阿默普萊斯金融 (AMP) 2006 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Ameriprise Financial fourth quarter and full year 2006 earnings conference call.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question and answer session.

Please note that this conference is being recorded.

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

Ms. Gagnon, you may begin.

Thank you.

Welcome to the Ameriprise Financial fourth quarter earnings call.

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

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

During the call you will hear references to various non-GAAP financial measures, like adjusted earnings or adjusted ROE.

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

The adjusted numbers exclude discontinued operations and AMEX Assurance from the full year 2005 and non-recurring separation costs in all periods.

The presentation of adjusted earnings is consistent with the non-GAAP financial information presented in the Company's Annual Report 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 Securities & Exchange Commission.

Some of the statements we will 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 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, and the earnings release, copies of which are 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 reasons.

Individual RiverSource mutual fund investment performance information and important disclosures are included in Exhibit A in our quarterly statistical supplement, available on our website.

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

Thank you, Laura, and welcome, everyone.

I'd like to begin by sharing what a strong fourth quarter we had, a quarter which capped a transformational year for us.

We're executing well against our strategy, generating continued growth in our metrics and bottom line results.

At the same time, we continue to effectively manage the separation from American Express, while strengthening our operating foundation and establishing Ameriprise Financial as a strong financial services company.

Let's take a look at our overall results.

In the quarter adjusted revenue growth was 15.6%, adjusted earnings growth was 30.1%, and adjusted return on equity was 11.8%.

For the year adjusted revenue growth was 10.8%, and adjusted earnings growth was 25%.

Our adjusted revenue and adjusted earnings growth exceeded our on average over time goals for both the quarter and the year, and adjusted ROE continues to improve, nearing the lower end of our near-term goal and ahead of where we expected it would be at year end.

I'm feeling good about these results and our ability to continue to grow the Company and achieve our objectives.

Before I discuss our business performance, I would like to update you on our separation activities, which are also going quite well.

Separation from American Express remains on budget and on track.

We're about 75% of the way complete.

We've made tremendous progress in establishing the Ameriprise Financial brand, ending the year at 50% total brand awareness, well above where we thought we would be.

This higher brand awareness is enabling us to be recognized by our target market, the mass affluent and affluent.

We've built new public company functions, undertook a complex technology separation, and implemented SOX 404 compliance processes.

Now, let's discuss our business results for the quarter.

I believe we've been able to strengthen our distribution capabilities, grow our fee-based businesses, and gather assets.

As you know, our business model starts with the client, and we're growing our target client base as we strive to help them achieve their financial goals.

Mass affluent and affluent clients ended the year up 10%, and as our advisors serve more of these clients, their productivity is growing.

Per branded advisor GDC increased 27% compared to the fourth quarter of 2005 and was up 18% for the year.

We're supporting continued improvements in advisor productivity by growing our target client base and deepening our relationships with them.

To better serve our clients and advisors, we're providing advisors with enhanced local marketing efforts, wholesaling, segmented client offerings, training programs through Ameriprise University, and new and better tools.

In fact, we're halfway through a phased desktop technology release program that's been very well received by the field and is directly linked to the productivity improvements and overall satisfaction we're achieving.

As many of you heard me share in November, our advisors are embracing our independence.

They're engaged and motivated to meet more of their client needs and grow their practices.

Total branded advisors increased 2%, and we continue to experience strong franchisee advisor retention, clearly answering the question of how advisors would react to our independence.

Very clearly, financial planning aligns well with our target client base.

Total financial planning penetration improved to 45%, with financial planning penetration of mass affluent and affluent clients reaching significantly higher levels.

Financial planning is an integral part of our investment agenda as we strengthen our leadership position.

Throughout 2007, we will be implementing new processes and tools that will better enable our advisors to provide ongoing financial planning, deepen client relationships, and enhance our Dream ) Plan ) Track client experience, our approach to financial planning.

The items I've just mentioned contributed to our owned, managed, and administered assets, increasing 9% year-over-year.

If you take into account the $17 billion reduction in administered assets from the sale of our 401(k) business, growth would have been 13%.

This was attributable to strong equity markets and growth in our fee-based flows.

We gathered $1.6 billion in wrap net inflows in the quarter, bringing total wrap net inflows to more than $8 billion during the year.

We saw very strong sales of direct investments in the quarter, as a result of our now robust selection of alternative investments and the reinvestment of liquidation proceeds from real estate investment trusts held by some of our clients.

Variable annuity sales continued to be strong, resulting in $1.5 billion of net inflows in the fourth quarter and $5.3 billion for the year.

This includes sales within our channel, as well as from outside distribution.

We generated a 61% year-over-year increase in third-party sales, a key component of annuity variable account net inflows.

We're managing asset declines in our fixed annuity business, with annuity fixed account net outflows of $1.1 billion in the quarter and $3.8 billion in the year.

