阿默普萊斯金融 (AMP) 2006 Q3 法說會逐字稿

Good afternoon ladies and gentlemen, and welcome to the Ameriprise Financial third quarter 2006 earnings conference call. [ OPERATOR INSTRUCTIONS ] I will now turn the call over to Miss Laura Gagnon, Vice President of Investor Relations.

Ms. Gagnon, you may begin.

Thank you, and welcome to the Ameriprise Financial third quarter earnings call.

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

After our prepared remarks, we'll open the lines for Q&A.

During the call, you will hear references to various non-GAAP financial measures like adjusted earnings or adjusted premiums; management believes the presentation of these adjusted financial measures better reflects the underlying performance of the Company's operations.

The adjusted numbers exclude discontinued operations and AMEX assurance from prior period and non-recurring separation costs in both periods.

The presentation of adjusted averages is consistent with the non-GAAP financial information presented in the Company's annual report and form 10-K for the year 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 and available on our website and furnished under an 8-K filed with the Securities and Exchange Commission.

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 as of today's date.

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

A list of factors that could cause actual results to be materially different 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 revise these forward-looking statements for any reason.

With that, I would like to turn the call over to James Cracchiolo, Chairman and CEO.

Thank you, Laura and welcome, everyone.

I am pleased to you have join us today to review not only our third quarter results but also the completion of our first full year as an independent company.

Overall, I'm particularly satisfied with how we have executed a large and complex separation while delivering solid business results.

There are three main areas I want to touch on today.

First, the key challenges we faced when we went public and how we responded to them.

Second, the results we have achieved against our financial targets for the third quarter.

And lastly, the overall progress we continue to make as we execute our strategy.

So let's begin with the main challenges we faced when we went public.

At the time, we knew we needed to establish a recognizable brand to replace the American Express brand, retain our advisor force and ensure their continued productivity and lastly, successfully execute our separation to establish our public company.

I believe we have been affectively addressing these challenges while positioning the firm to capitalize on our growth opportunities, serve client and advisor needs and generate shareholder value.

In fact, our independence presented a terrific opportunity for the Company.

First, we have been building a strong position with our brand.

We're gaining traction in the marketplace with awareness well above what we've expected.

After one year, our brand has achieved greater-than-45% awareness around the country which, is significantly higher than when we were American Express financial advisors.

Importantly, our brand is now more closely established around our core value proposition which better reinforces our leadership in financial planning and advice.

Next is the challenge we faced with our advisor force.

I have never felt better about the connection with our advisors.

Many of our most senior and productive advisors tell me this is the best they've felt in decades.

They're energized by our independence and what we're building for the future.

They're pleased with our focus on the business.

The investments we have made in our brand and marketing and the enhanced product, services and technology we're delivering to help them better meet client needs and grow their practices.

This focus has led to a turnaround in advisor retention and strong improvements in productivity.

Franchisee retention has returned to pre-separation levels at 93%, the same level we reported in the fourth quarter of 2004, which was just prior to the spin-off announcement, and we have seen a 14% increase in advisor productivity as measured by our total gross dealer concession.

As for the spin-off, we have completed a major portion of the separation without any material negative impact to the business from delinking and re-establishing our technology platform, creating our capital structure to revamping our marketing materials and advisor office signage across the country, we're on track and on budget to complete the separation while further establishing our platforms for growth.

Overall, against the major challenges presented by the spin-off, we're on target and delivering what we said we would do with a strong foundation in place.

Now, to our third quarter results, which reflect this continued progress, adjusted revenue grew 5%.

Adjusted earnings grew 29% and adjusted return on equity reached 11.2%, up from 10.4% in the prior-year period and 10.7% at the end of the second quarter.

This performance reflects our ability to continue to meet client needs and grow our mass affluent client base contributing to the growth in retail client assets and increases in advisor productivity.

With that, we have experienced strong in-flows to fee-based wrap products as well as movements of variable equity-based products by variable annuities.

This aligns with our efforts to derive an increasing portion of our revenues from higher margin, less capital intensive businesses.

These positives more than offset the pressure we and others in the industry are experiencing from the reduction and investment income in our spread products due to declining account balances and a challenging rates environment.

Now, let's turn to the progress we're making in executing our strategy.

First, our strategy remains the same.

This continued focus ensures we draw upon the strengths and differentiators in our model to deliver on shareholder objectives.

