阿默普萊斯金融 (AMP) 2007 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Ameriprise Financial first quarter 2007 conference call.

(OPERATOR INSTRUCTIONS) 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, and welcome to the Ameriprise Financial first quarter earnings call.

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

After their remarks, we'd be happy to take your questions.

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

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

These adjusted numbers exclude nonrecurring 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 2006.

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 with the Securities and Exchange Commission, as well as in the talking points we will post after the call.

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 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 2006 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 2006 10-K report already on file with the SEC.

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

Individual RiverSource Mutual Fund investment performance information and important disclosures are included in exhibit A in our quarterly statistical supplement also available on our website.

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

Thank you, Laura.

Welcome, everyone.

As you saw in our release, we had another strong quarter, the fifth straight quarter where we exceeded our adjusted earnings growth target.

So let's take a look at our results.

For the quarter, revenues grew 6%, adjusted earnings grew 16% and adjusted return on equity reached 12.2%, which represents the first time we reached the lower end of our targeted range.

Overall, I'm feeling very good about the progress we're making and the momentum we're seeing in the business.

Based on our performance, we have the ability to redeploy our capital or return capital to shareholders.

In that regard, we completed our two prior share repurchase authorizations ahead of schedule, repurchasing more than 5.9 million shares of our common stock during the quarter.

And in March, we announced a new $1 billion two-year share repurchase authorization and raised our quarterly dividend to $0.15.

Now, let's take a look at our business highlights and the progress we're making in executing our strategy.

Later, Walter will give you more color for our financial performance and balance sheet strength.

Our business is based on delivering a strong client experience, and that focus is helping us to grow our target client base.

For the quarter, our total number of mass affluent and affluent clients was up 8% year over year.

Advisor productivity continues to grow as well.

At the end of the quarter, total GDC increased 18% compared to the first quarter last year.

Our focus is to continue driving productivity gains in the advisor force, while improving the overall economics of our employee advisor channel.

As I mentioned last fall, we're reengineering our employee advisor platform to improve its profitability.

Therefore, we are being more selective in new employee hires, enhancing productivity and retaining and further tenuring our more productive advisors.

Consistent with our strategy, we've appointed about 30% fewer employee advisors than at this point last year.

At the same time, we're now focusing more front-line leadership time to enhance advisor productivity.

Over the course of the year, as we anticipated, we expect our total employee advisor count will decrease with the intended net effect of increasing per advisor productivity and improving the profitability of our advisor force.

Our more tenured franchisee advisor retention remains strong at 93%.

Advisors continue to be very receptive to the enhancements we're making in technology, marketing, practice management, and new products and services.

So very clearly, we're working to make our distribution network more efficient by improving our economics and increasing profits.

At the same time, we are increasing our ability to gather assets.

We ended the quarter with $474 billion in owned, managed and administered assets, up 10% when adjusting for the transfer of administered assets with the sale of our 401(k) business last year.

I'm feeling very good about our asset growth and strong flows across the business.

During the quarter, we generated total wrap net inflows of $3 billion, a year-over-year increase of 20% and one of our strongest periods of wrap flows.

We also continued to generate strong flows in annuity variable accounts with $1.4 billion of net inflows.

That's a 27% increase year over year.

Offsetting these strong net inflows was $1.1 billion in net outflows in annuity fixed accounts that's in line with prior quarters.

We expect net outflows in these products will continue in the current interest rate environment.

The quarter has also been very good for RiverSource retail fund flows.

We had our best mutual fund sales quarter in several years and also saw good flows into our variable product funds that are available as investment options within RiverSource Variable Annuities and VUL products.

We're down to $800 million in retail fund net outflows, compared to $2.1 billion in net outflows for the same period 12 months ago.

That's more than a 60% improvement.

We're also seeing solid growth in institutional.

During the quarter, we had approximately $700 million in net inflows and generated a 29% increase in year-over-year sales.

Overseas, Threadneedle is focusing on growing its higher margin hedge fund and property fund businesses while tightly controlling expenses.

Consistent with prior quarters, Threadneedle is managing net outflows primarily from the lower-margin, Zurich-related assets.

Our Protection business is also performing well.

Life insurance in force grew to $177 billion, an increase of 8% from first quarter 2006.

In addition, we're generating solid premium growth in Auto and Home, where we see favorable loss trends.

A core part of our strategy is driving future growth and we're focused on implementing a robust investment agenda.