Spreads remain around 200 basis points, where they have been for several quarters, and we expect to continue facing headwinds in this business.

Within protection we're gaining market share in variable universal life and universal life, with life insurance in force up 9%, to $174 billion.

We continue to be the leader in variable universal life insurance, an asset accumulation product.

We're also seeing growth in Auto and Home premiums, up 8%, as we generate targeted returns and grow this direct business in alignment with our target client base.

Within asset management, 2006 was a strong year for our investment teams, as we continued to improve three-year and longer-term track records at RiverSource Investments and Threadneedle.

For the year, 77% of RiverSource equity funds we manage ended the year above the median of their Lipper peer groups for one-year performance. 72% of fixed income funds were above the median of their respective peer groups for the same time period.

We launched innovative new products, like RiverSource Income Builder Series, a sophisticated fund-to-funds that gathered almost $700 million in less than a year.

In fact, we had a strong reception to funds we launched in 2006, gathering more than $1.2 billion.

This positive sales momentum is reflected in a 35% increase in sales of RiverSource funds, compared to fourth quarter of 2005, combined with significantly reduced redemptions.

While RiverSource funds remains in net outflows, flows are significantly improved and heading in the right direction.

Internationally, Threadneedle profitability continues to grow.

They have a clear focus to increase profits while diversifying revenue streams across their retail, institutional, alternative, and property businesses.

We're also extending our distribution reach through institutional and third-party channels.

We're signing agreements to offer RiverSource funds through third-party banks and broker/dealers, consistent with our third-party sales of annuities.

We're now in the process of staffing up wholesaling and are focused on driving sales this year.

Overall, we had good revenue diversity across our business.

This is contributing to the mix shift where we are deriving more of our revenue and pretax income from higher returning, less capital-intensive products.

This creates more capital flexibility for redeployment.

During the quarter we repurchased close to 1 million shares of our stock, bringing the full year total to almost 10.7 million shares, returning over $470 million in capital through share repurchases.

We continue to execute against our remaining authorization, which has more than $300 million outstanding.

And based on our strong operating performance I will review our dividend, share repurchase, and acquisition strategy and plans with the Board this spring, as we evaluate the best way to further redeploy our excess capital.

Before I turn it over to Walter, I would like to close by reinforcing how good I feel about our business growth and our financial results for the quarter and the year.

We're executing well against a clear strategy and a robust investment agenda, and we feel good about the shareholder value we're delivering.

I'll now turn it over to Walter for his perspective on the quarter.

Thanks, Jim.

What I'd like to do now is add some additional context to the backdrop that Jim just shared with us.

I believe the favorable results in the fourth quarter and in the prior three quarters clearly reflect the strong performance against our strategy and the leverage in our diversified business model.

So let's focus on the quarter and the four areas of strength that contributed to our results.

They are double-digit year-over-year revenue growth, improved adjusted PTI margins, our continued investment spending in growth, franchise, and infrastructure initiatives, and finally, our ongoing focus and commitment to balance sheet optimization, effective capital management, and prudent management of risk.

Let's look at each of these four areas in a bit more detail.

First, in the quarter our 16% revenue growth reflects the productivity generated from our advisor network and strong net inflows in fee-based products -- $8 billion into wraps, over $5 billion into variable annuities, and a substantial improvement in a proprietary mutual fund flows.

While our revenue growth is very strong, keep in mind that our on average over time revenue target is 6% to 8%.

Realistically, for 2007 we do anticipate continued revenue pressure from declines in spread income based on declining trends in fixed annuity and certificate account balances.

Next, let's turn to fourth quarter adjusted PTI margin, which increased to 15.1% from 13.5%.

The margin improvement impact of strong equity markets offset the continuing headwinds from declining contributions from fixed annuities and certificates.

We expect these headwinds to continue in 2007, but at a slower pace.

The key driver for us in PTI margin has been our continued focus on managing operating expenses and implementing comprehensive reengineering actions.

For the year we exceeded our $175 million reengineering target through strategic, structural, and cost-focused activities.

These saves have primarily been utilized to fund our robust investment-spending program.

Looking forward, we expect to continue on this trajectory with another $175 million in reengineering benefits committed for 2007.

Our third underlying area of strength is our ongoing focus on return on equity, balance sheet optimization, and risk management.

Here, our trend continues with product mix shifting from fixed annuities and other capital intensive products to less capital intensive, fee-based products, like variable annuities.

Another contributor is consolidation of our five life insurance entities, which freed up over $125 million in capital.

In the quarter we maintained and increased the strength of our balance sheet to ensure appropriate risk return tradeoffs.

In our Available-for-Sale investment portfolio, high yield bonds remained at a low 7%.

Bonds rated AA and above are now 52%.

And, we've seen a shortening of the duration of our mortgage-backed securities to 2.8 years and improving convexity on a year-over-year basis.

Our capital ratios remain strong.

