阿默普萊斯金融 (AMP) 2006 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Ameriprise Financial's second quarter 2006 earnings conference call.

[OPERATOR INSTRUCTIONS]

I would now like to turn the call over to Ms. Laura Gagnon, Vice President of Investor Relations.

Ms Gagnon, you may begin.

Thank you.

Welcome to the Ameriprise Financial 2nd quarter earnings call.

With me on the call today are Jim Cracchiolo, Chairman and CEO, and Walter Berman, Chief Financial Officer.

We have approximately 20 minutes of prepared remarks, after which we will open the lines for Q&A.

During the call, we will be referring to various non-GAAP financial measures like adjusted earnings or adjusted premiums.

Management believes that the presentation of these adjusted financial measures best reflects the underlying performance of the company's operation.

The adjusted numbers exclude discontinued operations, AMEX Assurance, and non-recurrent separation costs.

The presentation of adjusted earnings is consistent with the non-GAAP financial information presented in the company's annual reports and Form 10-K for the year ended 2005.

Reconciliations of non-GAAP numbers discussed in this presentation to the respective GAAP numbers can be found in the earnings release and statistical supplement issued today, available on our website and furnished under an 8-K filed with the SEC.

Some of the statements that we make in this discussion may constitute forward-looking statements.

These statements reflect management's expectations about future events and operating plans and performance and speak only of today's date.

These forward-looking statements involve a number of risks and uncertainties.

A list of the factors that could cause actual results to be materially different from those expressed or implied by any of these forward-looking statements is detailed under the heading "Forward-Looking Statements" in our 2005 Annual Report to Shareholders, a complete copy of which is available on our website, and under the heading "Risk Factors" and elsewhere in our 2005 10-K report already on file with the SEC.

We undertake no obligation to update publicly or revise these forward-looking statements for any reason.

With that, I'd like to turn the call over to Jim Cracchiolo, Chairman and CEO.

Good afternoon, everyone.

Thank you for joining us today.

We've just finished our 3rd quarter as an independent company and I feel very good about the progress that we're making.

We had a very solid operating quarter and are doing well against our shareholder targets and executing against our strategic objectives.

At the same time, we continue to make tremendous progress in managing through the separation and establishing ourselves as a public company.

Relative to the corporate targets we established, adjusted revenues grew 13% and adjusted earnings were up 22%.

Both measures are above our on-average overtime targets.

Adjusted return on equity continues to improve, reaching 10.7% as of the end of the 2nd quarter.

While this is below our 12 to 15% target, I am pleased with the progress we've made again this quarter.

I believe we will reach our target range on a 12-month trailing basis by the end of 2008.

As we grow retained earnings and free up capital through our optimization efforts, we're committed to redeploying that capital most effectively, either by returning it to shareholders or for targeted acquisitions.

During the quarter, we repurchased one million shares of Ameriprise common stock for a little less than $42 million as part of our approximately 840 million share repurchase authorizations.

Now let's review our business results for the quarter, which I group based on our five strategic objectives.

First is growing our mass affluent client base.

Here our focus is on meeting the financial needs and dreams of our mass affluent through a financial planning relationship.

The number of our mass affluent clients grew 8% year-over-year.

Importantly, average assets per new client increased 24% year-over-year, reflecting our focus on acquiring these clients to a comprehensive planning relationship.

We are also making great progress in continuing to raise brand awareness of the Ameriprise brand in the marketplace to really define our company in the mass affluent space.

In fact, we're ahead of where we thought we'd be at this point.

We will continue to focus on moving our campaign forward in the 4th quarter.

We have also recently completed the re-signage of all of our offices around the country.

Our second objective is to maintain our focus on financial planning.

We know that financial planning leads to deeper client relationships and more satisfied clients.

Advisors who do planning are more productive and advisors who develop ongoing planning relationships with their clients are even more productive.

Financial planning is at the core of the company and moving forward, we will devote even greater emphasis to helping our clients to a financial planning relationship.

This includes investing in systems, tools and strategies to drive new planning relationships with the mass affluent.

To date, 58% of new mass affluent clients are joining us through a financial planning relationship.

This is significantly higher than our total financial planned penetration of 44%.

Our third objective is delivering profitable growth and productivity in the advisor network.

Advisor productivity continues to show strong year-over-year improvement with per advisor gross dealer concession up 14%.

Near term, we will continue on focus on delivering productivity gains across the advisor base.

Technology enhancements are an important part of our strategy to improve advisor productivity.

Earlier this year we rolled out the first of four new advisor desktop releases to improve platform stability, provide new tools and make it easier to do business.

The reaction thus far from our advisors has been great.

In the end, our goal is to offer a leading advisor desktop technology.

One of the challenges created by this [has been] maintaining the stability of our advisor force.

As I've met with advisors across the country, they're very positive about the changes that resulted from our independence.

