Jan 24, 2008
Executives
Laura C. Gagnon - VP IR James M.
Cracchiolo - Chairman and CEO Walter S. Berman - EVP and CFO
Analysts
Jeffrey Schuman - Keefe, Bruyette & Woods Suneet Kamath - Sanford C. Bernstein Andrew Kligerman - UBS Thomas Gallagher - Credit Suisse Securities
Operator
Good afternoon ladies and gentlemen, and welcome to the Fourth Quarter 2007 Earnings 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.
Laura C. Gagnon - Vice President Investor Relations
Thank you. Welcome to the Ameriprise Financial Fourth Quarter Earnings Call.
With me on the call today are Jim Cracchiolo, Chairman CEO; and Walter Berman, Chief Financial Officer. After their remarks, we would be happy to take your question.
During the call, you will hear references to various non-GAAP financial measures like adjusted earnings, which we believe provide insight into the underlying performance of the company's operations. Reconciliations of non-GAAP numbers to the respective GAAP numbers can be found in today's material available on our website.
Some of the statement that we make on this call maybe forward-looking statements, reflecting management's expectations about future events and operating plans and performance. These forward-looking statements speak only as of today's date and involve a number of risks and uncertainty.
A sample list of factors and risks that could cause actual results to be materially different from forward-looking statements can be found in today's earnings release. Our 2006 annual report to shareholders, and our 2006 10-K report.
We undertake no obligation to update publicly or revise these forward-looking statements. With that, I would like to turn the call over to Jim.
James M. Cracchiolo - Chairman and Chief Executive Officer
Good afternoon everyone and before I get started I know it's been a tough few weeks for every one given what's happening in the markets, and I am sure all of you have been pretty busy. So I appreciate you joining us for this call.
This was another good quarter for Ameriprise Financial despite some very tough market conditions. Our operating results continue to demonstrate the strength and diversity of our business.
While we would obviously like to see some stability and strength in the capital markets, and while we are not immune, I feel good about our solid position. For the quarter and the full year, we generated good operating performance, our balance sheet remained solid, and we delivered on our growth goals.
For the quarter, net revenues grew 8% to $2.3 billion, adjusted earnings per diluted share increased14% to $1.16, and adjusted ROE finished the year at 12.6%. There are some disclosed items and investment gains in those numbers, which all told, net out to a benefit of $0.13 per diluted share.
These items are detailed in the press release, but I want to make sure we don't lose the underlying message here. Our operating results were solid in the quarter.
Maybe most important of all, in this environment, our balance sheet continued to perform well. We have always taken a conservative approach to managing our balance sheet assets, we have maintained a very strict risk discipline.
And while that leaves some money on the table during rising equity markets and more favorable credit markets, it also means we have been able to avoid any material investment write-downs during this time of extraordinary volatility. Now, let me review some highlights of our results during the quarter.
We serve the mass affluent and affluent market in personalized financial planning relationships, and the 10% growth in assets from this group of clients demonstrates that our strategy is working. We believe consumers need financial planning across market cycles, but perhaps most when markets are challenging.
More people already come to us for financial planning than any other firm, and we believe that the current demographics gives us a great opportunity to build on our lead. Revenue per advisor increased 11%, though it slowed somewhat from the third quarter due to market conditions as clients moved to higher cash positions.
Our advisors continue to be focused on serving more affluent and mass affluent clients and deepening existing relationships. Meanwhile, we are focused on providing improved advisor marketing support and technology tools, as well as innovative and broad product offerings.
In fact, we are in the early stages of our largest training effort ever. We are bringing the vast majority of our branded advisors to Minneapolis over the next several months to help them implement their new marketing tools, our enhanced client experience and financial planning focus, and the new desktop technology we are rolling out.
Cap Gemini has said we will have the leading technology tools in the industry for financial-planning focused advisors, and we are bringing the advisors here to make sure they get the most out of the investments we are making for them. Overall, advisor satisfaction continued to be quite strong.
In fact, our franchisee advisor retention remains very strong at 93%. And as you know, this is our largest, most seasoned and most productive group of advisors.
Consistent with the past several quarters, we are continuing the re-engineering of our employee advisor platform, which is the reason for our lower total advisor number. We are reducing the number of employee advisors we are hiring and focusing on advisors who are more likely to succeed.