Over the last year, we've launched a number of new products and have built a strong portfolio of innovative, advice-embedded products that we called goal-based solutions.

Active Portfolios is our new discretionary managed account platform, which we launched in the quarter, and we're very pleased with the initial response.

This product builds on our industry-leading position in investment advisory/wrap and leverages our strong quantitative investment management capabilities.

We believe Active Portfolios is a unique and compelling product that will be important for us going forward.

Another major investment is our new advisor desktop technology, which is being implemented through a phased release program.

The next phase begins rolling out in the second quarter and advisors are quite positive about the greater functionality and enhanced interface.

We've also focused on delivering a strong client experience and strengthening our leadership position in financial planning.

Later this year, we'll begin rolling out improved financial planning services and tools for our advisors.

And lastly, we're investing in building our wholesaling and infrastructure necessary to expand our third-party distribution of RiverSource Mutual Funds.

We've been able to fund these investments because of our focus on reengineering and gaining the related benefits.

Keep in mind, we're making these and other investments while effectively managing the separation from American Express.

In regard to our separation, this was an important quarter for us, as we completed several complex technology separation tasks.

We're in the final stages now, and the majority of our separation will be completed by the end of the second quarter.

Overall, we're on budget and on track to complete it later this year.

In closing, I feel very good about what we've accomplished and the future of Ameriprise Financial.

We're executing our strategy, use our reengineering strength to reinvest in the business, generating solid growth, meeting our on-average overtime goals and returning capital to shareholders.

Now, I'd like to turn it over to Walter and then we'll take your questions.

Thanks, Jim, and good afternoon, everyone.

Consistent with what Jim shared, I'd like to add some additional context for the strong performance trends we've seen since we went public in October of 2005.

I feel very good about our financial results.

Adjusted pretax income was up 17%, adjusted EPS was up 20%, and adjusted return on equity, including OCI, was over 12% for the first time.

This solid performance was accomplished while also maintaining strong balance sheet fundamentals and a conservative risk profile, which I will touch on shortly.

In the quarter, revenue growth was 6% or 7% adjusted for the sale of the 401(k) record keeping business.

When you look at where this growth was fueled, it was the result of double-digit increases in management and distribution fees.

These fees were driven by strong performance in our SPS and Direct investment broker dealer products, and RiverSource variable annuity and fund products, which are experiencing good sales growth, positive net flow trends, and improvements in the equity market.

These positives were offset by fixed account flows and lower certificate spreads, which, as you're well aware, are consistent with the situation the rest of the industry is facing.

From an expense perspective, they continue to be tightly managed.

On a comparable basis, operating expense growth was under 5%.

This includes adjusting for the Threadneedle equity participation plan (EPP) and other non-operating items.

In the first quarter, we recognized the full-year EPP fair-value adjustment, whereas last year, we expensed it over the full year.

We expect the 2007 EPP expense to be approximately the same as 2006 and to represent a lower percentage of profits and revenues.

So, our revenue and expense events helped facilitate a 14.6% pretax margin compared to 13.2% last year.

Two related areas of focus I want to touch on are the reengineering used to fuel our investment agenda and our ongoing separation from American Express.

We are on target to achieve our $175 million total-year plan through actions we're taking in technology, service delivery, distribution, and procurement areas.

This has sourced a very substantial investment and growth agenda for some of our key initiatives including new planning tools, third-party wholesaling and new product development.

The separation is still going very well.

Since we set out, we've incurred $739 million (company corrected after the call) of expenses.

Most of the more significant technology projects are now behind us and those related expenses will begin winding down at the end of the second quarter.

Now, let's move to our segments.

The Asset Accumulation Income segment generated a PTI of $232 million, up 2% from the prior year.

This 2% increase jumps to 7% when you reflect the sale of our 401(k) business and the EPP expense adjustment I already mentioned.

This profit growth is driven by strong performance in variable annuities, retail funds, and our fee-based brokerage activities.

Also contained within this number are fixed annuities and certificate accounts, which are negative versus the prior year.

These spreads were further impacted by our decision to liquidate externally-managed hedge funds investments.

For the year, I anticipate this segment's results to be within our targeted profitability range.

In our Protection segment, pretax income was $101 million or 36% higher than last year.

This improvement was driven primarily by strong performance in our Auto and Home, UL/VUL, and health insurance products.

Auto and Home policy account is up 8%, with continued favorable trends in the loss ratio.