Franchisee advisor retention, based on the past 12 months, remained strong at 91% and we're seeing an improving trend over the past two quarters.

In regard to our employee advisors, retention is at 60% reflecting high productivity requirements as well as the closing of certain field offices as part of our ongoing efforts to ensure efficient use of our resources and alignment with our mass affluent strategy.

Our fourth strategic objective is to develop new, innovative solutions and extend distribution beyond our current channels to capture more and greater asset flows.

Advisor clients continue to choose our industry-leading wrap program and it remains number one in assets.

Combined, our wrap products now hold more than $66 billion in assets, up 36% from the prior year.

RiverSource variable annuities continued to achieve strong growth in both the Ameriprise and third party channels.

Variable annuity sales rose 56% from the prior year and contributed $1.3 billion in net flows.

In the quarter, we introduced a new RiverSource Retirement Advisor for variable annuity series and a new rider, the Guarantor, withdrawal benefit for life.

As clients and advisors are increasingly recognizing our performance improvements, investment capabilities and more effective wholesaling, we are experiencing increased sales in our RiverSource funds and a decline in redemptions.

We've essentially cut net flows in RiverSource funds in half, both year-over-year and sequentially.

Even with continued positive momentum, we expect to experience net outflows in 2007, due largely to our move to open architecture.

During the quarter we've launched ten new mutual funds including RiverSource Retirement Plus series, an innovative target date fund-to-fund solution that utilizes our quantitative capabilities.

This is a product that central to our IRA and defined contribution investment-only activities.

Expanding third party distribution in our institutional asset management business is also important to accumulate greater assets.

Advisors at Securities America can now offer RiverSource funds and we're working to open third party distribution of our funds by the end of the third quarter.

We've also focused on growing our institution and sub-advisory businesses and we acquired a high yield and deep value mandates during the quarter.

Insurance is a critical need of many of our clients and our portfolio of products emphasizes asset accumulation.

Life insurance in force was up 9% over the past 12 months, reaching $167 billion.

Our market share continues to increase in variable universal life where we are leader with sales up 8% year-over-year.

We've also recently launched new universal life products in support of our retirement strategy and are seeing strong growth in auto and home.

The fifth objective in [churning] increasingly strong and efficient operating platform.

Let's begin with how we're leveraging the separation from American Express and subsequent re-establishment of our infrastructure.

These efforts are going very well and are on track and on budget.

We're accomplishing this while continuing to focus on the core of our business.

Meanwhile, we continue to re-engineer to improve our effectiveness and efficiency with more than 100 initiatives on the way across the company.

Our re-engineering program is on track to deliver targeted savings, both to improve our pre-tax margins and to fund new investments in the business.

The pre-tax improvement from re-engineering initiatives is consistent with our plan and will allow us to reinvest and improve business systems, capabilities, products and services.

Capital optimization is another priority area and we're redeploying against higher returning businesses to the right rate of growth while managing capital intensive businesses like fixed annuities and certificates which have been impacted by the flat yield curve.

One challenge that we, like others in the industry face, is the evolving regulatory environment.

We've invested heavily in compliance over the past several years.

We continue to make significant investments and believe we're making substantial progress.

We've put a number of matters behind us and continue to work with the regulators.

We regularly review our legal and regulatory reserves and make adjustments if and when necessary.

Lastly, we made the strategic decision to exit the record keeping portion of the defined contribution business, announcing its sale in May.

We generated a net gain of $36 million on the sale and are now focused on capitalizing on the growth opportunities of our defined contribution investment management-only business where we sell our funds on other platforms.

This was an opportunity to make a strategic exit from the technology processing part of this business to focus more on growth opportunities while assuring our clients' needs were met.

That concludes my formal comments.

I'd like to turn it over to Walter, who will provide you more comments in context about the financials.

I do want to reiterate that I feel very good about the underlying business results and the execution focus that the organization is maintaining.

Walter?

Thank you, Jim.

The 2nd quarter of 2006 was financially successful on a multitude of dimensions.

Adjusted earnings were $195 million or 22% higher than prior year performance.

This adjusted earnings growth was generated by a double digit increase in adjusted revenue coupled with tight management of our ongoing operating expenses.

As a result, adjusted contribution and PTI margins improved, along with performance in our two operating segments.

Return on equity on adjusted basis reached 10.7% as compared to 10.4% last quarter.

And finally, we successfully executed the sale of our 401k business record keeping and handled several special items during this quarter.

The net effect of this and all other special items was a marginally negative impact on our strong operating performance for the quarter.

The details on all special items have been included in our statistical supplement available on our website.

The strong performance in brokerage, SPS, variable annuity and improved sales in our retail mutual funds led to a double digit year-over-year growth in both our management financial advice and service fees and distribution fee lines.

