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Ameriprise Financial, Inc. (NYSE:AMP)

Q1 2010 Earnings Call Transcript

April 27, 2010 9:00 am ET

Executives

Laura Gagnon – VP, IR

Jim Cracchiolo – Chairman and CEO

Walter Berman – EVP and CFO

Analysts

Andrew Kligerman – UBS

Alex Blostein – Goldman Sachs

John Nadel – Sterne Agee

Suneet Kamath – Sanford Bernstein

Eric Berg – Barclays Capital

Sam Hoffman – Lincoln Square Capital

Tom Gallagher – Credit Suisse

Operator

Welcome to the 2010 first quarter earnings call. My name is Sandra and I will be your operator for this today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note this conference is being recorded.

I will now turn the call over to Laura Gagnon. Laura Gagnon, you may begin.

Laura Gagnon

Thank you and welcome to the Ameriprise Financial first 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 question.

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 website. Some of these 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 2009 Annual Report to shareholders and our 2009 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 first quarter earnings discussion. During this call, I will go into give you some insight into our performance for the quarter. I’ll also provide an update on our pending Columbia acquisition and I will discuss our positioning for the rest of the year. Walter will give you more detail on the quarter and our financial statements.

Let's begin. As our first quarter results demonstrate, we’re generating positive business momentum. While client and advisory activity still have not returned to pre-crisis levels, markets have continue to strengthen and it’s evident that our clients are slowly gaining confidence in the financial environment. During the quarter, we grew our client base, our advisor productivity increased nicely and we saw continued strengthen wrap net flows.

Just as important, our client and advisory retention remained at high levels and the long lasting client relationships that define our franchise are strong. The good friends in our business and the rising markets contributed to solid results for the quarter. The $215 million in operating earnings we reported today marks our best first quarter ever.

In fact, we are approaching the earnings levels we are achieving before the financial crisis and the recession began. For the quarter, our operating net revenues were 25% compared with a year ago and our total owned, managed and administered assets increased to $463 billion, a 31% increase.

Our strong financial foundation and prudent operating principals continue to serve us well. The balance sheet remains in excellent condition and we are maintaining on capital flexibility. We have over $2.5 billion in excess capital including the capital we raced to pre-fund the Columbia acquisition and a strong liquidity pool of $4.3 billion in free cash. I should note that yesterday we announced an increase in our quarterly dividend.

In addition, we remain focused on expense control and re-engineering. We are continuing to make investments for growth. For example, we have committed resources to our marketing campaign and new brokerage platform among other important kind of initiatives, but as we invest, we are maintaining our expense discipline just as we have in the past. While distribution expenses grew as a result of our stronger sales in the quarter, our controllable expenses remain well managed.

The recovery in our client metrics continues to be gradual and clients clearly don't fully trust the economic rebound. But as we continue to build on our steady progress in combination with closing our acquisition and integrating Columbia Management into the company, I feel good about our overall positioning and our ability to execute our agenda.

Before I provide a greater context for our performance, I would like to note that we have presented operating earnings on both a consolidated basis and by segment. Operating earnings exclude the impacts of the required accounting change, which requires consolidation on our balance sheet of client assets and certain investment entities. This rule change results on no financial impact on our financial strength or business.

Operating earnings also exclude integration cost and realize investment gains or losses. We believe this measure gives you a clear picture of our performance and we will continue to provide this disclosure going forward.

Now I will move on to a discussion of the segment performance. First, in Advice and Wealth Management. We reported pretax operating income of $54 million compared with a loss in a very different market environment we faced last year. Retail client assets increased 31% over a year ago which reflects both higher markets and incremental increase in client flows. This led to an increase of 20% in segment operating net revenues and a 6% pretax operating margin in the segment for the quarter, the best margin for Advise and Wealth Management since the second quarter of 2008.

The More Within Reach advertising campaign was launched in January and which is built around our advisors has driven our brand awareness up to 62% which is an all time high. Our advisors are enthusiastic about the new exposure for the brand, which they prove as an important element of support we provide to help them grow their practices.

As a result of this and the other investments, we are making to support them, the advisor remained satisfied and engaged and our advisor retention rate remains very high. At the same time advisor productivity continues to rebound with operating net revenue per advisor increasing 25% compared with a year ago.

The increase in productivity is also evidence in our wrap business where we had net inflows of $2.5 billion and 93% increase over a year ago. Total wrap assets were approximately $1 billion at quarter end, another all time high. While flows in long-term contracts remain challenged as I will discuss shortly, we are quite encouraged by the steady in wrap. This indicates the clients are seeking broad based advice portfolio diversity.

You will notice that our total advisory count decrease during the quarter. That’s a result of our continued focus on productivity. For quite some time now, less productive advisors have been leaving the system and we have been bringing in established and more productive advisors. We slowed our recruitment efforts in the fourth quarter and into this year as we completed H&R Block integration and introduce our new brokerage platform which will provide advisors with technology that will be among the best in the industry.

At the same time, the environment for recruiting experienced advisors has changed quite significantly compared with a year ago when many firms in the industry were in trouble and advisors were actually looking for a stable company and brand. Fewer advisors are switching firms now that conditions are stable. That said, our value proposition is appealing to a significant share recruits and our field leaders and recruiters are again ramping up their efforts.

While we did not bring in as many recruits as we did in the first quarter of last year, our recruiting pipeline is beginning to build again. In asset management, we generated pretax operating income of $22 million which includes a $27 million expense relating to significant come back in Threadneedle’s estimated market valuation which Walter will address.