Beginning with our clients and our target market mass affluent clients, our focus is to attract them to our franchise and grow their assets.

Total mass affluent client groups increased 7% year-over-year and average assets for newly-acquired mass affluent clients are now more than $300,000.

Second, financial planning.

We continue to focus on financial planning, especially from mass affluent clients.

This has resulted in a 59% financial planning penetration of newly-acquired mass affluent clients.

At the same time, we're also moving towards a more prescribed client experience.

In fact, our most recent advertising highlights the client experience we built around financial planning.

Our unique Dream-Plan-Track approach.

It's a one-to-one face-to-face financial planning that focuses on helping clients engage in planning that goes beyond the numbers.

Moving forward, we are further refining our financial planning capabilities, tools and processes ensuring an enhanced value proposition that we intend to deliver next year.

Our third strategic objective is to deliver profitable growth and productivity in our advisor network.

As I have mentioned, I feel good about the stability and productivity of our advisors.

This is clearly evident in the 93% franchisee retention rate and the 13% increase in per-branded advisor GDC.

Total advisors grew 2% to 12,427 with branded advisors up 1%.

We continue to emphasize productivity and we'll further refine our platforms to drive improved economics in our retail network.

One of the major satisfiers for our advisors this year has been our focus on upgrading the system's environment.

We're about mid-way through a phased technology release to provide them with enhanced tools and programs supporting their practices.

Now, let's turn to our fourth strategic objective: capturing greater assets through enhanced product solutions.

Today, our product solutions are broader, deeper and higher-performing.

Over the last year we have introduced more than 20 new asset management annuity insurance and lending products.

We're seeing that clients are increasingly choosing fee-based arrangements, leading to a strong growth in our #1 ranked wrap program which assets are up 31% year-over-year.

Consistent with the industry, living benefits on RiverSource variable annuities resulted in strong sales in net inflows of 1.4 billion both within Ameriprise and through third party banks and broker dealers.

Within asset management, I am pleased with the progress we're making at RiverSource investments.

We're delivering strong performance across our investment teams, demonstrated in many of our one, three, and in some instances, five-year track records.

In addition, our products enhancements include innovative new solutions that align with the investor goals like the RiverSource retirement plus and Income Builder series.

These improvements and our expanded wholesaling capabilities are helping to drive more sales and fewer redemptions in our advisor channel.

During the quarter, we established the operational infrastructure necessary to distribute RiverSource funds in third party channels.

We now intend to sign selling agreements with banks and other broker dealers for RiverSource mutual funds as we have been doing for annuities.

Overall, I feel good about the improved flow momentum we're seeing; however, there is one outflow we anticipate in the fourth quarter.

American Express has informed us that they intend to reposition their 401K investment alternatives, which primarily will impact the Y share balances we report by approximately 800 million.

Once this is complete, our Y share balances will be below $2 billion.

In addition to RiverSource, Threadneedle is becoming a key contributor to our results.

Threadneedle is growing profitability according to its plan with strong investment performance, a broad product suite and positive flows in higher-margin products.

Threadneedle's institutional outflows were driven by continued withdrawals of lower-margin assets, which is similar to what we have seen in earlier quarters.

Beyond asset accumulation, we also help protect client assets, we're a leader in variable universal life and offer a broad suite of variable universal life, universal life and disability income insurance products.

At quarter end, life insurance in force reached $171 billion, up 9%.

Another growing contributor in our protection segment is auto and home.

Where we're experiencing good performance with solid growth in premiums and effective risk management, which is achieving the target returns we have established for this business.

Finally, we're committed to our fifth strategic objective, further strengthening our operating platform and infrastructure.

We're completing the buildout of our corporate structure and our people are fully engaged, embracing our independence.

Significant investments are being made in technology, compliance, marketing capabilities, client servicing and advisor training.

Re-engineering continues to free up resources with the majority of our saves allocated to support our investment agenda.

We have more than 100 projects in place, focused on process and capability improvements and are on track to deliver our annual target of $175 million.

So in sum, it was a strong quarter and full-year as an independent company.

We continue to build the momentum against our targets and believe that the focus we had on our separation and on our strategy has served our clients, advisors and shareholders quite well.

With that, I would like to turn it over to Walter.

Thanks, Jim.

Adjusted revenue growth in the quarter of 5% was slightly below our target range.

Primarily as a result of product mix shifts as well as the impact of the sale of our 401K business.