This positive momentum was partially offset by the negative growth in our net investment income as a result of the anticipated decline in our certificate and fixed annuity balances.

Adjusted expenses increased 11% in the quarter versus last year; however, operating expenses, net of these special items, showed a significant lower increase due to strong expense controls and re-engineering.

As a result of the underlying revenue growth and the product mix shift, our adjusted contribution margin, excluding the 401k transaction, increased to 51.3% from 49.6% in the year-ago period, and, excluding special items in both periods, PTI margin improved substantially.

We have also continued to drive progress by optimizing our capital structure.

During the quarter we issued $500 million of hybrid securities, junior subordinated debt with tax deductible interest which receives equity credit from the rating agencies.

This hybrid security is a very attractive way of lowering our overall long-term cost of capital.

We continue to return capital to our shareholders through dividends and share repurchases, buying back one million shares for about $42 million.

During the first four months of the two-year authorization, we purchased 7.4 million shares for $316 million, leaving approximately $520 million.

As indicated, we had a number of specialized items disclosed in the quarter.

I'd like to provide you more context concerning four of these items.

First, we announced the sale of our record keeping business on May 3 this year and closed the transaction on June 1.

In addition to the long-term strategic benefits, we reported a net pre-tax gain of $36 million in the AA&I segment.

The $66 million in proceeds from the sale are included in "Other Revenue" with $30 million in transaction-related costs including other expenses in the segment.

These costs reflect system write-downs as well as related severance.

In addition to the current quarter financial impact, the sale resulted in the decline in low margin administered assets of $17 billion.

We will continue to manage about $13 billion in assets on a defined contribution investment manage-only basis.

We expect additional outflows of 401k managed assets in the 3rd and 4th quarter before we begin to capitalize on our efforts to grow this business.

Over the next year during the transition period, there will be a decline in revenue and expense related to exiting this activity.

The annualized revenue was approximately $60 million but as we've indicated, we expect the sale to be neutral to marginally accretive going forward.

We anticipate an additional $5 to $10 million in final exit costs in the first half of 2007.

Our protection segment was impacted by a number of special items.

Two of these items occurred in our auto and home business.

First, we recognized $28 million in additional DAC expense due to shortening the amortization period.

We do not expect this change will have a material impact on future profitability.

Second, we recorded a $12 million reserve release relating to the lower-than-expected claim frequency and severity for the accident years of 2004 and 2005.

Lastly, after a third party peer review of our deferred revenues, we determined it was appropriate to recognize $18 million in revenue that was previously deferred related to cost of insurance for our variable universal and universal life products.

Three lines have been impacted.

We recognized the $18 million in "Other Revenue."

As a consequence of this revenue recognition, we established and laid a reserve for future claims in the amount of $7 million.

And finally, as a consequence of the new claimed reserve liability, we decreased our DAC amortization by $5 million.

The net of these three lines was a pre-tax benefit of $16 million.

In addition to the items I've noted, other special items are disclosed in our release and in our fiscal supplement.

In the aggregate, the impact of all of these items on an adjusted-earnings basis was immaterial.

Jim, back to you.

Thanks, Walter.

Well, we're only three quarters removed from becoming an independent company.

Our employees and advisors have accomplished a tremendous amount.

We continue to execute against strategic objectives and are focused on building the company for the long term.

I feel very good about what we've accomplished and the work ahead to achieve our on-average overtime goals.

With that I'd like to open it for questions.

Operator?

[OPERATOR INSTRUCTIONS]

Our first question comes from Andrew Kligerman from UBS.

Yes, good afternoon, good evening, whatever.

A few questions.

Just first on the RiverSource flows which showed tremendous improvement in the quarter and I think Jim mentioned that in '07 you should still expect net negative flows.

Could you talk about the trend going into '08 and do you think you'll see positive flows by then and maybe you could give us a little color on some of the distribution arrangements you're thinking about by the end of the 3rd quarter.

Thank you, Andrew.

What we're seeing, as we've said, the trend line is showing positive.

Our sales have increased within our advisor channel.

We're seeing good uptake performance and our products are strong.

We're actually coming out with more products as we continue to move through the year that we're seeing some good uptake on.

Our redemptions are actually decreasing.

We still have redemptions in what was the old New Dimensions Fund.

The performance is turning around but we don't see that curtailing in a major way shortly, but it is improving.

So that's why we're still continuing to be in outflows with the open architecture.

The positive on that is with the sales increasing, the new funds, and now moving to our start to distribute our products externally, we're hoping that the amount of in flows will continue to increase.

We have two institutional mandates that came in the 2nd quarter.

We also, as we've just said, have opened distributions to Security America advisors who never had the ability to sell our RiverSource Funds and we will be actually launching in the 3rd party distribution channel by the end of this quarter, which is the 3rd quarter.