Excluding the Threadneedle item, the segment’s operating earnings would have been $49 million and its pretax operating margin would have been 13%. Operating net revenues increased 40% over a year ago. The stronger results were driven by market appreciation as well as inflows of the past year and significant reductions in controllable expenses.

In terms of asset flows, we recorded total net outflows of approximately $800 million, but if we exclude Zurich related institutional outflows and Threadneedle and some expected dis-synergy outflows related to the Columbia transaction, we would have been solidly in net inflows.

In the domestic business, equity mutual funds remain in outflows. While many of us in the industry expected investors to return the sideline cash to equities, this development has not fully occurred despite the strength of the markets. Investors remain cautious and continue to seek what they consider consistent returns rather than accept higher level of risk, a trend that underscores the depth and impact of the crisis.

In our domestic institutional business, we lost a few clients as we expect that we would as part of the process of combining Columbia's management team with ours. Nevertheless, domestic institutional sales were quite good and net flows were positive. Internationally, Threadneedle delivered another strong quarter highlighted by strong sales and retail net inflows of $1.3 billion. Even with the Zurich outflows, total Threadneedle net flows were positive in the quarter.

In terms of investment performance, we continue to see positive trends in the domestic equity performance with 78% of equity funds above the Lipper peer medians on an asset weighted basis for the year. At Threadneedle, 93% of equity funds were above medium for both three and five year performance.

We continue to believe that Columbia Management acquisition will be an excellent addition to the Asset Management business. We expect to close on May 1st and we continue to expect the final purchase price to be approximately $1 billion. Similar to our experience in the domestic institutional business, Columbia experience net outflows and low margin institutional counts that certain clients did not consent to change investment advisors. Again, this was a development we expected. Nevertheless, the total assets we will acquire ended the quarter at $189 billion, a 15% increase since we announced the deal.

Our planning our integration is proceeding according to schedule and expectation and we remain confident that we will be able to execute the transaction and deliver on our financial projections for the deal. From an operating perspective, Ted Truscott and his management team are very pleased with the talented investment professionals we have assembled to lead our funds post close. We will soon have a powerful Asset Management with strong performing funds in every style box.

The annuity segment reported pretax operating income for the quarter of $17 million, up slightly from a year ago. Walter will walk through the details of the segments earnings. In variable annuities, asset balances increased to $15 billion, a 37% increase over a year ago and a 3% sequential increase.

Net inflows were low at $98 million in the quarter, consistent with the generally slow sales environment in the industry and because our advisors were awaiting a pending product enhancement in another new product launch, we believe sales will pick up again as clients confidence in the market continues to grow and as these products are introduced.

In fixed annuities, our balances were $15 billion, up 6% from last year. As we told you last quarter, fixed annuity sales slowed in response to the current rate environment. While balances are expected to gradually decline in the coming quarters, the book is continuing to generate solid returns.

The protection segment generated pretax operating income of $118 million for the quarter, up 13% compared with last year. Sales started to improve in the fourth quarter, remain steady through the early part of this year. In fact, VUL and UL sales combined were up 64% compared with a year ago. While we still haven't returned to pre-crisis levels, we are seeing slow and steady progress.

The auto and home business continue to generate steady growth with another quarter of 9% year-over-year growth in policy counts. The overall book of insurance business continues to generate strong returns.

In total, as I look across our businesses, while flows haven't yet returned in all product categories, I am seeing improvement in our metrics, decline activity and advisory productivity trending positively and with assets and account balances rising. I believe we are positioned well for the remainder of the year. Our business fundamentals are improving slowly but steadily. We remain excited about the opportunities that Columbia acquisition and our other investments present and our financial foundation expense controls remain strong.

To wrap up, I feel good about where we stand today. We are focused on realizing the opportunities we created through the recession and we have a clear vision of how we intend to do that.

Now, I will turn it over to Walter and later we will take your questions.

Walter Berman

Thanks, Jim. We post the slides in our website again this quarter and they will be updated with my talking points after the call. Please take a moment to review the Safe Harbor on page two and then turn to slide three.

This was a good quarter for us. Reported and operating earnings per share were $0.81. We had good operating revenue and continued strong expense management that drove improved managers. All of our operating segments also reported solid performance and our balance sheet and liquidity continue to remain solid.

Turning to page four, in the quarter, the company has introduced new operating measures to provide additional transparency to our underlying business results. The operating result exclude the impact of three items.

One, a new accounting standard that required additional consolidation of certain investment entities onto our financial statements. While these changes impact our balance sheet and income statement, our exposure to these entities is unchanged and there is no impact on the underlying business. While the new rule allows net income to be reported as non-controlling interest, equity must still be reported in the retained earnings. This will be a separate line item and it will add transparency.

Second, acquisition related income, of course, and finally, net realized gains or losses. Our operating net revenue of $2.1 billion for the quarter represents an increase of 25% compared with last year. And our operating PTI of $281 million is 85% higher than the first quarter of 2009. While we realized only minimal Columbia related integration of course in the quarter, these integration expenses are on target to total approximately $100 million by year end.

Please turn to the next slide. You can see that the net income or loss attributable to the non-controlling interest is eliminated for both years, resulting in reported net income of $214 million for the quarter. EPS of $0.81 and return on equity of 9.3%. Our operating net income is 62% better than last year, while EPS is 35% higher than the first quarter of 2009.

The return on equity, which excludes additional equity relating to CIEs is 9.7%. Excluding the shares related to the pre-funding for the Columbia Management acquisition, adjusted EPS would be $0.94 and adjusted to return on equity would be 10.6%.