Our VUL and UL in force continues to grow and benefit expenses are well contained.

LTC and DI actual claims experience is performing as expected.

Now, let's move to our capital position, balance sheet and risk profile.

In March, we announced the authorization to add $1 billion to our initial share repurchase authorization and increased our quarterly dividend to $0.15 per share.

This action was predicated on our strong financial performance and continued commitment to maintain strong balance sheet fundamentals and a prudent risk decision framework.

Our asset quality reflects the strong fundamentals in our balance sheet.

For instance, our "Available for sale" portfolio, primarily backing our spread products, has declined from 35% of assets to 28% of assets.

Meanwhile, separate accounts, where the client assumes the risk, have increased from 47% to 54% of our assets.

Within our "Available for sale" portfolio, we continue to be risk/return balanced.

For several periods now, we've indicated that the market is not providing adequate compensation for taking additional credit exposure.

As a result, high yield bonds declined to 6%.

Even within our high-yield holdings, we have moved to the top end of the credit spectrum.

Because of our positioning on credit, we have avoided the major write-downs for credit disasters over the past two years and again this quarter.

We don't hold any debt-related to recent sub prime mortgage lender bankruptcies.

We believe our residential MBS and CMO portfolio is very high quality.

The entire $7.5 billion portfolio is very highly rated, with 96% rated AAA and 4% rated AA.

The majority of the portfolio is in the structured senior traunches, which result in its short duration of 2.3 years and favorable convexity characteristics.

Within this high-quality portfolio, we have approximately $350 million of highly-rated bonds backed by sub prime collateral.

All but about $25 million are AAA rated, with the remainder rated AA.

Next, we maintain both strong leverage ratios and capital positions, providing us with the access to contingent capital if needed.

Excluding non-recourse debt and with 75% equity credit for hybrids, our debt to total capital is 16.7%.

Our life company reported an RBC ratio of 595% at the end of 2006.

And finally, we continue to maintain ample liquidity with substantial dividend capacity from both our insurance and non-insurance subsidiaries.

In addition to the strong balance sheet fundamentals, we have established an enterprise risk process to identify and manage our credit, market, and operating risks associated with our products and other Company exposures.

As you are aware, our variable annuity hedge program is one such activity, and has two main goals; manage economic risk and mitigate earnings volatility.

We believe our program is working effectively, and while we are continuing to fine-tune it around the edges, we are particularly pleased with its performance levels, given the equity market volatility in the first quarter.

That concludes my formal remarks.

I would like to ask the operator to open the lines for Q&A.

Thank you.

Thank you.

(OPERATOR INSTRUCTIONS) The first question comes from Suneet Kamath from Sanford Bernstein.

Please go ahead.

Thanks.

Two quick ones, please.

First, on the EPP, I guess the $16 million, you took it all in the first quarter versus -- I guess you said last year, you spread it out evenly.

What was the decision there?

Why take it all at once?

And then, what was the comparable number in the '06 year relative to the $16 million?

And then second on the buy backs, I think you did $352 million in the first quarter and your guidance -- your authorization implies kind of a $500 million over the next couple of years.

It just seems like the guidance is conservative there.

So what are you thinking in terms of your excess capital?

What are your reinvestment opportunities that you see that would keep buy backs of the next couple of years closer to $500 million range, versus anything higher than that?

Thanks.

Okay, I'm going to -- this is Jim Cracchiolo and I'll have Walter take the first question and we'll both handle the second one.

Yes.

On the EPP, the amount we anticipate in 2007 is going to be equal to approximately what we took in 2006.

The reason why we recognized it in the first quarter and not spread it over the full year was, it is basically determined at the end of the first quarter and looking at it, we felt it was better treatment that way.

And so can we expect that same thing going forward or is this going to move around?

No, we expect going forward, we will recognize it in the first quarter.

Okay.

And with respect to the buy back, we completed the previous two buy backs ahead of schedule.

We had a two-year authorization and we completed them within one year.

We have the authorization for another $1 billion, again authorized over the two years.

As far as when we will exercise our ability to buy back, we will continue to look and monitor the use of our capital, most appropriately, including alternatives for acquisitions.

Okay.

Thanks.

The next question comes from Joan Zief from Goldman Sachs.

Please go ahead.

Thank you.

I have a few questions.

The first is that when you -- you're investing in wholesalers to move forward in third-party distribution.