So as we move then into 2007, we are hoping that there's a momentum shift and then with the new activities coming up, we have a positive expectation as we move forward but I don't want to give any sort of projections out.

OK.

Mr. Chairman, on the property-casualty, the loss ratio of 74.4%, I assume that had something to do with the $12 million reserve release.

Can you give us a sense of where you would expect the loss ratio and property/casualty to be going forward.

Is it going to stay in sort of the low 80s that we've seen in prior quarters?

OK, Andrew.

I'll let Walter comment on that.

You are correct.

The $12 million did impact it and right now, we don't forecast, but certainly we see every indication that the loss ratios will be consistent as we move forward.

Lastly, on the brokerage banking and other.

Distribution fees increased from $214 million to $242 million, a quarterly sequential.

That's pretty a pretty nice pick-up.

Is that Security America and can you give us a little bit of color around what's going on in that operation and do you see continued pick-up in revenues there?

Yes, Security America is a big part of that and certainly with their increase in advisors we've seen a very significant lift in their activity levels.

So, again, we don't forecast but it certainly the benefit that we're deriving from that activity relating to their increased advisors and productivity from them.

You don't think the trajectory is a fluke then there, really?

No, I don't believe it's a fluke.

Thanks a lot.

The other thing that I think also is the WRAP program.

As that really comes into higher asset levels in the distribution part of the business, we're picking up the annuity fee revenue from that business.

Got it.

Thanks a lot.

Thank you.

Our next question comes from John Nadel from FPK.

Go ahead.

Hi.

Good evening, everybody.

A couple of quick questions.

I realize that litigation expense is a sensitive topic and may be tough to talk about but if I look back to last year, you had the $100 million settlement.

Can you give us a sense for whether the $32 million this quarter related to a new item?

Is it an accrual or is there actually cash out the door at this point, or is it your best estimate?

How much of this should we expect to be ongoing?

Let me answer that question.

They say accrual.

It is not cash out the door.

Certainly we assess our exposures and we do our evaluations on a quarterly basis.

I think you're aware of the SIAs situation in Louisiana and we've looked at our overall assessment and we've just made our valuation on that basis.

We have ongoing claims and as they relate to our ENL [inactivity] and we certainly have reserves established for it.

We've taken our reserves to a point that we feel its appropriate as it relates to that.

Is it fair to say, Walter, that the $32 million is related in large part to new items or is it increasing reserves on older items?

It's related to our assessment of the overall situation, and the big item in the quarter was SAI with the overall reserve of, just looking across all of the areas.

And again, on the SAI, as we look at it, and certainly an assessment was made there, we are pursuing vacating that but we certainly have taken a prudent approach what we think as relates to it.

And the second question would be, Jim, just going back to your commentary on the re-engineering initiatives.

I think you had mentioned, I'll probably paraphrase here, but that you are "on track with respect to your targets."

Could you just remind us what your targets are?

If I recall correctly, you said that your '06 re-engineering savings should be similar to '05 and if I'm correct, that's about $175 million?

You're totally correct.

And any estimate at this point as to how much of that will actually be able to drop to the bottom line versus fund new initiatives.

John, the way I would look at it, just as you've seen the increase in our operating performance.

We're doing two things.

Our investment agenda today is quite strong and so we have not slowed up on new products, technology enhancements that we're making across the system, which I think is good that we'll pay other dividends as we move forward.

Some of that, as you would imagine, has come to improve some of our operating performance, so it's not as though we're making those decisions sort of like one off, which I understand is "what do we need to invest," "what do we re-engineer?" and continue to achieve our shareholder targets.

That's the way we're continuing to progress.

OK, just one more quick one on the re-engineering would be the $3.0 million in severance costs that ran through corporate this quarter.

I'm sorry, the $11 million, $0.03 a share.

Is that something that we should continue to expect to see too?

How much do we need to continue to spend to achieve the $175 million in savings, or is most of the spending done in the first half of the year.

That related to the office closing and over activity and as part of our ongoing evaluation so I think you should see that, from our standpoint, we look at our $175 net of all the costs from that standpoint of executing and right now we're evaluating as we move forward.

The $175 is net of the costs.

Yes.

The last question would be going back to the mutual fund flows, and Jim, your comment that '07 could continue to see net outflows from RiverSource I guess I'm a little bit surprised by your commentary there, given what we've seen the last couple of quarters, especially the 2nd quarter with redemptions coming down and sales continuing to improve.

I would have thought that, based upon the open architecture, the move to 3rd party, the opening to Securities America, that even if redemption's held steady at this level, that your sales growth would get to a level that's enough to offset those redemption levels.

Is there something that you're seeing or you expect to see on the redemption side that's going to pick back up?

Yes, one of the things, just to be clear, is that we're referencing only mutual funds, not all of RiverSource assets on the management.

So retail mutual funds?

Yes, and we weren't referencing Threadneedle or the other activities around it, so I just want to clarify that.