For future reference, we notice in your estimates that is many of you excluded the seasonal issuance of share in the first quarter related to long-term center plans. We issued $2.7 million share in the first quarter of 2010, and 3.1 million in the same period of 2009.

On the next slide, operating net revenue growth was strong at 25% and revenues have been on a strong trajectory over the past five quarters. Keep in mind the fourth quarter of last year includes hedge fund performance fees, which we always booked in the fourth quarter.

Underlying improved revenues were strong management fees driven by markets and flows over the past year. Distribution fee growth is impacted by markets as well, but continues to be moderated by the slow recovery in client activity. Management, advise and distribution fees were up 36% over a year ago and down 6% sequentially due to hedge fund performance fees recognized in the fourth quarter.

Excluding those performance fees, management's fees are up sequentially as you would expect. Premiums have been stable up 6% over a year ago and down 2% sequentially. And net investment income reflect a strong growth in fixed annuity balance is year-over-year, as well as impact of redeploying cash at attractive yields during the first half of 2009.

Net investment income was up 26% over the first quarter of 2009 and down 2% compared with the prior quarter. Expenses also continued to be well managed, with the benefits of our reengineering program, funding investments and increasing our operating leverage to the markets.

As Jim said, we are making many investments for growth including the new advertising campaign and brokerage platform. Just as revenue in the fourth quarter are skewed by hedge fund performance fees so too, are expenses. In the form of compensation paid in relation to the strong performance.

In the first quarter of 2010, investment performance and center accruals are also higher year-over-year. Excluding these timing impacts, G&A is actually down. Overall though, despite strong rising markets and good business growth. Our G&A expenses remain under control and flat to last year.

On the next slide, I would like to address the segments. First AWM, here you will see that we are making strong progress on margins and Advice & Wealth Management segment. In fact, the 6.1% operating margin this quarter is the highest in nearly two years. This improvement is driven by record wrap balances, stronger distribution fees, even though longer dated decline activity continues to be below pre-crisis levels and reduction in general and administrative expenses 7% year-over-year, reflecting very strong expense management as well as the full integration of the H&R Block acquisition.

In the asset management segment, we are making strong progress toward our margin goals. Our operating margin in the segment was 6% or 13% if we exclude the unusual $27 million expense related to Threadneedle's evaluation. The expense is driven by a more than doubling a Threadneedle's evaluation of over a year ago, which is extremely unusual, but of course it’s good news.

As the value of the business arises, so to our commitments the Threadneedle employees and center plan and because of the accounting, we recognize a full year's change in value in the first quarter upon completion of the evaluation rather than amortizing over time.

Last year declines in Threadneedle evaluation benefited earnings by $10 million. The PTI and revenue growth in the segment reflects market improves, net inflows over the year, a moved to higher fee business at Threadneedle and stronger expense control.

Please turn to slide 10, which about the annuity segment. Last year annuity segment profits were impacted by dislocation in the markets. We had large numbers improving both directions from inversion, credit spreads widening, death benefits and other impacts. This makes a comparison to 2010 difficult.

Focusing on what happened in the 2010 quarter, there are two key trends you need to be aware of in assessing this quarter's annuities PTI. Lower net investment income and higher benefit swing. We are implementing a new portfolio allocation program for valuable annuities, which we call enhanced portfolio navigator that will ship a long portion of fixed accounts from general accounts to separate accounts and establish a fund to fund structure that will provide us with daily of underlying fund investments.

This will allow us to match our hedge assets much closer to the underlying investment to continue to mitigate basis risk. To ship asset to separate accounts, we liquidated about $600 million in general account assets, which negatively impacted net investment income by about $5 million and resulted in about $30 million in realized gains.

We offset these realized gains primarily in the general account backing fixed annuities, strengthening the entire portfolio. The increase in benefit was driven by the mark-to-market of the hedge variable annuities benefits driven by model changes FAS 157 non-economic impacts and basis risk. While, there is a material DAC offset of the mark-to-market living benefit. It was mitigated by the accelerated DAC amortization driven by gains and valuable annuities. The offsetting losses and fixed annuities did not have a material DAC impact.

On the next slide, the protection segment continues to generate stable revenues and earnings. While, we still haven't seen activity are come back to pre-crisis levels sales are up year-over-year. In the quarter, claims were marginally higher in the auto and home business relating to weather events. But these impacts were partially offset by improved benefit expense in the life and health lines.

On next slide, we continue to effetely manage our balance sheet fundamentals. We hold excess capital of $2.5 billion, which includes approximately $1 billion we will use to fund the Columbia purchase next week. And we have a sizeable liquidity pool. During the quarter, we issued $750 million in debt, raised cash to $600 million to implement the enhanced variable annuity portfolio allocation product and increased cash to facilitate the payment of $450 million in dividend from the life company to the holding company.

In the near-term, we will use cash to close on Columbia, transfer cash to separate accounts in variable annuities and we pay $340 million in debt in November. As of March 31, post to dividend to the holding company, our estimated RBC ratio was well above 4 100%. And our invested asset portfolio remains strong.

We had unrealized gain position of approximately $1 billion. Our balance sheet ratios continue to remain conservative. Lastly a variable annuity hedge fund continues to be effective, good operating leverage and we are making progress toward our financial goals. Our balance sheet remains strong including our capital and liquidity position. And overall, we believe we are well-positioned. Now, we will take questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) The first question is from Andrew Kligerman from UBS. Please go ahead.