Excluding non-recourse debt and with 75% equity credit for hybrids, our total debt to capital is 16.4%, and we've maintained ample liquidity to manage the shift away from fixed annuities.

As I previously indicated, we continue to be very successful in our variable annuity sales, due to strong wholesaling, superior service, and a competitive product.

And we are continuing to prudently manage risk with our program to hedge equity, interest rate, and volatility risks.

We believe we are generating appropriate returns for this risk.

Now, as you are aware, SOP 05-1 was scheduled to be implemented as of January 1st, 2007.

We've completed our analysis based on preliminary FASB guidance, but the FASB is considering modifying its guidance and/or delaying the implementation of this accounting change.

We think it is best to wait until the FASB finalizes guidance, after which we will disclose our impact.

Based on their current guidance, we do not believe this below-the-line charge will materially impact our capital position.

Like Jim, I remain confident in our ability to reach our long-term return on equity targets, given our adjusted return on equity for the full year was 11.8% -- that's within 20 basis points of our near-term goal.

Obviously, we are ahead of the 2008 projections we made earlier.

With that, I'll turn it back to Laura so we can take your questions.

Thank you.

Operator, we'll now open it up for questions.

[OPERATOR INSTRUCTIONS.]

And our first question comes from Joan Zief of Goldman Sachs.

Please go ahead.

Thank you, thank you very much.

I have two questions.

My first question is given the information that we have in the supplement about Threadneedle, so we see the Threadneedle performance through this year, which looks like it has not made much progress and, also, the net flows.

How should we be looking at Threadneedle's performance and contributions so that we're as positive about this as you are?

So that's my first question.

And my second question has to do with the expense initiatives.

Could you just explain a little bit more about what happened to the $175 million of savings or plus savings this year?

And, also, could you talk about what might be a piece of the $175 that would flow into 2007 earnings, or will it be used elsewhere, as well?

Okay.

This is Jim.

Let me start with Threadneedle, and I'll ask Walter to answer the second question.

The Threadneedle performance over the last three years has still been strong, above the median, but it has softened a little from their stronger track records over the long term.

But there was also a mix shift, so they had some underperformance in some of their U.K. funds.

But the Threadneedle people feel very comfortable with maintaining good performance, and from that they are getting good flows into some of their funds and some of their newer expanding activities.

So we still feel very comfortable about Threadneedle's overall performance, as well as their ability to diversify and continue to receive mandates.

So we don't have a change in our outlook for Threadneedle since our November discussion with you, and that still feels on-track to us.

Okay.

On the reengineering question, as I indicated in my talk, that the primary purpose of those reengineering saves were to fund our investment program.

And we will be continuing our investment program for growth and infrastructure and franchise improvement.

And to your second part of the question, a reasonable portion of that does carry-over into 2007.

Could you just be a little bit more specific about what you've invested in?

Is this the technology investments?

Yes, we've invested in a number of the things, as Walter said, both from a structural, a strategic.

So as an example, I mentioned to you the desktop technology.

I've mentioned some of the enhancements in the new products that we're putting to market, some of the advice embedded solutions and capabilities there.

We launched a significant number of products this year across our franchise.

I mentioned some of the enhancements that we're making in some of the local marketing programs and the education programs, so it's across the franchise.

It's both operational.

It's from a business building perspective, as well as infrastructure.

Okay.

Thank you.

You're welcome.

Our next question comes from Suneet Kamath of Sanford Bernstein.

Please go ahead.

Great.

Thank you.

Two, as well, please.

Just first, on the disclosed items, I just want to make sure that I'm reading this correctly.

If I take the numbers that are in that page in your supplement for the fourth quarter and back them out of the $1.02, it looks like I'm getting a $0.94 sort of normalized.

I'm just wondering if you think that's a fair read of the quarter or if there are some other one-timers that you could highlight?

And then, second, on the third-party distribution of mutual funds, how long do you think it will take to kind of get to a position where you're -- that's actually starting to contribute to the mutual fund flows?

I mean is that something that you say it will impact '07, but is it really a second half or fourth quarter '07, or what's sort of the timing there?

Thanks.

Okay, on the items, we basically disclose it.

We really don't make a representation whether you should characterize them as normalized or not.

We just -- from our standpoint, these are expenses that we've incurred.

And we really -- from the math, you can do the math, we don't do that from our view.

The second question was around the --

Mutual fund flows.

Oh the mutual fund flows on the third-party distribution.

We are actually right in the process now of signing a significant number of agreements to distribute our funds, consistent with the distribution we established in the annuity business, both in the bank and the broker/dealer channels.

That's going quite well, and we are now staffing up the wholesaling.

So we do expect sales this year, but I think, as you know, it will take time to build to be significant in that regard, so we expect a bigger increase in that sales activity as we move into 2008.

But we also feel good about the increase in flows we're getting within our own channel, as well as some of the new mandates we're getting in the institutional subadvisory, and the slowdown in some of the flows, the outflows that we have.