Adjusted profit measures are quite good.

PTI is up 13% versus last year and adjusted earnings and EPS are both up 29% versus last year, and finally, adjusted return on equities including OCI increased to 11.2%, versus 10.4% last year, narrowing the gap to our target of 12% in 2008.

The drivers of this performance were twofold.

First, significant growth in fee-based equity products, balanced by an anticipated decline in income from spread products and the effective management of our operating expenses.

Let me give you more insight into each of these two trends.

First, growth in our fee-based equity products.

In the third quarter, this growth was fueled by a 31% increase in wrap assets and a 24% growth in annuity variable account assets.

Assets in our wrap products are now over $70 billion and total managed assets are 283 billion, up 9% versus last year.

This strong growth was balanced by the impact of declining spread income.

The year-over-year decline in pretax spread income from annuities and certificates was $42 million excluding the impact of the hedge fund loss.

It's a testament to the benefits and diversity of our model that we generated solid financial results in spite of this headwind.

The decrease in spread income is the result of two factors: First, the anticipated $1.3 billion in outflows as we shifted our product mix and declining spread rates driven by the challenging interest rate environment faced by all annuity writers.

However, these product mix shifts away from fixed annuities and certificates are resulting in declines in required capital relative to our overall growth.

Our capital position is increasingly strong, driven by our earnings growth and lower levels of capital needed to support our business activities.

Our balance sheet remains conservative, positioning us well for future redeployment.

The second trend driving the quarter's result is of continued tight control of our operating expenses.

Combined, our non-field operating compensation and benefits line and other expense line showed a 4% year-over-year decline.

If you exclude the impact of higher legal expenses in 2005 and higher expenses in 2006 from consolidating certain limited partnerships under EITF-04-5, year-over-year expenses in those combined lines increased only 4%.

This relates to our tight control of our staff count, which is virtually flat versus last year and to also the increase in expenses we are experiencing as an independent company.

And also the recognition of the impact of our year-to-date financial performance on our annual management incentives.

In the quarter, we also continued our stock buyback program.

In the third quarter, we repurchased 2.3 million shares for $106 million.

Total year-to-date repurchase were 9.7 million shares for a total of 422 million.

This program reduced our basic shares to 243.5 million, versus approximately 250 million at the end of 2005, a decline of almost 4%.

The third quarter ending diluted share count of 245.8 million reflected both these repurchases and an increase in dilution caused primarily by an increase in our stock price.

In addition, we reported the impact of our annual DAC unlocking in the third quarter of each year.

The impact this year was a pretax benefit of 25 million versus a benefit of 67 million last year.

A $42 million decline.

The asset accumulation and income segment reflects $28 million of this decline.

As many of you know, there is an accounting change expected in the first quarter of 2007 relating to SOP-05-1.

This change will require us to record a below-the-line write-off of [DAC] associated with internal replacement insurance and annuity contracts when adopted.

While we are in the process of assessing and quantifying the implications of this change, we do expect to be impacted.

Our vice model inherently creates internal replacement activity at a level we generally believe is above the industry.

We will communicate the expected impact early next year.

Now, let's take a look at our segment financials.

The 13% increase in overall pretax income was generated by our asset accumulation and income segment growth of 4%, our protection segment growth of 17% and a 9% improvement in our corporate segment.

On the segment front, the AA&I pretax income growth of 4% reflects the good growth in our core fee based products in the quarter, partially offset by the full impact of our annuity fixed accounts and certificates spread decline.

Second, while outflows of RiverSource mutual funds are less than half what they were a year ago, the product is still in outflows and finally, our strong variable annuity flows we reported this year don't have an immediate PTI impact but will drive PTI growth in the future.

In addition, the AA&I segment PTI growth reflects the significant decline in legal and regulatory expenses compared to last year, offset by a year-over-year decline of $28 million from DAC unlocking and the impact of recognizing $8 million in PTI related to Threadneedle’s hedge fund performance fees in the third quarter of 2005.

All fees for 2006 will be recognized when earned in the fourth quarter.

And finally, the increased accruals in the quarter for higher estimated annual performance compensation for year-to-date performance and for year-end improved investment management performance.

In the protection segment, strong results reflected in PTI growth of 17% were driven by solid performance across all of our life and health products and auto and home.

This strong PTI growth is the result of a combination of good revenue growth and stable margins in these products.