Andrew Kligerman – UBS

Okay. Good morning. Questions around asset management. It looks like there was generally some pressure on flows. The first question would be, how much disruption is likely to occur going forward. You mentioned the $600 million due to the Columbia synergy and institutional and out, net flows in retail were negative $1.1 billion. Was there anything any disruption there due to the ongoing acquisition? So maybe the first question would be what's the outlook from potential outflows from the Columbia acquisition going forward?

Jim Cracchiolo

Okay. Hi, Andrew. Good morning. This is Jim Cracchiolo.

Andrew Kligerman – UBS

Hi, Jim.

Jim Cracchiolo

We actually think the Columbia acquisition and the integration on the alignment is going very well. The institutional outflow we experienced was for one of the managers that we were consolidating and that was clearly outlined that was part of our plan. In regards to the other outflows that we experienced to be very straight, we didn't have good funds in those categories that we were selling.

Now, sales overall are still a little slow, particularly on the equity side and then in the area that is the funds were coming in – the fund flows were coming in, we didn't really have those categories so fully in our lineup. And now, with Columbia that should help things as we go along, as we match up what Columbia brings with Ameriprise. But I don't see anything significant from the disruption at this point in time. I think we are pretty much aligned with Columbia a similar on their side of the house. And so we are still feel I'm very good according to our original plans.

Andrew Kligerman – UBS

Jim, and then just looking over to Threadneedle, is the outflows a $1.3 billion this quarter, I think it was a similar amount last quarter. But where do the Zurich assets stand at this stage in the game? And you talked about in the release, it talks about being lower margin. What exactly are the margins on those assets?

Jim Cracchiolo

Well, the first of all, Threadneedle continues to get good inflows in much higher fee basis. So in the other retail funds and their institutional accounts particularly around products like emerging markets and emerging market debt, so in that the actual revenue net and is significantly higher than what is leaving.

Now, in regard to zero, it gets a continuation particularly around their own accounts and their closed book of businesses. And so this is what we have been experience different – sewer Rick, this is what we have been experienced it's consistent, the fees on that is very low debt. So it's not a material revenue drain. Having said that, we don't like any say assets leaving, particularly from a perspective of the size of on our gross basis, but from our revenue perspective, we more than offset by multiples based on the new revenue that we bring in from the new assets that we garner.

Andrew Kligerman – UBS

And where does the direct number, just I don't know if you have a rough number as where the assets stand right now?

Jim Cracchiolo

Laura, do you have that – it’s…

Laura Gagnon

I don't have an exact number, Andrew but I know there is – total AUM. And the revenue is obviously substantially lower than that.

Andrew Kligerman – UBS

Got it. And then just one last question. On the – in Advice & Wealth Management, the $13 billion of assets there in money markets up 53 basis points some spread you sited in the release. Could you give a sense of what you are crediting right now the clients and what kind of yields you are getting on those assets?

Laura Gagnon

Andrew, the assets the brokerage cash is non-balance sheet for Ameriprise. So the fee that we are getting on their well as the spread fee comes through the distribution fee line in the AWM segment.

Andrew Kligerman – UBS

Right. And could you give us a sense of each side of the spread or?

Jim Cracchiolo

Right now, the spread on the brokerage cash is low because – and we are recovering the fees from that standpoint. But the – and we invested out from a standpoint through some strong balance sheet through various arrangements, which have helped give us the extra 20 some odd basis points in the spread.

Andrew Kligerman – UBS

Right. But you think at some point, you invested significantly higher yield in short-term money? Is that the upside?

Jim Cracchiolo

Absolutely. As we spoke about it and the short-term yield curve goes up, that will give us substantial benefits and we anticipate that in the latter part of 2010.

Andrew Kligerman – UBS

Right. Because normally, you are going somewhat north of 100 right?

Jim Cracchiolo

We have gotten to those ranges, actually.

Andrew Kligerman – UBS

All right. Thank you.

Jim Cracchiolo

And much higher.

Andrew Kligerman – UBS

Thank you.

Jim Cracchiolo

Thanks, Andrew.

Operator

Thank you. The next question is from Alex Blostein from Goldman Sachs. Please go ahead.

Alex Blostein – Goldman Sachs

Hi, good morning, guys. It's Alex Blostein. Question on Columbia, so it looks like, since the beginning, since the time the deal was announced, you guys lost, by my math, maybe $5 billion to $6 billion in outflows. Can you give us a sense – I know you mentioned that's lower-fee assets. Can you give us a sense of what the blended fee rate is on remaining Columbia assets and then in your projections of 25% operating margin by 2012. What did you guys assume for the ending balances for Columbia by the time the detail closes and then the flow outlook going forward?

Jim Cracchiolo

Let me start with the balances. Columbia, as we said, is up about 15% from when we did the deal, a lot driven, of course, by markets. They are at about $189 billion today. They have been in an outflows. I think part of the outflows, for instance, from what we just saw experienced was from some lower margin, an IMA account. One of the bank clients down in Charlotte that didn't want to re-up. So it is not a significant loss from a revenue strain. The other flows on retail have been mainly mixed, some in – some out, mainly in the sub-advice category, again. So we think they have been holding pretty strong through this change. And overall, when we look at what we actually purchased to where they are today, it is actually in a more favorable stance, because of the appreciation of the assets. There has been no material change in, what I would call the revenue streams. Walter?

Walter Berman

Right. As evidenced by the fact when we close on the 5/1, the purchase price will not be adjusted by any material amount and that was, as we told you, was calibrated to a revenue calculation. As Jim has indicated, these were index institutional money which had very low distal [ph] left. So from that standpoint the transaction is performing as we thought.