At the same time, we are further developing our efforts to recruit more experienced advisors. Owned, managed, and administered assets increased 3% over a year ago to $480 billion.
However, coming off 12% increase for the third quarter, we saw assets decrease on a sequential basis due to market declines, foreign currency translation and continued outflows of lower-margin, Zurich-related assets at Threadneedle. In terms of overall flows, the performance of our wrap business continued to be strong.
We now have $94 billion in total wrap assets, which is up 23% from a year ago, with $1.8 billion in net inflows in the quarter. For the third consecutive quarter, and despite some market-related slowing, RiverSource Funds net flows were positive, and we recorded net inflows of $500 million for all of 2007, the first year in many that we have been in net inflows.
We have reached this milestone sooner than we have expected primarily because of the strength of our new, innovative goal-based solutions. Our investment performance is another key contributor to these flows, and while we faced some challenges during the quarter, when you look at our short-term performance on an asset-weighted basis, it remains competitive.
In addition, our three and five year track records remain solid, with 68% of equity funds above the median on an asset-weighted basis for three-year performance, and 58% above the median for five year performance. In the annuities business, we continued to realize good variable annuity inflows, with $1.1 billion of net inflows in the quarter and inflows of $4.4 billion for the year.
At the same time, like many other annuities providers, we continue to manage outflows in fixed annuities based upon the interest rate environment. As we have said, we expect these fixed annuity outflows to continue over the near term.
Threadneedle's investment performance has been quite strong. In fact, their equity performance for all of 2007 was the firm's best ever.
They continue to experience asset outflows, but, as I mentioned, most of that is driven by outflows of low-margin Zurich assets, partially offset by asset growth in higher-margin products. Threadneedle continues to provide valuable geographic diversity to our results, and that diversity is increasing.
In 2007, the majority of Threadneedle's sales were in Continental Europe. Our insurance businesses also produced another solid quarter, with life insurance in force growing 8% compared with last year and reaching $187 billion.
Total Protection segment premiums increased 4% in a slow growth environment. Overall, cash sales, returns, and margins were solid in the Protection segment.
So in total, I think you can see that the underlying measures for the business are strong. Now I'd like to give you some brief insight into our balance sheet and expense management.
As we shared in detail on last quarter's call, we have very little exposure to the sub-prime market; and as a result, we have not taken material write-downs. While the problems in the credit market have clearly expanded recently, our balance sheet remains strong, and we feel good about it.
Walter will take you through more detail shortly. We told you last quarter that we would be in the market buying back our shares and returning capital to shareholders, and we did that.
We bought back 4.8 million shares at a cost of $283 million, and for the year we returned $948 million through buybacks. We continue to believe this is an effective use of our capital in the current environment.
It goes without saying that we are in a market-sensitive business, and we believe we have established the flexibility necessary to navigate through this difficult environment. We are prepared to pull the expense levers necessary to maintain earnings.
We plan to be more aggressive in our reengineering efforts; and while we will continue to invest in long-term growth, we are slowing our level of investment in the business. In addition, we're in the process of implementing a flexible expense plan.
We are identifying expenses we can cut or defer to manage the company through a longer-term weakening of the markets and the economy, and we will implement these plans relative to the depth and breadth of the market impact. We are confident that we have a compelling long-term opportunity, and we are going to keep pursuing that opportunity.
But we are going to do so prudently. So overall, the business performed well in the quarter and quite well for the full year.
I feel good about the foundation we have put in place, including our strong balance sheet and, in particular, about our ability to weather the current markets. We have delivered on our financial targets, and we are in a solid position.
Now, Walter will take you through some more of the detail from the quarter, and after that we will take your questions.
Walter S. Berman - Executive Vice President and Chief Financial Officer
Thank you, Jim. Before I go into the details of the quarter, I would like to reinforce Jim's overall view of our results.
It was a good, solid quarter given the markets we operate today. We reported adjusted earnings of $1.16 per share.
That represents a 14% increase over last year. There were several disclosed items in the quarter that positively impacted our earnings by a net $0.13 cents per share.
Based on normalized operating performance for both periods, we still met our growth targets. The disclosed items are described in detail in our release and supplement, so I am not going to go into detail here.