Before I finish, I would like to spend a few minutes reviewing the highlights of our overall GMWB hedge program.

First, our products are designed to meet our clients' needs and give us a balance-risk return profile.

For example, while our GMWB for Life product has a higher initial percentage withdrawal than competitors, we balanced this risk through the use of a required investment allocation models and by not increasing this percentage over time as other competitors do.

Second, we believe our current variable annuity hedging program is within the best practices in the industry.

Our core program is static.

Meaning we purchased long dated customized options that closely match the options we sold to our customers.

We believe our approach is superior to dynamic hedging for several reasons.

We are not exposed to the risks of discontinuous market movements and severe liquidity events because our program doesn't rely on frequent dynamic rebalancing and the ability to trade in the market.

Second, because we do not rely on frequent rebalancing, our transaction costs are mostly fixed up front when the hedge is established.

And then finally, in addition we believe our static program results in lower aggregate operational costs and risks such as systems and execution errors.

The hedge program has two objectives: to manage our economic risks and to mitigate earnings volatility.

We believe that the program is working effectively on both counts.

In conclusion, I would like to say with another quarter behind us and the benefits of our diversified model strongly visible, I am confident in our plans to deliver on our shareholder targets and reach a 12% return in equity in 2008.

With that, let me turn it back to Jim.

I'll close our formal remarks by sharing that Walter and I feel good about the continued progress we're making and the direction we're headed.

We're highly focused on our strategic initiatives to grow mass affluent clients, continue our lead in financial planning, build a productive advisor for us, gather assets by developing high-performing product solutions and enable our operations through investments in our underlying infrastructure.

For those of you who will be in attendance at our November 15 financial community presentation, I look forward to sharing my view of our key points of differentiation and plans for the journeys ahead to ensure we deliver on our long-term commitments.

We'll now open it up for any questions.

Thank you. [ OPERATOR INSTRUCTIONS ] The first question comes from Joan Zief from Goldman Sachs.

Please go ahead.

Thank you, good evening.

I just have a few questions.

Just very quickly Walt, when you talk about the write-off of DAC related to the new SOP, will that mean that the amortization going forward will be lower?

Yes, going forward.

After the initial adoption, I don't -- I can't really answer that.

Obviously it will take into consideration the fact of the exchange programs, but I can't really answer if it's going to be positive or negative at this stage.

We'll have to see where the circumstances drive it.

Okay.

My next question is can you just update us then about what you see about excess capital?

You talk about the fact that your fixed annuity and certificates business is shrinking, so do you have a renewed view of excess capital going forward?

I think our capital position is certainly improved from that standpoint and certainly as our earnings generation is demonstrated and the shift in the mix in the business from a high capital intensity to a low-capital intensity, changes that will only improve the situation going forward.

Should we then expect a higher level of buybacks?

Right now, we'll just have to re-evaluate how we're going to redeploy that capital.

Okay, my last question is about long-term care.

You have a block of long-term care business, about $2 billion in reserves.

We have seen a -- many of your competitors in that business suffer from margin pressure because of the low interest rate environment and lapses; is there anything about your book of business that is significantly different than what is out there in the market?

Is that something you're taking an extra look at?

As you're aware, we currently do not underwrite long-term care.

Now, from our standpoint, we recently had a price increase to deal with the margin and we're evaluating the situation as it relates to profitability and potential evaluation of what we do with that block.

Okay.

Thank you.

The next question comes from Andrew Kligerman from UBS, please go ahead.

Okay, good evening.

A few quick questions.

Just in terms of the Threadneedle 28 million performance fees, could you give us a sense what the bottom line was for Threadneedle and --

That is -- right now, that is something we do not disclose.

It's obviously improving, I'll leave it at that from that standpoint.

Jim, does the 28 million pretty much eat out most of the profit, though, or -- .

No.

No and the profitability of Threadneedle continues to improve.

One of the things we will look to do in the future is give you more information around Threadneedle.

We're not ready to do that at this stage.

Threadneedle is profitable; the profitability is growing.

They're actually performing quite well against the plan we have established for them.

And I would actually say that I think they're in very solid good territory.

Okay.

Because it seems like the performance numbers looked great and I wonder when you might see a sharp increase or something to that affect.

Is there any sense that it could sharply increase the earnings?

The earnings are increasing in Threadneedle from their performance of the business as they move to higher margin businesses, as they re-engineer their operational infrastructure.