Alex Blostein – Goldman Sachs

Okay. And now on the fee rate, the blended fee rate, would you say is comparable to RiverSource, about maybe 50% basis points or so?

Jim Cracchiolo

It's comparable to RiverSource, yes.

Alex Blostein – Goldman Sachs

Got it. And then, on the Advice and Wealth management business, it seems like the productivity continues to improve, obviously with a reflection of you guys trying to cut down some lower-producing FAs, but also recruiting. Do you guys have any targets in mind, in terms of where you want to be as far as FA productivity, any so like near-term target would be helpful.

Jim Cracchiolo

Well, as we look at the advisor productivity, it is recovering from the low points of the market. We are not back to the productivity levels we were at pre-crisis yet. Now, I was looking at, I mean, the asset fees are coming back more quickly because of the market appreciation. Some of the transaction revenue is still down, like on some of these longer-term contracts that we think we are starting to see some increase and in greater activity. We have been gaining clients over the course of the year and that has been adding to our overall client activity, as well. So I would want to see the revenue per advisor continue to increase and probably in the double-digit category, low to mid-double digits, in that sense and really starting to get back to more of a full-fledged activity across their book of business. And I think we are starting to see some of that increase as we come and, of course, what will be important here is continued stability in the markets. So as the markets continue to be less volatile, client activity will come back as clients feel more comfortable to put more dollars to work.

So we are seeing dollars go back already into the wrap programs, which are shorter-term type of contracts, meaning that we can always rebalance them more quickly. As they move into longer-term contracts, that money becomes pretty much locked up, even though we can reallocate the balances, people still feel a little like they want access. That is why we still have strong cash balances. But I would continue to focus on the continued rise in revenue per advisor. Now, we have been taking out and losing some of the lower-producing advisors, but the people we are bringing in are much higher in production. And overall, the overall production has gone up tremendously. So, we said 25% per advisor, but it is overall 20% as we look at the total across the house, as well.

Alex Blostein – Goldman Sachs

Got it. And then just one last one. On wrap accounts, it seems like the flow has been pretty steady, kind of like in this mid– $2.5 billion, $2.7 billion per quarter. What would you guys say is the main source? Is that existing accounts or converting into your wrap account or is it just new money coming in and what is the sort of source of that?

Walter Berman

It's actually a combination of the three you just mentioned. And so, we have some money coming off the sidelines back into the accounts. We have some new money coming in from new clients, it's also from some of the advisors coming over to the house.

Alex Blostein – Goldman Sachs

Got it. Thank you.

Operator

The next question is from John Nadel from Sterne Agee. Please go ahead.

John Nadel – Sterne Agee

Good morning. Maybe you covered this and I am sorry if I missed it in the opening remarks. But could you give us an update on the split of the assets at Columbia. I think you mentioned a total AUM of $189 billion but could you give us a little more detail on the equities versus fixed income versus other accounts?

Jim Cracchiolo

I guess the latest information we have on the AUM, if you look at the equity, it is about $111 billion and the fixed income is about $77 billion. Okay.

John Nadel – Sterne Agee

Okay. And then a high-level question for you, Jim. As you look at results through the first quarter, transaction activity, maybe coming back a little bit, margins, at least on a core basis, in your Advice and Wealth management and Asset Management segments improved modestly, maybe more than modestly in Advice. As it relates to your 2012 targets, feeling better, the same, worse. Any commentary as it relates to that?

Walter Berman

What I would say after another quarter of business activity is that we continue to feel good about the progress we are making. I think on one end, I continue to feel – if you are asking me am I feeling a bit more positive, the answer would with absolutely yes based on market conditions being more stable and no one is necessarily at the higher level predicting a double dip here. And more stability in the markets gives me more confidence, because we are more of a retail client driven than institutional activity. So, that is all positive.

I would also say, I am quite more positive because the Columbia now is about to close. And I think we spent the last three or four months since we spoke last in our financial community meeting, there was a lot of work going on, to do and integrate and the people line up. And all of that has gone really well from our perspective consistent with what we thought would be really good. So the combination of those factors and I think, as you start to see, like the Advice and Wealth has come back a bit. There is a lot of questions around that in the last quarter of whether we will continue to see some improvement and we are seeing some of that improvement, as well. So the answer to your question would be yes, I am feeling a bit more positive. Under our belt of traction that we are see in progress made. There is always a lot of work to get to where we said we would ideally want to get to, but we are continuing to move it along.

John Nadel – Sterne Agee

Thanks. And then last one for me, just on the tax rate. I just want to understand what tax planning strategies means here. Is this something – it sounds like it is a discreet event or a couple of events that are going to impact the results in the first half of this year and then there afterward, you are back to your former target of 28 to 30. Is there anything here that is sort of mixed shift or is this just the impact of a couple of discrete tax planning items?

Walter Berman

Okay. Well, they certainly are discreet items in there. There is tax plans as it relates to international taxes and other things of that nature. And to your point, I believe that from the standpoint we did have guidance before of 28 to 30. We lowered that to 25 to 27. I believe that is sustainable into 2011.

John Nadel – Sterne Agee

Good. The 2011 is sustainable at 25 to 27?

Walter Berman

Yes.

John Nadel – Sterne Agee

Thank you.

Walter Berman

You are welcome.

Operator

Thank you. The next question is from Suneet Kamath of Sanford Bernstein Please go ahead.