The second thing just to do in clarifying that is, our trend line to your [point] is improving very nicely; however, we also know that we've moved to a complete open architecture and there are just a level of new sales, even as we gain them, we're not gaining based on the total of what we used to do and with the redemptions are coming from.

So we're also just monitoring that.

As we expand our distribution, we think that will move us into a new territory but we're not at the point yet of having that open so that we're driving those flows.

So just based on the natural math of it, we see those outflows occurring into 2007.

OK, so you're still seeing some pressure on the sales side from people redirecting away from the [inaudible].

Well, no, the sales actually hit a low point last year and have come back up.

But with the 401k business, we just moved that over to Wachovia.

We've seen some of the outflows, some of the mandates there, so we're assuming that we're going to continue to get some of those outflows as we move a little forward, but our sales in the advisor channel hit a low point last year and it's trend really strongly positive so that's where the positive momentum is occurring.

We just see some continued outflows and things like new dimensions that were part of the 401k platform, etc.

OK.

Thanks very much.

Our next question comes from Tamara Kravec from Banc of America Securities.

Please go ahead.

Hi, thank you.

Just a little elaboration on your distribution and how that's going.

You're working on getting into wire houses and also more heavily into banks so if you can just give us more detail on that, and my second question is just on the run rate in the asset management segment on the other expense line which I understand is mostly allocated costs and administrative costs but you have a couple of extra items in the 2nd quarter so I'm just wondering what you would expect a good run rate to be for that, given your re-engineering and some of the things you have already talked about.

OK.

I'll handle the first and I'll ask Walter to handle the second of your questions.

The first is how is our third party going?

As you are aware, where we really are in the third party was with our variable annuities.

Our sales are up very strongly in this year, both 1st and 2nd quarters, and we are continuing to sign new distribution arrangements as we move from the bank to the broker-dealer segment.

So that's going well.

In regard to the mutual fund area, as we said, we've just put in place the infrastructure necessary with a new transfer agency system, etc. to [sought] our 3rd party distribution.

The first we opened was SAI which is now able to sell our funds and we will be announcing over the next month or two another distribution arrangement, etc. as we start to expand.

Now one of the questions would be as we expand, how are we going to do that?

We will be expanding our wholesaling activities, leveraging off of a combination of our third party as well as our in-house wholesaling but we will continue to put resources there to expand our distribution activities and that is all a part of our plan, okay.

Let me take the second part of the question as it relates to the ongoing expense.

The 401k obviously is related to the sale and one would anticipate that to be a continuing situation.

The legal is also in the AA & NI section.

There's another item which you may not be aware of which is relating to Threadneedle due to the reevaluation of certain limited partnership properties.

We now have to put that on the books and that was not consolidated in the prior year, so you basically have on the expense side, you're picking up, and then you're picking up the revenue, so it's almost a net neutral from that standpoint.

Threadneedle will continue because it's part of the way that accounting has to pick it up but it has no impact, a marginal impact, on profitability so it's just a matter reflecting the variable interest entities.

The other two like indicated, are what we'll classify as the specials.

OK, so the first, I'm sorry, was the $30 million in costs associated with the defined contribution business that was sold?

Right.

And the second item was the what?

The legal that we spoke about, bringing up the legal reserve and the other $25 million related to Threadneedle as it relates to putting up the expense and revenue associated with the variable interest equity.

OK.

Tamara, this is Laura.

For your benefit and others, I just wanted to let you know that there's a new exhibit in our supplement that lists out the lines and the segments where these disclosed items would appear.

Oh great, thank you.

And, just also on the variable annuity competitive environment, just a couple of sentences on what you're seeing there and obviously it's been competitive and lots of new products are hitting the marketplace from all different aspects and companies, so can you just give us an update of how you feel in this environment and any new things you're seeing in the 2nd quarter.

We actually feel good about the products we have to market.

It's a combination.

We also won the Dalbar award again this year for our servicing.

Our wholesaling is quite strong and always gets high marks and now with our product features in the variable annuity products, we actually feel that they are very appropriate for the segments we're selling in.

So we feel good about it.

As I mentioned here, we just introduced some new products into our advisor channel which is also having some strong uptakes.

So we feel good.

We feel good that we understand the product.

We're actually doing a lot of work around ensuring that these are the right products from a client but also from an exposure that we can manage, and so we think that we're on an uptrend not a down trend.

OK, and my final question is just on excess capital and whether you can give us an update on where you expect to be by year end and if any of your expectations have changed?

No, our expectations have not changed.

We feel that we're well capitalized and well capitalized to the point that we announced our buy-back and our continuing operating performance is straight on the path that we indicated previously.

OK, great, thank you.

You're welcome.

Our next question comes from [Doug Schuman] from [KBW].

Please go ahead.

Hi.