Are you feeling comfortable that the performance measurements that we're seeing for the products for the mutual funds, both at RiverSource and at Threadneedle, are going to provide you with product that is going to be competitive in the third-party distribution channel?

Yes.

Let me -- this is Jim Cracchiolo.

Our performance last year, if you also saw the report from Barron's, we actually had the third-best performing mutual fund family last year.

If you look at a number of our products' performance over the last one, three, and five years, we think they're quite strong and quite competitive.

So we actually think it is the right time for us to start to distribute our funds through other third-party channels, and we are getting strong interest in contracts for us to start to put our product on third-party shelves.

All right.

Can you just -- is third-party shelves that you're looking at, are they banks, are they broker dealers, are they warehouses?

-- direction you're going to?

Yes, they are banks, they are broker dealers and there are other financial advisory firms.

Okay.

My other question is, can you just explain a little bit more about what you're seeing in your disability block and also in your long-term care block?

And what we should expect from those -- those books of business in force going forward?

Yes, it's Walter.

We've -- in long-term care block, we've actually experienced improved claims there and we are also filing for various rate increases with the states.

So, as you're aware, that's a block that we don't underwrite anymore, that we -- we get that from Genworth.

Now, as it relates to disability, the disability performance has been within our plan and is actually performing very well and we are feeling very comfortable with it.

So what was the reserve increase?

The reserve increase actually had to do with DI, we took a look at our models, where we basically took, as you can see there, up by $24 million and then we -- when we examine basically some of the assumptions we were using, we were able to bring that down by $12 million.

So the net impact in the disability is $12 million and that was basically a negative from that standpoint.

And that was offset by benefit in the P&C activity.

Okay.

Thank you.

You're welcome.

The next question comes from Saul Martinez from Bear, Stearns.

Please go ahead.

Hi, good afternoon.

You mentioned in your press release that the $12 million net increase in your disability income reserves were more than offset by variable, decreases in variable annuity benefit reserves and also favorable loss development in the P&C business.

Can you help us quantify how those items benefited earnings in the quarter?

Well, actually, in the quarter, the items that we talked about as you looked through the DI and then the P&C within the Protection segment basically neutralized.

Okay

So it was -- that was the impact, it was neutralized.

What about the VA, the benefit reserves in the variable annuities?

Saul, you can see that -- this is Laura Saul.

In the AA&I segment you can see the change year over year in the benefit line related to the variable annuities, and it has to do with how the mark-to-market flows through for the expected benefits for products like -- with the sector guarantees and GMAB.

Okay.

So that's in the benefit claims losses and settlement expenses, the negative -- the negative add, is that correct?

There's an improvement in the benefits expenses, yes, in AA&I, yes.

So that goes from 22 to minus 8, basically, in quarter over sequentially?

Sequentially, but as you recall, yes --

Okay.

Okay.

And just a quick question.

I mean, can you give us an update on when we might see enhanced segment disclosure?

Yes, as I mentioned -- this is Walter.

We're targeting to do that in the latter part of 2007, and we're on track and that's -- that's the target right now.

Okay, great.

Thanks a lot.

You're quite welcome.

The next question comes from Eric Berg from Lehman Brothers.

Please go ahead.

Thanks very much.

My first question concerns your certificate business, which you have acknowledged is sort of a drag on your earnings.

And my question is, why has -- it's interesting to compare what's happening in two spreads -- in your two spread -- your two main spread businesses.

Fixed annuities on the one hand, where net interest margins or spread seemed relatively stable, and is in the certificates business, where the spreads are falling very sharply.

Why the difference?

What's happening in that certificates business that's causing the big crimp on profitability?

Now -- Eric, it's Walter.

What you're finding is that in the certificate business, it's invested out in longer term and obviously we're paying now on the short end, so there's been a compression there.

So that's where you're seeing.

Whereas the fixed annuity, you're seeing dealing with the ten-year rate and the crediting being on the ten-year rate, so you're seeing less of that.

But you did notice -- as I mentioned, if you look at the -- in the first quarter of last year, we're at a 2.29 net spread, and this -- in this quarter, we're at a 2.00 and that's the impact that I mentioned as it relates to the change in our strategy and coming out of the hedge fund.

But it's really dealing with the fixed annuities deal for ten year and the certificates deal, with the spread dealing with short-term crediting versus long-term investment.

The other question I had related to just growth of your life insurance businesses.

And by that, I'm referring to life insurance per se and to disability insurance.