So we're seeing nice improvements and I think that will continue to materialize as we move forward.

Okay, shifting on, the $20 million one-time hedge fund loss, is that included as part of the $14 million gain, hence it would have been $34 million gain or is that separate?

Separate.

Separate.

Okay.

Great.

The $25 billion DAC unlocking, could you talk a little bit about -- you have gotten a lot of criticism from investors that you might be in a bad position with DAC and yet we see an unlocking.

Could you talk about why you did that unlocking and where specifically?

Well, I think the unlocking is done as we do our comprehensive review in the third quarter and we evaluated all the variables that have changed and we do our deep drill.

From that standpoint, it's totally consistent where we see the future development of that, so it---it really does reflect a comprehensive review of it from our standpoint.

So, as you noticed, the benefit this year is 25 million as I indicated last year was 67 million.

It was a net change of 42 million lower in 2006, versus 2005.

It really does relate to reviewing all aspects of it.

Again while we look each quarter, we do the deep drill in the 3rd quarter and we felt with the assumptions we see changing, that this was the outcome.

Yes, still a very good signal.

Buyback, $106 million.

Again, there are investors that don't think you have any excess capital and you might be short.

What is the sense --- I know you can't give any specifics in terms of what you think is excess capital but looks like you have an adjusted debt-to-capital of 17%.

What are some of the areas where you think that you have got some flexibility?

Well, as we said, the issue is the positioning where we are right now.

The flexibility is, as we have, we're certainly managing the capital as it relates to where the emphasis is on the growth of high capital intensive versus low-capital intensive businesses.

Our positioning coming in was quite strong.

We did the hybrid from that standpoint, so people that are, I don't know, have not have -- had that direct conversation, our capital position is quite strong and so we have announced our buyback.

We feel very comfortable with the ability to achieve that and so we are just performing as we indicated we would.

Okay.

The last question, on institutional RiverSource, I see redemptions of 1.7 billion, it's kind of a big pickup since the subsequent, prior quarters.

Anything unusual there?

Yes, Andrew, this is Laura.

There is a single investor who, unfortunately had a large sum withdrawal over quarter end and subsequently, it comes back.

The number you see in the supplement is overstated.

It's going to come back?

It already has.

Yes.

Has come back.

I like that.

Okay, thank you.

You're welcome.

The next question comes from Eric Berg from Lehman Brothers.

Please go ahead.

Thanks very much, I have just a few questions here.

First of all, I wanted to clarify and sharpen my understanding of the unusual income at Threadneedle.

The very helpful exhibit that you have at the back of your financial supplement called Disclosed Items, I'm referencing now page C as in Charles 1 in that document.

Said the unusual revenue was $28 million, but on page 9 of your news release, it mentioned a $12 million figure.

What would be the right number, please.

There are two different numbers.

I think you're looking at, Eric, and we can take those off the call.

They're both related to EITF-04-5.

One's RiverSource, ones Threadneedle.

Okay.

And Mary and I will be around tonight to handle all of these reconciliation calls if we can use Jim and Walter's time for more strategic issues.

Okay.

Fine.

Why don't I get back in the queue then.

I have some other questions.

But, please take the next question.

Thank you.

Thanks, Eric.

The next question comes from Jeff Schuman from KBW.

Please go ahead.

Good evening, I was wondering if you can give us a little more color around the annuity and certificate spread issue.

Spreads have been under pressure for awhile.

They did come in a little bit more this quarter.

Is this kind of a new run rate or was the investment income unusually depressed in this quarter?

This is fine.

It was basically fine.

The certificates trend line as it relates to, certainly the short-term rates and the compression we're beginning there and as it relates to the, the element on the annuities, that drop there reflects candidly the write down we had on the hedge fund.

Okay.

And then with regard to further, I'm sorry, the capital situation, can you give us more of a picture of kind of what the unencumbered cash position is at the holding company.

You did the sub-debt raise earlier, presumably a lot of that went to the holding company.

What is the holding company position at this point?

The holding company is extremely liquid from that standpoint due to the fact you mentioned and the position going in even before we did the hybrid.

And we have a steady dividend flow from basically all of our subs.

We are actually sitting in a good positive -- in a very positive liquid situation.

Did you pull any insurance dividends in the third quarter?

Laura will get back to you.

I think we did --- I don't have the exact number.