To make sure you understand the impacts, we had two large benefits plus net investment gains, and these were partially offset by increased legal and contingency reserves, as well the impact of the extraordinary market movements. All these impacts net to a benefit of $0.13 per share.
Now, I will move on to discuss our operating results. In the quarter, reported net revenues were up 8%.
We had strong growth in management and financial advice fees, which were up 25% over a year ago. This fee growth was driven by strong wrap net flows, variable annuity flows, and higher yields on our managed assets, including higher Threadneedle hedge fund performance fees.
This increase was partially offset by lower distribution fees, due to the unusually high fees from REIT sales recorded in the fourth quarter of last year, and lower net investment income from declining fixed annuity balances. On the expense side, total expenses before separation costs increased 8% over the fourth quarter of 2006, reflecting increased business activity and market impacts.
Our general and administrative expenses were up only 3% compared with a year ago. These expenses included higher hedge fund performance compensation, higher costs associated with the build-out of Ameriprise Bank, and the technology investment in the fourth quarter of 2007.
These increases were partially offset by the impact of consolidations under EITF 04-5. The technology investments, which we do not expect to continue at this level, were primarily incurred in the Advice and Wealth Management segment, and while I won't go through every segment, I would like to spend some time on our results in Advice and Wealth Management.
The segment generated pretax income of $34 million for the quarter, down 8% from last year. This was driven by three key factors.
Lower distribution fee income due to clients reinvesting the proceeds from REIT liquidations in the fourth quarter of 2006, and lower earnings in the bank and certificates line due to start-up investments. These were offset by decreased legal and regulatory, and contingency reserves allocated to the segment.
Adjusting for the items I've just mentioned, our normalized PTI growth rate would be in the 15% to 20% range. Looking at the sequential trends, there is a seasonal impact on G&A expenses in the segment.
These expenses tend to be higher in the fourth quarter, and this seasonality was exacerbated by this year's higher level of investments in technology. For the full year, on a reported basis, PTI margin in the segment was 7.5%, up from 5.9% in 2006, primarily driven by top-line growth.
So that's what happened during the quarter. Given the market conditions, what didn't happen is equally important.
The balance sheet remains very sound. During the quarter, our total impairments were less than $3 million on a base of $35 billion.
There are four important elements that comprise our strong balance sheet position, asset quality, investment and risk management capabilities, capital position, and liquidity. I will go into some detail on these.
In case you miss anything, remember that our remarks will be posted on our website. I will start with asset quality.
We continue to have a very high quality portfolio that has performed well under these market stresses. First, our exposure to financial guarantors is limited to guarantees provided on invested assets on our balance sheet.
We have no wrapped transactions, no counterparty exposure, and no backup or liquidity facilities. At the end of the year, within our total $35 billion portfolio, we had $722 million of enhanced securities, $597 million of which was in municipals and $125 million in asset backed securities.
Keep in mind that about half of municipal bonds are enhanced securities. It is important to note that as we evaluate securities, we base our investment decisions on the integrity of the direct investment cash flow.
We do not rely on the guarantee. Next, I want to update you on our mortgage and asset backed portfolios, all of which are performing within acceptable ranges given current market conditions.
Our structured asset portfolio totals $10.4 billion, with $6.3 billion of residential mortgage backed securities, $3 billion of commercial mortgage backed securities and $1.1 billion of asset backed securities. Our residential mortgage backed securities portfolio of $6.3 billion is 96% AAA rated.
This portfolio is seasoned, and has a shorter duration and better convexity than the mortgage index. Over 70% of the portfolio, $4.5 billion is agency backed.
They are Ginnie Mae, Freddie Mac, and Fannie Mae securities, which carry an explicit or implicit guarantee of the U.S. Government.
Our non-agency mortgage exposure totals $1.8 billion, 85% rated AAA. These include our Alt-A exposure of $1.2 billion, which I have discussed with you before.
As of last week, our Alt-A portfolio had a market value of 96% of book. That covers our residential mortgage-backed securities exposure.
Now let's move on to our commercial mortgage-backed securities portfolio. Our commercial mortgage-backed securities portfolio totals $3 billion, over 99% AAA-rated.