Suneet Kamath – Sanford Bernstein

Great. Thanks. The first question is on Threadneedle and the $27 million compensation accrual that you booked. I guess it has been a little while since we've had to worry about this. So can you just remind us exactly what this evaluation or appraisal is based on? Is it based on just the absolute earnings that Threadneedle delivers or is it based on sort of market comparables? Any detail there would be helpful.

Walter Berman

Sure. This is Walter. It is based upon DCS. It's based upon market comp. It is based upon independent review from a third party. It has to meet standards with the taxing authorities and FSA. So it is a very comprehensive review that takes place and it is consistent to drive compensation.

Suneet Kamath – Sanford Bernstein

So is the right way to think about this impact, should we be thinking about it really as a 2009 event and as we think about that kind of margin in the first quarter, I know you backed out the entire thing, but is it based on really events and profitability that was generated in 2009 as opposed to this quarter?

Jim Cracchiolo

I think what you see there is an event and it really is an unusual event from the standpoint of the dramatic dislocation that took place and the comeback with the markets and with the comps as you take a look at the asset managers over there. That is what really triggered the substantial and unusual aspect. We always have some, but it never reaches anywhere near that proportion. We also had a situation, because of last year, many people stopped redeeming because of the low market, so that compounded a little. So, it was the down market and then the precipitous coming back. Again, it is creating value that is basically – the good news of it, it is basically three times or more than when we acquired the firm.

Suneet Kamath – Sanford Bernstein

Got it. Then just one last question on this topic. If I go back to one of your presentations, I think it was maybe 2005 where you first talked about the equity participation plan. You noted that the expectation back then was that in 2009, the charge was expected to represent about 20% of the pre-EPP profit at Threadneedle. Is that consistent in terms of what actually happened, that 20% number?

Walter Berman

It is based upon market volatility on that – it is based upon market volatility on that and the charge on this, it's based on market, this was an unusual charge.

Suneet Kamath – Sanford Bernstein

So I guess am trying to figure out if that 20% is still consistent with what happened in terms of the 2000 – charge that you booked this quarter?

Walter Berman

I am trying to gauge where you think the 20% – can you help me with that? Can you state what you think I said?

Suneet Kamath – Sanford Bernstein

Well, you showed a slide, I think it was maybe in Simon's presentation, and you showed Threadneedle equity participation plan from 2004 to 2009, obviously ‘06 to ‘09 being estimates, and you showed the EPP charge and the profit after tax, after EPP, that’s one of these bar charts. Then over on the right, it says in 2009, the EPP charge is expected to represent 20% of pre-EPP profit as compared to 35% in 2004. I think, I know – there are two elements to that. I will have to go back and I'll check, but I think the answer is, the EPP targets at two factors. One, it has an approximation of around 10% of the profitability. And then you have a change in evaluation that then drives it. So that is basically what drives the element. Here, obviously in this quarter and this year, because of the change, it took the valuation portion of it way above. Does that answer? I will go back and check the slide I have but that is the way it works.

Jim Cracchiolo

Suneet, what happened was, in 2007, the firm's value continued to appreciate then in 2008 and 2009 they came down significantly based on the market dislocation. At the time, point we evaluate and so this year it bounced up significantly. And so the good news is the firm is worth a lot more today and since they have a piece of it, a small piece, since we took back some of that a year ago, part of that came back, plus the additional upside that has transpired over the market that grew since that point in time. So, this overall is good news. It is an exceptional charge, one that we don't think continued on a normal basis. And if you actually average this out over the length of the time outside of the volatility of it, it actually is a reasonable number.

Suneet Kamath – Sanford Bernstein

Okay. I mean, what I was basically getting is, can we use this information to back into Threadneedle's earnings since you don't provide that.

Walter Berman

I want to go back and check the context of that element. Like I said, there is a portion that represents that percentage and then you get the evaluation change. That is why I want to go back and let me get back to you on that.

Suneet Kamath – Sanford Bernstein

Okay, great. Thanks very much.

Operator

Thank you. The next question is from Eric Berg from Barclays Capital. Pease go ahead.

Eric Berg – Barclays Capital

Thank you very much. Good morning, Jim and good morning to everybody on your team. So, I wanted to follow-up on Suneet's question and then I have just two more, so three questions all told. First, I am still struggling to understand why Threadneedle's value, I know you have touched on this but I hope you can build on your previous answers. When thread needle value has doubled in a year. If a event hasn't doubled. How do we think of – shouldn't the value of the company be roughly, that unit, be roughly, that said unit be roughly proportionate to the assets, which at least was not the case in the current valuation?

Jim Cracchiolo

Eric, I think what you would do again, this is a market driven valuation and so, if you go back to January or February of last year, which is one of the low points of the market, I think you can actually see what was happening, particularly whether here in Asset Management businesses or in the U.K. And the values of the firms just dropped significantly, as all the values of all the financial services companies, if you look at the market caps of any financial services companies in the industries. And so, here again, that is where we got – that valuation went down. There was also take back from that from a financial perspective and I think if you look at the values of companies in the UK today and the Asset Management arena, you will find where their valuations are.

Eric Berg – Barclays Capital

Okay.

Jim Cracchiolo

But the profitability…

Eric Berg – Barclays Capital

My next question…

Jim Cracchiolo

… is to come back, assets are up and it is a combination of all those factors that really lended to the value of the earnings.