First of all, I'd saw that Threadneedle mutual fund redemption's picked up a little bit.

Can you give us a little bit of color on that and what's the outlook there?

Well, actually the overall Threadneedle, what we're actually seeing is in some of the retail funds that has come back now, they're inactivity is positive.

I think they faced what was similar in the industry in the U.K. and Europe where the retail consumer pulled back a bit but I think that's actually turned more positive.

They have experienced some continued outflows in some of the institutional but they're also now winning more mandates in the key areas that they want to expand some of their capabilities, so we're actually seeing that as a positive coming around and I think the market may have had some impact to their numbers which, as you are aware, I think it particularly impacted in the international marketplace.

In the U.S., back to the mutual fund distribution strategy.

I guess I'm not clear on how you plan to wholesale the mutual fund channel.

Will you be leveraging some of the variable annuity wholesalers or will this be a dedicated team or how are you going to approach that?

We are ramping up our team activities.

Now, of course, we have a strong wholesaling already established and some of the channels like the bank channels that we'll look to leverage off of the relationships that we've crafted but we're going to add more wholesalers in expanding our activity.

In fact, I'll be very frank.

We're also going to be adding some wholesalers, even in our internal panel, because we think there is an opportunity for further sales.

We have to also market in our own channel so we're going to be expanding the wholesaling that we have.

As we sign appropriate agreements and we're looking to penetrate those agreements on a regional basis, we'll be adding the resources to go do that.

As you talk to potential distribution partners, how are you positioning yourself?

What is the pitch?

Are you emphasizing certain select funds with really killer performance or how are you pitching yourself?

Actually what's occurring on some cases is that people are calling us to get some of our products on our shelf.

They've seen some really strong performance in some of our products and are interested in having those products distributed in their channel.

Of course, we know that we have to win the business every day.

Performance does count.

But we also think that we have some good products and actually some of our even newer products that are more solution-based we think we'll actually apply both in some of the institutional business, the 401k, our target maturity funds that we've come out with, our portfolio build-a-products, so we actually believe that we have some right products for the segments that are appropriate for the retail client today.

Thanks a lot.

Our next question comes from Joan Zief from Goldman Sachs.

Please go ahead.

Thank you.

I just wanted just a little clarification.

When you talk about the expense savings for the year, when we talked in 1st quarter, basically there wasn't any incremental expense savings that flowed down to the bottom line.

I guess they had all been reinvested.

Is that comparable to the 2nd quarter?

Is that what you were really trying to say, that you are recognizing the re-engineering but investing that amount of money so it isn't really having an incremental impact to the earnings?

I think what I did say in comment as we looked at the numbers as we've gone through the 2nd quarter is that we are using, and one of the ways we look at it is to free up resources to re-engineer but we always look to then take some that money and part of our new investments so that if we can get some good investments that will give us a good return to reinvest it.

Having said that, I would also say that some of the re-engineering is falling to the bottom line.

We do have improvement in our operating earnings and our margins so it's not a one-for-one per se.

So as we continue to proceed we want to make good investments if we have those investments to make but we're also managing that so that we get the rate of right return and we're looking not to overspend there.

But we are looking to free up resources in our operating environment and to the extent that we can, bring that to the bottom line.

My second question also relates to the litigation.

I just want to understand what defines "special" litigation and regulatory versus the normal expense of being an insurance company of doing business and always having litigation and compliance issues.

Is this just the piece of that expense item that you believe is unusual and not something that you will be seeing on an ongoing business as a cost of doing business.

Yes.

Let me try and say that.

We have ongoing litigation and we certainly monitor that and we have programs that evaluate that and make determinations working with our advisors on that.

Special items are like come through when we look at when the basic claim in this particular case, SII, it's only one aspect of it where there was an arbitration where they awarded something and we have to make an assessment on that basis even though we feel there's a potential [inaudible] which waive fee levels that we thought and we evaluate, and we look at overall looking at cases that go outside the scope of normal claims and we then, working with our legal department, come in and make an assessment over and above those normal claims that flow through.

And then as you saw last year, we had some claims come through that we put up in those categories also that we disclosed so in this particular case considering adding to our reserves, we classified that as in this conversation as "special."

But again, we attempt to try and be as prudent as possible as it relates to those reserves and they're evaluated on that basis.

OK.

Thank you.

My next question is just related to some of these outflows that you have identified, [part] one, because of the 401k sale and your open architecture and maybe some of the institutional business, and I just wanted to know if there is any characteristic that you can see in the margins of the business that goes out the door versus what you're putting on the books.

Let me try to handle that.

From my perspective in looking at it as we evaluate the company, first and foremost, I want to just say that actually we're doing better than what we had expected to happen and we feel that there is more positive news coming out in the 2nd quarter based on what we've actually seen in the results.