I think we have regular dividend programs coming from all our subs.

I think it's about $100 million.

Lastly on the mutual fund distribution, you have the infrastructure in place, are you just now starting to kind of talk to people about selling agreements or a lot of those discussions pretty advanced?

What should we think about the timeline for seeing some progress there?

Yes, we -- as we mentioned to you, we wanted to proceed with that as we approached the fourth quarter of this year, and we're out now talking to people and -- on signing them up for distribution of RiverSource mutual funds.

We have already spent time and have expanded the number of distribution agreements we have on the annuity side and now the team is focused on their RiverSource mutual funds.

Perfect, thank you.

The next question comes from Suneet Kamath from Sanford Bernstein.

Please go ahead.

Great.

Thanks.

Two quick questions.

First, with respect to the SOP, I think you mentioned your model causes more replacement activity and I just want to reconcile that with your persistency which I believe is below--is better than peers.

What is it about your model causing more replacement activity?

The second question is, Walter ---probably your very last comment, I think you talked about the ROE outlook for 2008, and you said 12%, which is your existing guidance, but I think ---I thought your prior guidance was kind of 12 to 15.

Are you saying that the 15 is not achievable or are you just saying that kind of 12%, you feel good at the low end.

I just want clarification there.

Thank you.

No, no.

It was still a 12 to 15 and we're just indicating when we get to the minimum hurdle and from that standpoint, but certainly 12 to 15 is in our target range, and we feel good.

As far as the exchange programs, it's part of the way our advisors managed their solution-set driven activities.

They, therefore, are constantly evaluating the elements and trying to upgrade and improve the activities with their clients and so, therefore, as products are pertained, they will make the exchange programs take place.

But, there is also a balance where we're just not like third party distribution where they're just pulling it out as a commodity.

Okay, so customer persistency is high but the product might be flipping back and forth.

That's correct.

Okay.

Thanks.

You're welcome.

The next question comes from Tom Gallagher from Credit Suisse.

Please go ahead.

Hi, a few different questions.

First is really on the spreads.

When I look at your asset accumulation segment, P&L on page 10 and then I look at net investment income minus interest crediting rates, I actually get a sequential increase in the income contribution using just those numbers of about $6 million, yet your spread disclosure shows that spreads went down substantially sequentially.

And I guess I had been using that as kind of a rough estimate of spreads, so there is clearly a big disconnect and I'm just curious if you can reconcile that.

Yes, if --

I think the issue probably relates to the gains and not in the spread, but Laura…

If you look in our supplement that has gains related to hedge in the interest credited line.

When you look at the spreads we publish in our supplement, we normalize out both the crediting impact and the earned impact for things like stock market certificates and equity index annuities.

Okay.

But would that be so substantial that it's -- I think the number you're talking about, it would need to be something like a $30 million to $40 million sequential swing.

Is the number in fact that big?

On the face of the financials, you're also getting impact from some of the items we’ve got in what was previously referred to as a C-1 page there.

There's another 12 million in there just from consolidations under the EITF 04-5.

Okay.

We can work through all the reconciliations for you.

Okay, that's fine.

We can take that offline, but you’re -- basically -- the numbers and the P&L would not necessarily be indicative of your true spread.

Is that the main conclusion to draw from that?

It's a fair conclusion.

Okay.

The next question I had was just on the DAC amortization and protection.

It was a positive 11 million, I guess, for VUL/UL and I just wanted to get a handle over what I should -- and I understand you said the positive one-time adjustment based on the annual review is 25 million?

I just want to make sure I'm understanding what the right run rate should be, though.

Is that all I need to take off the run rate or -- is there also somewhat of an additional benefit in there -- and I guess the reason I ask is if I just try to trend this and look at where things have been running in terms of overall back amortization, I would get something like a $50 million reduction this quarter based on where things were trending versus the 25, so, anyway, any help you can give me on what, like the run rate we should expect over the next several quarters would be helpful.

Okay, like I said, from our standpoint, we do the evaluation, it's the best estimate we have at this time.

From that standpoint, it is a reflection on what we feel when we've taking all factors into consideration.

From a run-rate standpoint, this is where we see it as of this moment based upon the facts we have.

So, I can't really say from a run-rate standpoint, because like I said, we will change as we see change occurring in the quarter, but right now, this is where we basically see it.

Okay.

From a modeling standpoint, it's fair just to take off the 25 million.