The -- one of the critical measures that I look at --and I think that you think it's important, too, because you're preening it in your supplement -- is the net amount at risk.

Can we expect growth out of these -- this life insurance business, as well as out of the disability business, which are two important Protection businesses for you?

Yes, well, sales certainly as you can see, has not grown.

The profitability in the UL and VUL has grown nicely as relates to the market, as have basically, the policies in force.

And the DI is certainly growing and we're enjoying the profitability there.

If you want to, Laura, you want to --

Yes, I think, Eric, one of the things to consider is when you look at our business, it's not so much the risk assumption, because the mortality is actually primarily reinsured.

For us, the VUL/UL which is a big driver of the at-risk is a fee-based business for us for managing the assets underneath.

Eric, Jim Cracchiolo.

One other thing that I'll add to complement what Laura and Walter said is we're continuing to be very much focused on growing our financial planning activities and greater penetration particularly with our higher-end client base, and we're going to be rolling out a lot of new tools and capabilities to help our advisors do that.

We think one of the benefits of that is really to look at our clients' whole protection, and we think there is a further opportunity to penetrate our current base, as well as new clients coming in.

So, we do recognize the trends in the industry.

We've been impacted like everyone else in a slowing in our sales activities.

But I think, based on the type of clients, what they really are looking for for the future, that there is still good opportunity for us in the Protection area.

And that's both for disability, as well as in life.

Thank you very much.

You're welcome.

The next question comes from Jeff Schuman from KBW.

Please go ahead.

Good evening., I was wondering if you could help us reconcile the mutual fund flow numbers a little bit.

It looks like there was some reclassifications in the roll forward.

I think you moved some of the variable products into the RiverSource managed funds roll forwards.

So you're referring to outflows this quarter of $800 million, but what would be --what was the impact on that number of putting the variable products into the mix?

Because that would not have been, for example, in the $1.5 billion of outflows that we talked about last quarter.

Okay.

Let me answer and then Laura can tell you where you can find the reconciliation.

Our variable product funds are actually clones of our retail mutual funds.

It's just that we have them as these separate accounts within the universal life, as well as the variable annuity and we see very strong flows.

They actually have a very similar fee structure.

They're managed under a mutual fund board as governance, so they're actually pretty much cloned products.

And so they actually should be included in our overall fund flows for the retail business.

And I think that we've always looked at them that way.

However, as we note, you track some of the industry reports, the industry reports do not pick them up and so in our reporting, as we talked about our quarterly highlights, we left them out.

But I think it would be inappropriate for us not to include them, because they are a very key part of our business.

We see very strong growth from them.

And they do generate the same type of revenue streams as just the retail mutual fund since they're a clone.

Laura, do you want to comment on the consolidated, where they can pick that up?

We do have some of the information in the very back of the supplement, as far as the changes that we made to the roll forward.

And then, I'd be happy to walk through period by period with you later if you wish.

Okay, yes.

I think in the back what we get is the numbers that help us reconcile the fund balances, but not necessarily to tie the flows together, so I guess if you can help me with that later, that would be great.

Sure.

Okay, sure, we'll try to did that.

And just to make sure -- not to beat this to death, but it's kind of important, just to make sure I understand the reserve discussion that you went through a moment ago.

So, within Protection, there were adjustments to both disability and prior development on Auto and Home and those basically washed.

And then, outside of that, separately in AA&I, there was the positive adjustment to the variable annuity benefit reserves.

And you didn't quantify that, but you referred us to the difference of (8) versus, I guess, what's normally a positive expense item.

So we can kind of think about that as ballparking maybe what the adjustment was there, is that the right way to think of it?

Yes, that is -- it's Walter.

That is the right way.

You have the right way.

Okay, thank you very much.

That helped --

You're quite welcome.

The next question comes from Tom Gallagher from Credit Suisse.

Please go ahead.

Hi.

First question on excess capital, I just want to make sure I understand all the pieces here.

Just based on the level of RBC in your life subsidiaries, I would assume that's where the vast bulk of your excess capital resides.

Is that correct?

That's correct.

Okay.

And is that -- the most recent comments you've made of that I believe it's north of $1 billion.

Is that still the case?

That is still the case, yes.

So, then that implies your definition of excess capital doesn't assume any leverage capacity, is that also correct?

That's correct.

Okay.

And what -- in your definition of excess capital, can you comment on what RBC levels you're contemplating?

Well, we deal with two.