So we continue to feel like we're going to make good progress this year.

But the third-party distribution, as you know, will take more time to build, but right now we're getting a good reception out there, as far as people wanting us on their platform.

Okay.

Thanks.

Andrew Kligerman of UBS has our next question.

Please go ahead.

Hey, how are you doing?

I wanted to just ask a couple of quick ones.

Just to make sure I heard the answer to Joan's question correctly, the expense saves, Walter, did you say that you were going to plow most or all of it back into these new initiatives that Jim was outlining, or is there a portion that's going to go to the bottom line?

I just -- I missed that, so I'd like to get a quick answer there.

As I indicated, primarily it went towards the investment spending.

And the thinking going into '07, will some fall to the bottom line?

In '07 there is carryover, and then we also have investment spending programs going into '07.

And as we indicated, we keep flexibility programs and there are things like that, but primarily it will go towards the investment programs, but we don't really divulge the percentage.

That's the way we operate.

Okay.

Shifting over to the repurchases, it looked like you did about $48 million in the quarter per the release.

Jim, when you go back to the Board, as you mentioned earlier, do you have -- do you think you could take that up substantially?

The way I'd answer that is that I think we are ahead of where we thought we would be.

We have strong operating performance, and we are generating good excess capital now, and we have a good position right now of excess capital.

So I do believe that we will evaluate our overall position and make some decisions, as far as how we redeploy that capital as we move into this current year.

And that good position -- at the Investor Day I think you highlighted that it was $1 billion.

This $125 million that Walter mentioned earlier, is that in addition to the billion?

I think it was some consolidating companies?

Yes, actually, I think when I mentioned we were over a billion, and within that factor -- we knew that was happening, and that was actually included in that number.

Okay.

We were just -- I was just mentioning, we actually concluded on December 31st the implementation of that program.

Got it.

And then the $30 million of higher expenses, legal and regulatory, could you give us a little color on what that entailed?

Yes.

The legal and regulatory, you know, it was a number of different things.

One or two that you might have seen is some of the settlements with Securities America on some of the arbitration settlements.

So those were the things that we experienced in the quarter, and you know, we feel that we're in an appropriate position to cover those expenses, and that's what the reserve was, as well as the actual expenses reported.

Do you think that number could mitigate into '07 or it's just hard to say?

You know, I think we, like the industry, have experienced some larger costs in that regard, but I think we're working our way through those costs, and I feel good about the progress that we're making, so let me say that at this point.

I just -- Andrew, I'd just like to remind the audience that the number we disclosed in the supplement is not the entirety of our legal costs but discreet reserve related-type items.

That's right.

Got it, got it.

And then just a last question would be on Threadneedle, you know, at the Investor Day you talked about how, I think, a few years back 35%, I believe, of the revenues were spent, paid toward management at year end, and the goal was to get to 25 -- to 20% in '09.

Where are you right now?

Where were you in '06, just to kind of get a sense of how close we are to that 20%?

Are you referring, about the EPP?

Yes.

We are progressing the way we told you at that meeting.

So are you sort of at the midpoint [inaudible]?

We're progressing, let me put it that way.

You're progressing?

The percentage of the EPP against the earning stream is going down, as we said.

Yes.

All right.

Thank you much.

And John Nadel of Fox-Pitt has our next question.

Please go ahead.

Hey, good evening, everybody.

Good evening.

A question for you about the impact of the equity markets in the quarter.

I mean, obviously, you know, a great way to end the year, a solid performance in the S&P 500, you know, to use as a benchmark for the quarter.

And throughout your press release you mentioned it a few times, and I was just wondering if you had, you know, obviously, there's a lot of moving parts, but if you had just some sort of either a rule-of-thumb or some sort of an estimate internally that you'd say with the quarter being so strong we benefited by about this many million dollars, or this percentage, or something?

I can -- let me -- I can't give you the percentage because, obviously, it affects so many parts as you get into the elements in which it drives.

But I will say while we've gotten a good lift from the equity markets and that has helped throughout all the businesses, and certainly the variable annuities, the SPS and everything from that standpoint.

We also had, as I indicated in my talk, headwinds from the fixed annuities and certificates.

So I would say that we had benefits, and it's part of our model.

It really does -- we have good parts, and we're able to balance the other elements.

We really just don't disclose, because it really does impact a lot of parts.

Okay.

And maybe if I can hone in on one line item, only because in the press release you did mention the equity market specifically as having an impact on your DAC amortization in the AA&I segment, and it looks like it was mostly in the variable annuity line, as we'd expect.

But, you know, DAC amortization in that specific product line was down significantly if I look sequentially.

You know, can you give a sense for -- I don't know, your DAC process, what sort of impact happened there?

Is there some reversion to the median corridor that moved, or I mean what happened there?

There is reversion to median, but it's not a material factor.

Okay.

I guess one last question for you.