I don't need to do anything in addition to that.

Well, that's your choice.

From my standpoint, it's a disclosed item, whether it's run rate or not, it becomes an interesting discussion.

This is Laura.

We've got the DAC roll forwards for both our products in the stat supplement.

I can walk through those with you after the call.

Great and just one last question.

Any, any other metrics, Walter, you could give us around internal replacements, either percent of sales.

I know you mentioned you're trending above industry average.

Any numbers you can give us to get at just some kind of handle on what that means, whether it's substantially above industry average, whether it's a percent of maybe your DAC asset, that represents internal replacements or percent of sales, any numbers at all you can give us.

We don't really disclose that and right now, from that standpoint, just leave it at that.

We just don't disclose it.

We do, as the model works as I indicated, we believe it is above industry average.

Okay, and then if I could just get---try to get a little more on that just to understand the potential scope of magnitude and I don't know how much can you say about this, but, I guess when I consider what this impact might be for most companies, I'm kind of thinking tens of millions of dollars of adjustments, not hundreds of millions.

Is there anything can you tell us directionally of where -- how the adjustment might fare for you?

You know -- this is Laura -- and what we have said is we're in the process of analyzing it and as soon as we have an understanding of the implications and the quantifications, we'll come back to you with that.

Fair enough.

Thanks.

The next question comes from Vlad Artamonov from Greenlight Capital.

Please go ahead.

Hey guys, this is Vinit Sethi for Vlad.

Four questions, the first was with respect to the management incentive accrual you talked about.

Is that something you just take over the course of the year or was there something, some special reason why you commented on it for the third quarter?

Second question is whether there were any excess legal or severance expenses in the quarter that were not highlighted in the statistical supplements.

Third is if can you comment on how much of the re-engineering expense save fell to the bottom line this quarter, directionally and fourth, why the cash itself versus the investments is so high this quarter from a mixed perspective on the balance sheets.

All right, let me take --- okay, let me take the first one.

The --

Someone has us on speaker -- .

On the incentives.

We recognize in the quarter, it's really our assessment of where our performance is and based on our analysis of our grids.

It's a year-to-date evaluation.

On that basis we're projecting that we will have a higher pay-out and we're taking that all on this quarter.

We have made that determination in this quarter.

As related to legal, we do have legal expense, but it certainly is not a level of that is that large to basically disclose.

The re-engineering, we are on track.

We generated as Jim said, returns towards our $175 million.

Again, we continue to invest in our business, so it's a combination from that standpoint.

Jim?

No, and I think we don't disclose exactly how much moves to the bottom line but we have a very strong investment agenda that we think will build good capabilities for the future.

But as Walter also highlighted, our expenses have been maintained quite tightly and the reason for that is after the investments we are bringing some reductions into the bottom line.

So, what I would just say is we have a strong investment agenda this year but we are deriving good benefits from the re-engineering, part of which is going to fund those investments and some of that is falling to the expense line-item as reductions.

Okay, your last question, I'm sorry?

The cash itself on the balance sheet grew to 3.3 billion and the investments were down and it wasn't a mix that looked usual to us whether this was an ongoing---

Okay, no.

We're actually in the process of bringing our bank assets back and also we're positioning ourselves with liquidity needs for our certificates and our fixed annuities.

So, the bank actually, we were able in the third quarter to launch our new bank under our new charter as Ameriprise Financial and we moved those assets back from American Express.

Okay, but then---why does that--- that has to be held in cash?

We had cash because we'll be doing that in the fourth quarter and we're positioning our liquidity basically on the certificates and keeping a liquidity position to ensure we have adequate funds.

Okay.

Got it.

Got it.

Thank you.

Thanks.

Okay.

The next question comes from Darius Braun from Citadel Investments.

Please go ahead.

Hi, just a couple of questions.

First, what were the total hedge funds that were earned last year and would you expect those fees to be higher or lower this year?

Next question would be, on the bank, were there any startup expenses associated with bank this quarter and if so, how much?

And then just following up to Vinit's question on the excess legal charges that you said were not material this quarter, I just want to make sure we understand what is material from your point of view and our point of view.

Could that have been, $0.01 a share or anything like that?

I want to get some closure there.

Thanks.

Okay, on the hedge.

On the hedge fund what we have disclosed is the 28 million in the third quarter.

We haven't had a material difference to really talk about or put in the disclosures for the first two quarters.