Eric Berg – Barclays Capital

Okay. That is helpful. That rounds out my understanding. That is helpful. My next question is client activity. You discussed repeatedly in this call, how client activity is beginning to recover. My question, where do you best see this in your reported numbers? Specifically, the wrap is doing well but it had been doing well. Essentially, you had been running at about a $2.5 billion rate for several quarters. The Retail Mutual Fund business in the U.S. has negative flows and of course, you have your institution – well, why don't I just end it there. Seeing the negative flows in retail continue and seeing the stable but strong flows in wrap, I would like to look in your financial supplement or in your other disclosures for numbers that speak directly to this assertion of improving customer activity. Where should I look?

Jim Cracchiolo

Okay. So, Eric, I think there is a combination of things that you could look at. One is the operating revenue per advisor, you can see it has increased nicely and it's consistent where we were at sort of the year-end overall. But that is the first thing that is up significantly from the previous quarters. Second is our overall flows and certain client activities improved. So if you look at the wrap assets, as you mentioned, the numbers up at $100 billion, we've received good inflows over the last few quarters again, et cetera.

The other thing that I would probably say is that even though we say it is not fully recovered, there is client activity back. And you could see that money moving from some to have cash balances, some activity picking up. You can see some of the insurance sales increasing. We also have brokerage activity that has increased tremendously on some of the transaction activity. So there is that gradual progression that we see. The issue that we are saying, if you go back to pre-crisis, we had more advisors more fully active against the balance of the full book.

So for us, as an example, last year we had strong activity in fixed annuities. Variable was there, but it wasn't as strong and right now variable is a little slower than we usually have and fixed, actually, because we haven't actually put higher rates out to the market because the interest rate environment, is a bit low. So some of that activity that we receive in there is not there. Now, I think variable will start to come back as we get some of the newer product out there and we are starting to see some pick-up right now for some of the enhancement we put out already in April. So I think it is a combination of factors, but you can see steady quarters from the quarters previous.

Eric Berg – Barclays Capital

The last question relates to the Columbia acquisition. I think you said in September, at the end of September, when you announced the transaction that you expect to save between the two companies combined, call it $140 million, $150 million pre-tax. My question really is in two parts. First, what would that – can you remind us, what would that number be expressed as a percentage of the combined companies' expenses. And finally, what is your take on where the ultimate call savings will end up? Thank you.

Walter Berman

Savings – again, you have to look at – you can't look at total expense because there are certain expenses that don't get directly impacted, but that expense, for the ones that we measure impacted in the 25% to 30% range. And what was the second question?

Eric Berg – Barclays Capital

Okay. And are you thinking next that you will end up there or not as stronger number or better than expected number? What is your current sense of where the ultimate cost savings will end up?

Walter Berman

Current sense is both on gross synergies and also on the net – negative synergies that we will wind up at target, we are totally tracking right now. So we are feeling certainly that we will be able to achieve the numbers we spoke about.

Eric Berg – Barclays Capital

Thank you, sir.

Walter Berman

You're welcome.

Operator

(Operator Instructions) the next question is from Sam Hoffman from Lincoln Square Capital. Please go ahead.

Sam Hoffman – Lincoln Square Capital

Hi, I just wanted to follow-up on some to the questions already been asked and just talk just about, are you effectively reiterating your guidance for $0.46 of accretion to EPS and – this year from Columbia? In 2011?

Jim Cracchiolo

I think we were totally on track from Columbia. Obviously, from the standpoint – it is a month later than we anticipated the closing. So we will have to take tall factors associated with that but right now you should assume there is no change until we have a complete review. Because like I said, the synergies are on target, and the one-time comps are on target, and we are certainly – the market is increased the AUM, but we have closed later and then we have to (inaudible). To stay on point, I would say with no change.

Sam Hoffman – Lincoln Square Capital

Okay. Then also in terms of the outflows, the $6 billion year-to-date, roughly and then also the outflows that took place at Ameriprise this quarter. Are you saying the outflows that are to be had will be completely had before closing? So therefore, after closing, the flows should be at whatever run rate they are at organically?

Laura Gagnon

Can I ask a clarifying question? You said $6 billion year-to-date?

Sam Hoffman – Lincoln Square Capital

From Columbia. We just estimated that as a prior caller had estimated.

Walter Berman

That is not correct. That is not correct.

Sam Hoffman – Lincoln Square Capital

Okay. What would the – go ahead.

Jim Cracchiolo

The outflows are roughly in the $3 billion range and $2.9 of that billion is from this IMA account that I mentioned. This indexed account that is a very low fee. And so, I think the total outflows that they provided us was about $3.5 billion, so $2.9 billion is that one account I mentioned to you.

Sam Hoffman – Lincoln Square Capital

Okay. So would you say that post the closing of the acquisition, that all unusual outflows will cease and that we will be able to basically see the run rate business in terms of whatever organic growth rate it is at, at that time?

Walter Berman

I think – it's Walter, there is a natural shake out. We assumed actually higher in our net negative synergy. So right now we are in a situation but feeling good about it, but we have to work through once we close, but we don't see any issues over the horizon at this stage.

Sam Hoffman – Lincoln Square Capital

Okay. And my other question was on the Variable Annuity benefits line. I guess, how should we think about the $24 million hit? I understand it was partially offset by DAC but then we can't see that because it is mitigated by other accelerations of DAC. Is the $24 million hit on the Variable Annuities benefits line, is that something that should continue going forward or is it a one-time?