You know, Jim, you had mentioned that, in your prepared remarks, leadership and growing market share in the variable universal life and universal life sort of product category.

Yet, if I look at your fourth quarter sales and third quarter, so essentially the second half of the year, we're looking at down year-over-year sales, 2% or 3%.

I suspect you could still be growing your market share if the industry is declining, and I guess is that what you're saying, that the industry is declining at a faster pace?

Yes, I would say particularly if you look at it across the industry, sales have slowed across the industry, and particularly in variable universal life, we do continue to gain share.

So even though our sales have slowed, I think the industry has slowed more.

So we actually feel like we're continuing to make progress.

Of course, it has slowed from previous years, but I think you'll find that across the industry.

But we still feel a good ability for our business and our advisor channel.

Okay.

And then maybe one last question, and that's on the allocated capital to AA&I, flat sequentially, really no change from 3Q to 4Q.

And despite the reduction in the fixed annuity account balances and the certificate account balances, which would be your higher capital intensive businesses, is there some -- what's the major offset there?

Is it just growth in the lower equity, you know, equity sensitive products or equity required products, like VAs and wraps, or is it something else happening there?

I believe we actually saw that it was down as it relates to fixed annuities.

And you saw it go up in the corporate sector, which was really the offset.

Okay.

Thank you.

You're welcome.

And our next question comes from Saul Martinez of Bear Stearns.

Please go ahead.

Hi, good afternoon.

Can you comment on the sustainability of the earnings results?

Obviously, the equity markets were a meaningful tale when in the corner, but if we do return in '07 to a more normalized equity market environment, how comfortable do you feel in your ability to sustain these kinds of earnings results?

Because, obviously, if we look at the AA&I segment there are some revenue items that really bounce in the quarter.

Second question, it's a very specific question.

Can you -- is the net impact of the Threadneedle hedge fund performance, is that -- should we look at that as $4 million if we net out the expense items?

Okay.

Let me answer the first, and Walter can take the second.

In regard to the business, as both Walter and I said, we feel good about our ability to continue to meet the objectives that we set for ourselves.

Of course, it was nice that we had a stronger equity market in 2006, but having said that, as we move down to more normalized equity markets and appreciation there, we feel very comfortable with the goals that we set out for the company and the achievement based upon the positive movement we have in some of our flows and productivity improvements across the company.

Yes.

As it relates to the Threadneedle, the impact as we recognized the earnings in -- for the year in the fourth quarter is about $9 million pretax differential.

Okay.

Great.

Now, just to reiterate what your guidance was, it was 12 -- your goal is to get to a 12% ROE run rate by 2008, is that correct?

We said a range of between 12 and 15, and then we said we'd hit the lower end of the range.

By '08.

Okay.

It's not a run rate.

It's not a run rate.

The lower end of the range by '08.

Yes, but not a run rate, an absolute in that year.

Got it.

Thanks.

You're welcome.

And our next question comes from Eric Berg of Lehman Brothers.

Please go ahead.

I actually had a few questions, but before I get to them can you explain -- I just wanted you to elaborate, if you could, on your last point, when you say that your goal is to achieve a certain level of ROE but not at a run rate.

Could you rephrase or elaborate?

I don't understand what that means.

Well, let me -- okay, the run rate to me is -- and I think this question came up last time, that as we exit 2008 we'll be at the last quarter run rate.

And so if you just isolate it, it would be 12%.

So we're saying, no.

The way we talked about it, it would be 12% for the year 2008, we would be in 2008, the entire year, when you do the calculations.

Not for the quarter, but for the whole year?

Right.

And that's what we said in June or July of 2006, and we said we're running a bit ahead of that, based upon our current performance.

And right now we're at 11.8, so.

Okay.

I'll proceed then to the original questions that I had.

First, in your biggest business, your asset accumulation and income segment, there was a very, very large year-over-year increase in the distribution fees in brokerage, banking, and other.

Certainly, I understand that your wrap business is growing rapidly, but the rate of growth in those fees was well in excess of the rate of growth in assets.

Why that difference?

Well, okay.

What you have is in the distribution fees, the direct investments contributed very heavily to that.

As we -- in the management piece, the Threadneedle, as we talked about the hedge funds, and we did get, certainly a substantial benefit driven by the market on the SPS in the management fees.

That's it.

And by direct investments you mean?

Yes, we have a--

REIT program.

Right.

We have a full suite of products right now.

I think you remember us saying at the beginning of the year we did not have the product to market yet and there was some pent-up demand that we had, as well as some liquidation of proceeds from previous funds that was reinvested in the quarter.

Okay.

My next question relates to the reporting of performance.

In the supplement, for some time you've been reporting performance -- I'm looking now on Page 17.

And you talk about everything on an equal weight basis.

Why is that the approach that you take since, as everyone knows, equal weight doesn't take into consideration the size of funds or the fees you're generating and, therefore, could in theory give maybe not the clearest picture of what is really going on with the performance?