The second thing I would also comment is that overall, our flows are quite positive, because you have to take into account the variable annuities, the WRAP programs, etc. which we do derive good margins from, so the mutual funds is only one aspect of it as we have some outflows in the mutual funds but we're also gaining flows overall in our system that we derive revenue as part of our distribution or our management fees, etc. and the same time with the variable annuity products.

From a perspective that the funds [itself] the $17 million that went as part of the 401k was a very low margin activity.

It was assets under administration for the 401k plans.

We also do expect some flow changes in some of the managed assets but again, we're working hard to manage that activity through the transition and we also feel that we have an opportunity, actually, to stop putting our funds on other people's shelves because now we're not in a competing business, it being in the 401k processing business.

So here again is, even though we do expect some or looking at some outflows that will be in the transition, we actually think we can get that now to a more positive movement by us actually now taking some of our products, putting them into the system, including on what Wachovia's overall platform beyond what we've sold to them.

So that's how we're thinking about the business and we're looking at the business in more of the high enlarging products rather than some of the administration that we've lost in the 401k business.

OK.

Thank you.

Our next question comes from Tom Gallagher from Credit Suisse.

Hi.

The first question is just to circle back on the issue of the $32 million in legal & regulatory costs and AA&I, so Walter, the $32 million that you're citing there, that's what you considered the one-time charge, the un-recurring legal and regulatory costs because presumably you have ongoing legal and regulatory costs every quarter.

That's the unusual amount, is that fair to say?

I'm careful of the term "one term."

Certainly as we assess it and certainly then with the arbitration and SAI and which it becomes over and above what we've observed and then we then step back and assess all the exposures created and that one came in in that quarter and that's part of others that we evaluate, and again, we try and be as prudent under the set of circumstances we're evaluating as it relates to establishing those reserves but we do have ongoing reserves that relate to and we're constantly evaluating all the ENO activity that takes place and then just each quarter we evaluate it.

In this case we felt it was appropriate to add $32 million onto our reserve position.

OK.

So $32 million wasn't your entire cost for the quarter?

That was the reserve?

That would have been in addition to other ongoing legal costs.

Yes, that is correct.

And there was no reserve charge taken in the 1st quarter of '06 if you were to compare apples to apples, or were there any reserve charges taken last quarter?

We took a smaller amount at that time as we made the assessment but it was really not at the level to disclose.

It was just a smaller amount.

I guess the other thing I was wondering about was if you just look at versus 1Q, your spreads in the certificate business and the fixed annuity business contracted pretty substantially, is there anything unusual going on there?

I noticed your net investment income dipped by a lot just versus last quarter.

Can we expect those to come back a little bit or should we assume they're likely to remain at this level?

I think what you're seeing is us taking a prudent position as it relates to our investment strategies, relates to certificates as we view the yield curve and the performance in the market and that is a function of how far out we're going to go out and invest.

So on that basis we're not forecasting where it is but certainly you're seeing the flow-through coming.

And we are taking a more conservative posture to protect the balance sheet and the exposure to unrealized losses.

So we shouldn't necessarily expect a bounce-back of spreads there?

I don't want to forecast but a bounce-back is interesting.

Got it.

I guess the Threadneedle flows.

I think timing-wise some contracts are going to be expiring in terms of the very low margin business that they're managing.

Should we expect to see a significant pick up and redemptions of some of that lower margin business starting in 3Q or is a lot of that already started happening.

I can't project that.

What I would just say is if that did pick up it would have a minimal impact to the economics of the Threadneedle business.

Having said that, that' not a decision made by Zurich and their owned assets at this point, that I know of.

And then last question.

Just on the employee advisors I note that's been sort of trickling down and you're growing your independence more.

How aggressive are you prepared to get in terms of minimum productivity standards, you closing offices… I presume that's going to be a key metric in terms of turning around your overall margins, in terms of getting the employee advisors more efficient.

We've actually tightened the standards so we have the standards in place now that we're comfortable with on the employee side of the channel and I think you've seen that sort of work its way down.

I think in regard to the office closings, what we're really doing is we're trying to focus really where we could put more investments and certain other offices and expand our activities.

The first thing in that process is we want to move out of office where we don't think that we're going to derive the type of return over time that we really want and so it's actually a good re-engineering move.

It frees up costs, lowers our infrastructure expenses and with that, yes, we're terming a number of advisors or moving them to a different status but I think that as we do that we'll get the channel a bit more efficient and then we'll be able to actually look at expanding in certain other areas as we move into 2007.

OK, thanks.

Our next question comes from Annette from Greenway Capital.

Please go ahead.

Hi, guys, this is actually Brad of Greenway.

I have two questions.

First: Have you started distributing the [reed] product that you weren't able to distribute before?

Yes.

I'm sorry?

Yes.

And how much did it contribute in the fees?

I don't think that we give that number but the issue is it's building now and it has not reached the full expectations yet but it is starting to build.