Obviously RBC and BCAR and you can assume that we're dealing with the 350 RBC level.

Got it.

So anything over and above 350 as a rule of thumb should be considered excess?

Right.

Because what we do is we look at really the regulatory capital, the rating agency capital and economic capital and we take the higher amount.

But that is -- basically the RBC 350 is the core.

Got it.

And then, just in terms of the separation costs, did I hear you correctly that we now have about $100 million left in terms of -- from your original plan?

We're around $739 million and it was original -- was in the target range of $875 million, so it's closer to around $150 million, $145 million.

Got it.

And you said the bulk of that should come in 2Q?

The technology, yes, will have the bulk of their expense and then the others will continue into the third and fourth quarters.

But technology will basically achieve the bulk of their expense at the end of the second quarter.

And, Tom, we don't perceive at this point being over budget with the number there.

So we think that we're pretty much in line.

And a lot of that expense, as Walter said, in technology separation, will be in -- as we said, in the first quarter and the second.

Got it.

And then, last question, just on the employee advisor head count and what we should expect, there was a decline of 191 versus last quarter.

And I heard your comments that a lot of that sounded like it was just due to lower hiring as opposed to pick up in attrition, because I think you're numbers for retention remain the same.

Yes, you're correct.

And if you look at the breakout, you would clearly see that we have very strong retention continuing in our most productive, which is the franchisee advisors -- very strong productivity.

Our productivity in P1 is also good, but we've actually slowed down the hiring so that we can actually reengineer the system.

And with that in mind, we are going to continue that and so there will be a lower number of advisors in the P1 channel as we go through the rest of the year.

But we think that will help us significantly improve our profitability, as well as put more resources to drive improvement in the productivity and the type of advisor we want and the type of client that we want to attract.

Okay.

And Jim, is it fair to say that, just based on the hiring that you're doing to date in the P1 channel, that we should see similar levels of declines in the next several quarters or was this unusually large this quarter?

No, I think we'll continue to see this type of activity, because we have lowered the number of new hires that we'll bring in over the course of the year as we go through the reengineering to drive productivity and profitability.

But you will also see profitability improvements coming from this, so it's not as though that won't take place at the same time because we are lowering some of our cost in doing it.

Okay, thanks.

The next question comes from Vlad Artamanov from Greenlight Capital.

Please go ahead.

Hi, guys.

Two questions, I guess.

First, just wanted to tighten up the assumptions on excess capital, since you're saying that RBC that your looking at is, call it 350.

As applied to the regulatory capital as disclosed in the 10-K, if I do that, that's roughly $2 billion, while the actual capital is $3.5 billion?

So, is it fair to say that between these two numbers, plus some capital entrapped in Threadneedle -- which are arguably might not need much capital at all and other things -- your excess capital position's at least $1.5 billion?

And, second question is, in other expenses you mentioned that you spent on compliance, other legal and regulatory costs, as well as consolidated limited partnerships.

Can you quantify exactly how much was spent?

Let me take your first question.

We're talking about our excess capital just north of the $1 billion and as I indicated, we do use a 350 and there are other factors coming in.

Then we -- as I indicated in my remarks, we feel we have the ability to pull dividends out of not just the insurance but also the non-insurance activities.

So we have not quantified above that, but certainly we feel comfortable with the above $1 billion.

Okay.

And your second question?

Walter, you want to handle that?

Is second question -- could you just repeat, I'm sorry, just to get --

Sure, [principally just discloses various investments] that went on and were reflected as part of other operating costs?

And they were described as compliance, legal and regulatory costs, and expenses related to consolidated limited partnerships.

Yes

So it seems like there was a significant level of expense that went on in the quarter, particularly given that, from my memory, about $20 million got classified into compensation on a year-over-year basis.

So, is that line -- line item came in fairly high?

Can you tell us how much was spent on the activities that were specifically highlighted in the press release?

Right, let me try to do it this way and see if I -- if you look at the two areas which I look as the nonfield compensation and the other, you're up about 6-7%.

Then, as I indicated, I mentioned the EPP, which is the acceleration, which is the $16 million, all right, which is factored in there.

You also then would have -- there is a reclass between the -- for technology.

Where we had it last year, it was reflected in basic other, and that's moved up.

Now it's in noncomp, okay, field noncomp?

Yes.

And the VIE is really related to recognizing for Threadneedle.

As we explained the last time, there are certain partnerships they have that we have to bring on the books and it basically gets negated from a revenue and expense perspective.

