah. It was basically a waiver premium benefit and the UL. We improved the valuation as we got throughout data and using our new system and it doesn’t reflect any underlying trend. It’s really just an update and capability that we have with the new poly system.

Colin Devine – Citigroup

Okay. What assumptions then changed? Just so I’m clear, was it your long term interest rate assumption, a lapse assumption? What triggered –

James M. Cracchiolo

I will have to get back to you on the specifics about what it was, what aspects within the tables that they were using or whatever drove that change. We’ll get back to you on that and we’ll get that.

Colin Devine – Citigroup

Okay. And then the final one, as you laid out the issues with comp and attracting and experienced advisors, given the delay for them to become fully profitable for you, does that put at risk your goal still of the 15% ROE for 2012? Because I assumed for the advisor channel there’s a lag here for that ramping as a probability. And clearly that’s a big part of your story if you’re going to hit the 15%.

Walter S. Berman

Let me just say, when we celebrated the 2012 we fully understood the economics associated with the advisors, both from the volume of advisors and certainly the rate and margin associated with that. So that was totally incorporated in it.

Colin Devine – Citigroup

Okay. So you’re still on track for that.

James M. Cracchiolo

That’s right. Nothing has changed since the last time we presented.

Colin Devine – Citigroup

Thanks.

Operator

The next question comes from Eric Berg from Barclays Capital. Please go ahead.

Eric Berg - Barclays Capital

Yes. My question is, just a follow up to Colin’s, if the lawsuits don’t relate to the advising north management business, to what do they relate? Thank you.

Walter S. Berman

It relates to a settlement we had in the asset management on the thread needle side. And the settlement actually, was a client settlement and basically we settled with a client.

Eric Berg - Barclays Capital

Thank you, Walter.

Operator

At this time there are no additional questions.

James M. Cracchiolo

Okay. I want to thank everyone for their participation this morning. And if there’s any other follow up questions you can call Laura Gagnon. And we thank you very much and you have a good day.

Operator

Thank you for participating in the Ameriprise Financial 2009 fourth quarter earnings conference call. This concludes the conference for today. You may all disconnect at this time.

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Source: Ameriprise Financial Q4 2009 Earnings Call Transcript

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