Why this equal weight approach as opposed to say an asset weighted approach?

We actually, you know, ourselves look at it both ways.

You know, I think from our perspective of what the people thought would be most appropriate here, but--

It also tends, Eric, to be the most conservative, because generally the higher performing funds are the ones that end up accumulating the most assets.

So we, actually -- so we thought this was a fair approach to it.

Okay.

Last question, so that we can go on to the next person.

I would -- just going back to John's question, John Nadel's question, I would have thought given the strength of the stock market that your amortization of DAC in your variable annuity business would have been up a lot compared to the September quarter and certainly compared to the year-over-year quarter.

Instead, I think it was down.

Why in the strength of -- in the face of a strong stock market with much higher earnings would you have lower DAC amortization?

This is Laura, Eric.

And what happened is you're required to amortize your costs to align with the profitability that you could generate from those products, so the higher equity markets mean higher profitability over a longer time, which extends your amortization.

Is that -- are you -- is that another way of saying you did a DAC unlocking?

No.

No, we're just following the way you're supposed to do the gross profits approach on it.

It's totally consistent with the way you're supposed to do it.

Thank you.

You're welcome.

Our next question comes from Jeff Schuman of KBW.

Please go ahead.

Good evening.

You talked a couple of times about the liquidation of the REIT proceeds and how those enhanced distribution fees.

I was wondering if you could give us kind of a ballpark as to what the impact was in the quarter?

And, also, is this a phenomenon that spilled over to any extent into the first quarter?

The answer to the first is it's very difficult, not only because in -- our advisors will be selling a number of different products, depending on what they think is appropriate for their client at the time they do.

So, you know, we can't tell you.

We know that there is some increased activity from that, but we also know there's been increased activity across the franchise in the fourth quarter.

And I think part of that's due to the stronger equity markets, in general, that has more client activity.

So we do believe that the activity in the fourth quarter was up.

You saw it over the course of the year, but the full year, itself, was quite strong at over 18% up.

Okay.

And then one other question, just to follow-up.

I apologize, I didn't quite catch the answer to one of Saul's questions.

He was asking about the $46 million of Threadneedle, the hedge fund performance fees, and the $42 million of higher compensation and how that sort of bottom lined.

What was the answer there?

The $42 million was a change fourth quarter over fourth quarter.

Walter answered the net PTI impact for the hedge fund performance fees in the fourth quarter this year was $9 million.

Okay.

So the $46 nets to $9 this time?

Yes.

And that's after tax?

Net, pre, pre, pre.

Pre-tax, okay.

Great.

Thank you very much.

And Tom Gallagher of Credit Suisse has our next question.

Please go ahead.

Hi.

Just one follow-up on the question about the REIT liquidations.

Can you comment on whether or not there's a substantial bottom line benefit when you see that kind of activity in terms of liquidations, then moving into other products?

There's a benefit.

I don't want to quantify whether it is substantial, and but it does get into is it a substitute for other activities.

So the issue is there was a benefit derived.

There's a benefit from increased production activity and, of course, there's margin on that production activity.

Okay.

So we should consider that when we're thinking about sort of sustainability here, that there is a bottom line benefit to those liquidations which -- and would you expect to continue to see more of those in terms of directionally?

Well, we can't comment on redemptions, but we can say we are -- we have a lot more product than we're selling on the REIT, so we see production.

But, as we said in the press release, the fourth quarter trend was out of norm.

It was higher.

Yes.

So.

Got it.

And, Walter, I'm sorry, I didn't quite get what you said about SOP 05-1.

Can you just elaborate a little bit --?

Sure.

Of what you're expecting there?

Yes, we went through all the calculations based upon the guidance as they were given, but as you're aware, or maybe not, that the FASB is actually looking potentially at, based on some requests, of potentially even delaying it or changing it.

On that basis, it would be premature to come out, and we spoke to you about that.

But we did not -- do not believe it will have a material impact on our capital.

Well, I certainly wouldn't expect it to affect your capital, because I think of capital on a statutory basis, and this is a GAAP only issue.

Is there -- are you going to come out with some quantification on this when you file your K?

As soon as the FASB gives us more definitive positioning, yes.

I would just like to mention that when we think of capital, we generally think of its impact on our GAAP and excess capital.

Yes.

Got it.

Okay.

And then, let's see, the last question I had was just related to what we should expect out of the advisors force for '07?

If I recall, at the Investor Day there was, I guess, a comment made that suggested you may actually see some shrinkage in your employee advisors.

Yet that actually went up pretty nicely, as did the overall advisor base in the fourth quarter, at least versus 3Q.

Should we still expect to see more of a cost focus for '07 or could we actually see growth overall?

Yes, I think our focus is really, as we mentioned, to sort of trim the sales force a bit so that we focus on profitability, some improved economics, and improved retention from the employee channel.