Walter Berman

There is an element in there. As we talked about the $157 million, obviously as it affected the liabilities which we don't necessarily control from that standpoint, as the valuation fee. Element on basis, as we talked about, is the program we are launching. We believe we will be able to manage that more effectively. Even though it is managed effectively, it will be an improvement. And so as we work through it, that asset should improve and certainly it helped – that was what helped drive on the DAC on the offset where we didn't get the benefit from – the gains actually offset the DAC amortization. So yes, normally we would not be taking gains of that magnitude and not have the impact on the amortization but the big element is here $157 million and we believe we will then get to the – improve the basis management as we element the enhanced Portfolio Navigator this quarter.

Sam Hoffman – Lincoln Square Capital

Okay. Then, Jim, when do you see activity rates normalizing based on what you are seeing in the marketplace today?

Jim Cracchiolo

I wish I could tell you. I think everybody feeling a bit better, but I don't think the environment with the unemployment picture and the noise coming out of Washington gives people a lot of comfort every day. So I think it will just be a continuing gradual. This has been a big dislocation. It's actually – the markets have come back, I think, a bit quicker than people had expected and I think the consumer will always take a bit longer. We started, as we said originally, it takes at least six months after dislocation. This was a more severe one. We started to see activity come back six months later, which was in the fourth quarter and things are gradually picking up again as people are starting to venture back in.

So things have come back. People are putting money to work, but having said that, I don't think that if you speak to people that you know, people are feeling go-go about the markets or putting all of their money at risk again or locking it down. So I think that's going to take a bit longer. But things are improving. I think the climate is feeling a lot better, but my personal opinion is I don't think we are back to everyone feeling very comfortable.

Sam Hoffman – Lincoln Square Capital

Thank you.

Operator

The last question is from Tom Gallagher from Credit Suisse. Please go ahead.

Tom Gallagher – Credit Suisse

Good morning, sorry for the bad connection. I just want to follow-up on the asset retention question. You talked about the $3 billion of outflows from Columbia. Walter, can you talk about what were your negative synergy assumptions in the deal and is it fair to assume that we are through the biggest institutional outflows you expect or from a timing standpoint, can we still expect to see some fall-off there? That is my first question. The second question is, post the close of this deal are there going to be any incentives in the place for the Bank America distribution that originated these asset to keep the Columbia funds in place? What I am getting at is, I know the earn-out goes away on net flows post the close of the deal. So is there risk here that we see some fall-off in retention for that asset pool on the Columbia side from a retail standpoint? I know you addressed the institutional side.

Walter Berman

First of all, I think one of the things we actually outlined when we announced the deal was a long-term agreement in place with Bank America and the various channels, particularly around the U.S. trust channel. And the people are in place, both us and Bank America wants – we worked hard to maintain, including the people, the right relationships and the right economic arrangements between us and Bank America.

So, we still feel, as we felt at the time of the deal, pretty good about that as being an ongoing strong relationship. If anything that’s continuing to pan out as such. So I can't give you any change to what we originally said. I actually think that is one to have good things about the deal.

Jim Cracchiolo

Yes. And the timeline on the first part of question, the negative synergies, we couched in terms of P&L impact and certainly dealt with the combining of the funds and fees and also watch those account. And we have not achieved – we are in a good position relative to the amount we put up. It certainly has materialized on low levels so far.

Tom Gallagher – Credit Suisse

I guess just one follow-up, Walter. So is it fair to say, though, that based on the conversations you have had with the Columbia folks, that you think the pig is through the python or is there still more fallout to come? I just want to know cosmetically, should we expect to see outflows maybe for the next couple of quarters on the Columbia side?

Walter Berman

We have been working very closely, monitoring it. Right now, as I said, we feel that it is moving according to plan and there is nothing we know about that will give us concern at this stage that there is something that is coming our way that was unexpected. We told you when we did the transaction that we were assuming $20 million to $40 million in net negative EPI impact associated with the negative synergies and it certainly has not materialized that.

Jim Cracchiolo

So, Tom, I think one of the things we did say is that, first of all this is pre-close, right? We are talking about what has occurred at Columbia. And of course, we said that whatever it is pre-close will be in the price, adjusted one way or the another in net inflows or outflows. What Walter is talking about with you is the net negative potential expense savings as well as the synergies on the revenue side, which we factored in post-close. So that if assets were to leave us, we had estimated a number for that. So, as an example, we lost $600 million in the first quarter from RiverSource, that is part of what we estimated for RiverSource as we went forward. For Columbia, the amounts that we have included in this synergy hasn't occurred yet, because we didn't close the transaction.

So we do have a plan in case in case that happens as part of our plan in numbers. But having said that, we are planning that there may be some further dislocation that occurs, and we have factored that into our analysis up front. Now, maybe that will not occur and we are hoping it doesn't or it can occur over the next number of quarters as we had originally planned. We don't see any reason why it should be greater than what we had planned at this point in time. So that is as best I can tell you at this point.

Tom Gallagher – Credit Suisse

That is clear, thank you.

Operator

There are no further questions at this time.

Jim Cracchiolo

Great. First of all, we appreciate you taking the time this morning. Laura will be available for any further question that is you may have. Let me just close by saying, as we continue to look at what we are doing and how we are doing it and continue to monitor the environment, we are feeling that we are making good progress here. There is a lot of work to continue to do and we will continue to do that work. We will continue to be diligent around insuring that we can continue to drive growth here and improve profitability and return to shareholders, which we will be diligently working on. But I would say we are making progress, we do feel good about where the company is positioned, what we have in place, how we are executing against that. And, so, we will continue to report to you as things unfold. But, we think we had a good first quarter and a good start to the year and we are seeing good things coming about. Thank you.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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Source: Ameriprise Financial, Inc. Q1 2010 Earnings Call Transcript
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