It is what we have to do for variable accounting and that does have an impact on the expense line.

I don't think we've quantified that, but it's -- it's in the area -- it's probably in the area of $16 million.

And so, those are the major factors that are -- are there.

And, of course, let me repeat - we do not have -- we've sold the 401(k) business which is taken down the amount on the expense side and obviously revenue side.

Does that get you -- the question?

I see, but on the compliance and the legal cost front, since it was mentioned specifically in the press release, can we get the number that was spent in the quarter?

Yes, well --

Why was it significant?

Well, okay.

On the compliance side, if you go -- last year we had compliance expense.

This year, the compliance was marginally higher than the last year expenditure on it, which was disclosed.

Yes.

And those expenses had to do with some continued, as we saw it, reserves for some of the potential activities in the securities America area.

Did that --

I see.

I see.

And when you're saying marginal, that's --

It's within the $5 million, $6 million range.

Got it, okay.

Thank you.

You're welcome.

The next question comes from Al Copersino from Madoff.

Please go ahead.

Hi.

Thank you.

I had a question about the -- there was a recent decision in the U.S.

Court of Appeals in the D.C.

Circuit regarding brokerage accounts.

And if I'm reading it correctly, it sounds like brokerage firms are either going to have to switch their fee-based brokerage accounts to advisory accounts, where the legal obligations are more extensive, or perhaps switch over to traditional brokerage accounts, where you receive commissions as opposed to fees.

And I'm wondering if I'm reading that correctly, if this is in any way a concern or if you think the court of appeals decision will be overturned?

Is this something we should think about for Ameriprise or is this not an issue for you all?

First of all, you are correct in what you just stated.

For Ameriprise, actually, it is not an issue because we are today governed under the 40 Act and we're actually held to that level of compliance with the 40 Act.

And so all of our fee-based accounts are under an ADV monitored under the SEC.

So, it does impact the accounts at the major and the brokerage houses that have fee-based accounts in a sense where they're -- if that is upheld, they're going to have to make a decision on how they actually either are governed under the 40 Act or have to change the accounts.

For us, it is actually the way we do business today.

So it actually levels the playing field a little more because we're already doing business consistent with what the court ruled.

That's great.

Thank you.

The next question comes from Tamara Kravec from Banc of America.

Please go ahead.

Thank you.

A couple of questions.

First, on the investment income, you noted in the press release that you are moving away from externally managed hedge funds and I was wondering where you are in that process and if we should be expecting further declines from that?

And then my second question is, you talked a great deal about your new initiatives that you're investing in this year, including the desktop technology, a number of new products and you're funding that through reengineering.

And my question is, is there any way to quantify how much this reengineering is really bringing in terms of funds for investment, or give us a sense of whether this reengineering runs out at some point and then you have to start investing excess capital in into these types of initiatives?

Okay.

Let me ask Walter to handle the first and I'll --

Which one, the client?

Yes.

Hedge fund.

The hedge funds -- and it's basically been completed and going forward, we should not -- we are not expecting deterioration as relates to the hedge fund repositioning.

So it's already been done -- I think you're seeing the steady state as we see it today in the run rate on that.

Okay.

And in regard to the reengineering, we stated that we're on track $175 million of opportunity.

We clearly have an ongoing reengineering agenda that we actually think will continue way beyond this current year as the way we constantly look to free up resources, and reinvest them, to generate higher returns or better margins.

In that, we had a number of those things that have been in our P&L -- real savings, that we actually have available to use.

So today, as an example, the items I've mentioned in the investment agenda are all being funded by this reengineering.

So we feel that those things will provide -- those new investments provide good growth opportunities and better return for the future.

So, we actually feel good about our ability to continue to generate the reengineering.

And we actually feel the investments we're making are things that are being taken up quite well by our field, our advisors, as well as clients.

Okay.

So in your view, this is really self-funding and improvements are brought to the bottom line through better margins and productivity and that's in turn reinvested in future growth endeavors?

You said it very well.

Okay.

All right, thanks.

At this time, there are no additional questions.

This is Laura.

I just want to thank you all for joining us on the call.

I will be in my office.

That number is 612-671-2080 in case you have any follow-up questions.

Thank you.

Bye-bye, everyone.

Bye-bye.

Thank you for participating in the Ameriprise Financial first quarter 2007 conference call.

This concludes your conference today.

You may all disconnect at this time.