I think can you assume most of it will be in the third quarter.

As relates to the bank, since that is, of course, with separating and re-established---and that goes to separation expense and very little is actually coming into our operating.

That is, like I said, separating and re-establishing the bank which we had before.

And then on the legal expense, let's just say, we're just not disclosing the amount---it certainly is from our standpoint, we believe, a level that is manageable.

Okay, and just to confirm on the hedge funds, all the fees will be recognized in the fourth quarter, is that correct?

That's correct.

Thank you.

As realized, right.

The next question comes from Eric Berg from Lehman Brothers.

Please go ahead.

Thanks, I did have a follow-up of more of a strategic nature.

That is, with respect to your efforts to stabilize the mutual fund business in particular by closing New Dimensions and moving it to Boston, even though New Dimensions doesn't exist anymore, that doesn't take the sour taste out of necessarily out of the mouths of investors who lost money.

My question is: Is that fund, are flows stable with respect to the old New Dimensions or does the Boston funds that inherited it continue to suffer significant negative flows?

The Boston funds that has been absorbed into the Boston fund, the Boston fund continues to absorb negative flows from what was New Dimensions but those negative flows slowed materially from where they were and the performance of the Boston funds are in really good performance at this point.

So, we're hoping that over time that our investors in those funds will recognize the new performance as well as our advisors who had their clients in those funds.

Thanks, Jim.

Thanks, Eric.

The next question comes from Jason Zuker from Investment Firm.

Please go ahead.

Good evening, everybody.

Jason Zucker at Fox-Pitt Kelton.

I'm just down to one question.

Walter, anything that was one time in the tax rate other than the $13 million benefit?

Right -- no.

Short answer no.

Great.

Thank you.

The final question comes from Sam Hoffman from Adar.

Please go ahead.

Hi, I have two questions.

The $15 million long-term care premium adjustment, is there any expense or loss reserves associated with that or is that a one-time item?

No, no expense or loss reserves.

Okay, and then the other question is on the share repurchase, when you announced the $750 million repurchase program in March earlier this year, can we assume that the board would not have authorized that amount to repurchase unless that amount of capital was available to buy back stock at the time?

Whether or not you chose to use it to do that is another thing, but would they have not -- would they have authorized that size of repurchase without that amount of excess capital at least available at that time?

Yes.

I think it's a good question -- what you can assume that from our standpoint we reviewed with the board and with the rating agencies our position, how we felt, we would be accumulating excess capital and we went forward on that basis.

Okay, and the last question is on the reinvestments of the re-engineering, can you talk about your philosophy in terms of deciding how much you allow to flow to the bottom line and how much you actually reinvest this year and then going into next year?

Right, the way we look upon it, first of all is we look at what we really could be freeing up by better effective management, improving our processes, enhancing our capabilities, reducing just plain old costs in certain areas where we're not getting value.

That is set up as a separate program that we really look at each of the businesses, each of the functional areas, the activities we have to derive the savings as well as what we would like to see there as an ongoing process improvement.

Aside from that, we make a decision on where we need to invest in the business that would give us good growth for the future.

And from that, then we make a tradeoff decision on how much can we afford in those investments based on both what we free up, as well as to achieve our shareholder targets that were striving for.

So, what I would just say is consistent with having a good re-engineering program in place, the business building strongly.

We have set a good agenda for investments this year appropriately so that they build for the future.

That's the way we do it.

It's not necessarily that we say we want to take two-thirds of the re-engineering to put it to investments.

We actually look at that holistically with the overall business and its performance.

So if you chose to not make these re-investments, perhaps you could have earned the $100 million more pretax this year, recognizing that that would not be the optimal strategy.

If you had chosen to do so, perhaps you could have earned significantly more.

Yes, if we chose not to make those investment decisions for the medium and longer term that would be correct.

Okay, thanks.

[Overlapping Speakers]

Please go ahead.

This is Laura Gagnon.

I will be in my office after the call.

For those who don't know, the number is 612-671-2080.

Thank you very much for joining us.

And, Walter and I appreciate you at this time of the night being on the call and as we said, we hope that we're providing you the information you need and Laura and Mary will continue to provide anything you that need in your reconciliations.

Thank you.

Bye.

Thank you for participating in the Ameriprise Financial third quarter 2006 earnings conference call.

This concludes the conference for today.

You may all disconnect at this time.