And so we are going to be very much focused on continuing to strengthen the employee channel and productivity.

And so on the numbers side, that's not necessarily our focus, to continue to get that number up but to get it in a very strong, productive area as we move forward.

So, as we said, I think we're still consistent with that.

Having said that, to be very frank, our retention was quite strong, which is showing the improvements that we saw in the third quarter, and so it does give us greater comfort that we were maintaining the productivity and the productive advisors.

Got it.

Okay.

And then just a last question.

The -- so as not to beat a dead horse, but the DAC amortization, Walter, from -- so if I'm understanding you correctly the number you amortized this quarter should -- we should expect that to be a pretty good run rate?

Is that fair to say?

I can't give you the run rate, but it's only representative of, basically, the factors that occurred in the quarter, and really there's nothing unusual about it.

So there was no significant onetime unlock due to the strong equity market?

It does vary.

It varies.

Quarter-to-quarter with the change in the equity market.

Because it changes the gross profit calculations, but that's normal, and that happens, up and down.

Okay.

Thanks.

You're welcome.

Our next question comes from Darius Braun of Citadel Investment Group.

Please go ahead.

Hi.

Great quarter, guys.

Thank you.

Just a couple of questions.

The first, as it relates to DAC, since there seems to be some confusion on it, it obviously bounces around from quarter to quarter, but at least on an annual basis do you think we have some reasonable run rate?

I can't -- you know, we're having trouble hearing you.

Could you speak up?

I'm sorry.

Can you hear me now?

A little better here.

Okay.

On the DAC amortization, just because there seems to be some confusion, can you sort of comment on an annual basis does it seem like a decent run rate?

Because I know there's variability from quarter to quarter.

It is variable, but it is mostly driven by volume and, again, there is -- this relates -- in the third quarter we do unlocking, and really then it is basically market-driven from that standpoint.

Okay.

The next question is with respect to the excess capital position and the SOP 05-1, was your excess capital that you articulated in your Investor Day, does that contemplate any impact from SOP 05-1?

We made that statement knowing about SOP 05-1.

Okay.

Great.

And then final question, there's been some debate in the market with respect to how you hedge your GMWB.

Can you remind us of your program, and where do you think that stands versus peers?

That's all.

Thanks.

Jim Cracchiolo

Yes.

We take an approach where we call it "static," where we basically go solely in trying to deal with the tail risk, and all elements of the interest and equity aspects of it, and dealing with the earnings volatility.

So we feel we take a very prudent and conservative approach to it.

And so, on that basis, we feel that we are well protected from capital market's view of it, and so we feel we stack up fairly well against our peers.

Great.

Thank you.

Our next question comes from Tamara Kravec of BOA Securities.

Please go ahead.

Thank you.

A couple of questions.

The first, the pre-tax investment gains of $27 million, couldn't find it in the press release, but did this fall mostly in the corporate segment, or was it spread throughout your segments?

I think that was spread, and I don't think it was mostly in the corporate segment at all.

Do you have that -- you say you have that breakdown?

It's on Page 3 of the supplement.

Yes.

You can see it by segment.

Oh, great.

Thanks.

Okay.

And just looking at the RiverSource retail fund flows and where you are now, I mean there was a little bit of an increase sequentially in the fourth quarter.

You've had improvement from '05 to '06.

Can you comment on or maybe give us a sense of what you would expect in '07 and '08, just given what you've seen now?

You've had a full year of improvement.

You know, do you think that you're on-track to have positive net flows in '08, or do you have some internal projections?

If you could just comment on that?

What I would say is the increase, first, in the fourth quarter was what we also mentioned to you at the end of the third quarter.

It's the outflow from our 401(k) account.

One of the big ones was American Express.

Right.

In our funds.

So that actually gave us the extra blip in the fourth quarter from that sort of reduction.

And as far as the overall flows we continue to see improvements in the net outflows.

Where, actually, with the focus we have with more products, the better performance of the products, the expanding distribution, and the increase in our own channel, we feel we're in a good trajectory to turn that around, but I can't sort of sit here and give you a timeframe.

But we just feel positive about the shift that we're seeing.

Okay.

So you'd be comfortable with additional momentum going into '08 but you don't really, you can't quantify --

Correct.

At what point you'd see a positive turn in that?

Right.

Okay.

And, lastly, I am going to beat the DAC issue, because maybe it's just me, but I -- I'm just -- you said it varies from quarter to quarter, but we had strong equity markets in the third quarter, and your DAC was up sequentially from the second.

So I guess I'm just not understanding why it would be that much of a difference.

If it should vary with the equity markets, there really isn't a sequential pattern, so --

It does vary, but in the third quarter, when we do our DAC unlocking...

Right.

It had an influence on it, but it does vary, as we indicated, based on mean reversion and the impact to the market, up or down, and that is the trend line within it.

I'd be happy, if after the call or tomorrow anybody wants any further discussion of this, I'd be happy to talk to you.