So we did start to increase our sales activity in the 2nd quarter and we actually had more products coming on line but we're not at the full run rate we used to be at.

I see.

So when you reach the full run potential, what's that fee level going to be?

We don't disclose that but it's certainly an important product to us.

I also want to remind you that's a product where it has a relatively GDC or payout back to the advisors, particularly if they're franchisees.

So while the distribution fee has been a significant factor and variable, it's less of a factor on PTI.

Got it.

OK, and my second question is what is the amount of expense in 2nd quarter financials associated with a restart of the banking operation, if you've been working on it.

The restart of the banking operation, I don't have the exact number.

Obviously the ongoing cost is embedded within the focus.

It is on target and some of the expenses that we're slated for are in re-start or in a separation but it's on target and I just don't have the number.

Paula, if you call Laura, we can see if we can break that out for you.

But is the higher percent of the expense in the separation budget or some of it is in separation and some of it is in…

It's a combo.

The re-establishment of the bank charter and getting the bank back to live operation is part of separation.

The product and activity that we'll be launching back in the bank will be a part of normal operating.

Got it.

Is this something in the tens of millions or is it just a minuscule number at this point?

We don't really break that out but what we would say is that we're looking to run a profitable banking business and so it is part of our [factored] plans and operating plans.

OK.

It's not going to be large or significant from an overall against the company.

Right, okay.

OK.

We'll take one more question.

Our last question comes from [Sam Huffman] from [DAR].

Please go ahead.

Hi.

At the beginning of the call you talked about reaching your target range of 12 to 15% ROE by the end of 2008.

And what I was wondering was at this point where are you tracking within that range?

Is it going better or worse than expected and what are the biggest variables that will determine whether you get to 12 or 15%?

And part of that question also is there have been some acquisitions rumored and is that part of the plan to improve the ROE?

What I said in my comments and again, I mention, that's a 12-month trailing basis and you would imagine so there, just as you factored that into your thought process.

The second thing is I think we're making very good progress in moving into the 12 to 15% range.

I think we're executing our operating plan.

We're freeing up capital.

We're starting to re-deploy that capital both in share buy-back as well as what we've just started with the dividend program and as we go forward, we definitely want to maintain a conservative capital position but we also think there's an opportunity for us to use capital for acquisitions and we will look at opportunities as they come along.

So it is all part of our plan to get to higher return overall for our shareholders and I think we're making good progress along those lines.

So I think if you looked at us now, I think we've shown good, strong stability, some of the big questions on the business.

We're showing good progress against and the returns are improving.

Sam, it's Walter, and the only thing I will add to that is one of the elements that is important to that is our re-engineering, for instance, and our consolidation from five legal entities in insurance down to two and we're totally on track to achieve that which will free up a substantial amount of capital so as Jim said, we are on track.

We are certainly [inaudible] from the generation and from the re-deployment of it and so the plans are aligned.

OK.

Just a couple of quick follow-ups.

How long do you need to maintain the RBC ratio and the 425 to 450% [RIMS] and what criteria are the rating agencies using to determine when you can reduce that to be more in line with your peer companies?

Well, you're going to have to ask the rating agencies but we've actually gone through our reviews.

I think the rating agencies are feeling good about the progress we've made, the stability of the company and the growth.

Just as an example, brand awareness is being re-established quite nicely and growing.

Our advisor retention is strong.

These are some of the things that the rating agencies look at as well as our overall establishment to maintain the strong capital structure.

So I think we're making good progress and with that, as the rating agencies also reviewed our share buy-back program.

So I think we're continuing to make good progress.

OK.

And one last quick question.

Over the past couple of quarters, you've made some significant new hires on the institutional side from Putnam and from Fidelity and I guess my question is what are the objectives of these individuals?

How can we size them?

And how can we gain confidence that they're going to be material based on the history of these individuals and also based on your existing distribution?

Well we think we have an opportunity, as we said, to grow our institutional business.

I think we're bringing in strong talent that will help us go do that and they see the opportunity to introduce that as part of Ameriprise so that's just something we focused on doing.

We know it's a road ahead of us but we have plans in place and we're bringing on the talent to go execute against those plans.

Are we talking about sizing this in the hundreds of millions of assets or in the billions of assets over the next couple of years?

We're always looking to grow it to be strong, but it always has to side off with individual mandates and as I've mentioned, we received two good mandates in the 2nd quarter and we're continuing to look to build that as we build the sales channel.

We're going to have to cut it off now but I thank you all and all the materials are there, I think as Laura said, Laura and Mary, more disclosures to reconcile some items based on your previous requests.

And I think, as I said, that we're making good progress here and hopefully there's enough information there that will be very useful to you.

Thank you very much and have a great evening.

Thank you, ladies and gentlemen.

Thank you for participating.