All right.

Thank you.

You're welcome.

And our next question comes from Sam Hoffman of ADAR.

Please go ahead.

Yes.

I think my questions have been answered, but I wanted to just throw out one more question about the banking business, what the strategy for that is, how you size that opportunity, and when you expect that to kick in?

Yes.

We just -- we had a very successful launch of a bank at the end of the third quarter.

We moved over the assets that we were maintaining at the American Express Bank.

And we just recently launched our home equity program.

So we're training our advisors right now, and we feel that the banking products will be a complement to our advisors' activities.

We're looking for mortgages, home equities, some deposit gathering products over time, as well as some lending products, as well as card products.

So it will be really to enhance sort of our overall advisor proposition is our focus.

And we are continuing to now develop those products to put to market.

Can you give more detail on how much assets were transferred?

And, also, how we should model that business in terms of sizing the market, what the spread is, when it becomes profitable?

You know, anything that you could tell us just to help us understand the potential contribution to the business?

The transfer of the assets was in the $6- to $700 million range.

Again, all of the details are in--

And from that standpoint, then we're going to start building now.

I don't think we've really given any projections on that.

And, as Jim said, it's part of our value proposition as we'll be offering to our advisors.

Okay.

But I assume you expect that to become profitable at some point?

Yes.

Yes.

No, we think it will be a profitable business for us and a complement, because our clients are there, the accounts are there, our advisors are already working with those clients, and they refer a lot of that business away to local banking institutions.

Yes.

And then, I think you're aware that our regulators will not allow us to really run an unprofitable bank.

Right.

So it should be profitable pretty soon, like this year and then continue to grow?

We're not going to forecast.

But profitability is certainly our intent.

Okay.

Thanks.

Thanks.

And our next question comes from John Hall of Wachovia.

Please go ahead.

Thank you.

I have just two quick questions.

Do you anticipate any other wholesale-type of withdrawals like we saw in the fourth quarter, similar to the 401(k) going forward?

We, as you know, with the transfer of the 401(k) business, our sale to Wachovia, we have a number and we break it out in our supplement Collective Funds, and so there's always the potential for those funds to over time flow out, but there -- the Collective Funds have very low revenue basis points for us.

So even if the flows do go, they should not be a material impact to our revenue and our profits.

Okay.

Great.

And then, finally, with the Securities America, what's your appetite for adding to that platform through acquisition?

And if you were to contemplate such a thing, what would be the metrics in terms of looking at that acquisition, on your part?

You know, we, as we said to you previously, would always look at acquisitions for the asset management, the distribution world, mainly.

So I can't comment on exactly what type of acquisition, but from a perspective of the company, we will evaluate those things with the interest that we'll create a stronger overall platform and better economics.

Operator, I'd like to take one more question.

Very well then, our last question comes from Sun Lee of Royal Capital Management.

Please go ahead.

Hey, guys.

Congratulations on a good quarter and a good year.

Thank you.

Thank you.

Just one quick question is given where you guys have progressed to date, what's the thought process on updating sort of your longer, or your medium term targets, especially sort of on the top line?

It seems that you're well in excess of your 6% to 8%.

And I'm trying to understand, A, sort of what surprised you sort of aside from the equity market?

Was it more of a conservatism stance that you didn't know sort of how people would react to the new branding?

Or did something really surprise you on the top line?

And then, B, what's the thought process on updating those targets to reflect sort of where your business stands today?

Right.

I mean if you think back, it's just been a short time since we became public, five quarters out.

And I think you, the analysts and investors, raised a number of particular questions and concerns of coming public -- you know, the establishment of the brand, the advisor network, the complexity of the separation, the timeframe to execute, the amount of capital we need.

I think, you know, so us coming into the year, we were very cognizant of what we needed to accomplish.

There were a significant number of things we needed to address.

We felt we had a good solid plan, a feeling about our ability to go do that, but, again, not knowing the market, the investment climate out there, as well as the idea of the number of challenges we had to meet, we probably were much more focused on what we think we could achieve at that point in time.

I feel good about where we are.

Our advisors stuck with us, in fact, increased their productivity.

Our brand is establishing nicely.

We've been able to execute a complex separation and at the same time, to Walter's point, been able to actually make all the investments that we needed to continue to build the business at the same time.

So we will evaluate our ongoing targets.

We will also evaluate the use of our excess capital in the current period, and we will be getting back to you, but we feel good about the progress we've made and the path that we're on.

Great.

Thanks, guys.

This is Laura.

As we close, I'd just like to say that Mary and I are both in New York, and so for a quicker response to your questions, we will be in the office this evening, as well as tomorrow.

Her phone number is 212-437-8624, and we should be available in about 30 minutes from now.

We appreciate your time and your questions, and we look forward to our continuing ongoing conversations.

Thank you.

Ladies and gentlemen, this concludes today's conference.

Thank you for participating.

You may now disconnect.