These bonds have seasoned collateral, predominantly 2005 and earlier vintages. The underlying credits we hold continue to perform very well, with delinquency rates well below the overall CMBS market.
As of last week, these bonds had a market value of 101% of book. Next, I will cover our asset-backed securities exposure.
Our asset backed securities portfolio of $1.1 billion is 95% AAA-rated. $449 million are securitized small business loans backed by the full faith and credit of the U.S.
Government. $378 million are other assets, primarily credit cards, automobile loans, and student loans, 89% of which are AAA rated.
In addition, this category contains $241 million of securities backed by some sub-prime residential mortgages. 93% of this book is rated AAA-rated.
Last quarter, we reviewed this portfolio with you. The characteristics of this high quality portfolio remain the same.
As of last week, this portfolio had a market value of 94% of book. Now let's turn to our traditional real estate loan portfolio of $3.1 billion.
It is also of very high quality. We look at the underlying cash flows of the properties in assessing these loans.
Cash flow coverage ratios average 1.83 times, and there are have been no delinquencies in the past 12 months. Loan-to-value ratios continue to be conservative, averaging 54%.
This portfolio is diversified by both property type and geography. We are continuing to monitor our corporate credit exposures of $13.9 billion carefully.
The investment grade portion is highly diversified and is positioned with a preference towards non-cyclicals, and a bias toward regulated industries and asset-rich companies. The below investment grade bonds of $1.7 billion and bank loans of $.3 billion, combine to form our high yield portfolio, which comprises 6% of our invested assets.
This part of the portfolio is highly diversified from an industry standpoint, with a focus on credits that are generating free cash flow through economic cycles. The homebuilder sector is the component of our portfolio that is currently experiencing the most dislocation.
Our exposure to homebuilders is limited to $181 million, or just over one-half of 1%. As of December 31, unrealized losses on these holdings were $31 million.
So, overall our asset quality remains strong, and the portfolio is performing as expected. There have been no surprises.
We will continue to monitor our balance sheet very closely as market conditions change. Moving to our investment and risk management capabilities, we have built a very strong infrastructure, and believe our investment team is one of the best in the industry.
We also just completed building our enterprise risk management team and believe we have the resources, people and tools, necessary to manage our balance sheet and market related exposures. You will recall that last quarter we reported an after-DAC, after-tax loss related to living benefits of $21 million, driven in part by our incomplete GMAB hedging program.
With our hedging program essentially complete, our after-DAC, after tax loss is relating to living benefits dropped to $9 million. This negative impact was offset by the impact of SOP 03-1.
The third component of balance sheet strength is capital. Our overall capital position remains strong.
Even with the repurchase of well over $900 million in shares in 2007, we continue to hold over $1 billion in excess capital. At the end of the year, our debt to capital ratio was 20.5%, or 16.6% excluding non-recourse debt and including equity credit for hybrid notes.
Finally, our liquidity position is also very strong, with over $3.8 billion in cash and cash equivalents at the end of the year. I know that's a lot of detail on our balance sheet, but we think it is important in the current market conditions to clearly communicate our balance sheet strength.
To reiterate, the underlying business metrics remain solid, and we met our goals for revenue and EPS growth and ROE. We are pleased with this performance and with our balance sheet, and we are committed to taking the actions necessary to manage through the current market environment.
Thank you.
James M. Cracchiolo - Chairman and Chief Executive Officer
Okay. We are now...would like to take any questions that you may have.
So, we are open. Question And Answer
Operator
Thank you. We will now begin the question-and-answer session.
[Operator Instructions]. Our first question comes from Jeff Schuman from KBW.
Please go ahead with your question.
Jeffrey Schuman - Keefe, Bruyette & Woods
Good afternoon. Jim, given the difficult markets, I was wondering if you could talk a little bit more about your ability to adjust expenses in the near term in the Advice and Wealth Management business.
And then second question I had for Walter; a little bit of clarification on disclosed items, not quite sure how the tax affected. If you take the $63 million in tax affected, I don't think we come out to $0.13.
Some of the items are not tax affected. And also I am not clear what the mean reversion items are there...in the disclosed items.
That's it, thank you.
James M. Cracchiolo - Chairman and Chief Executive Officer
Okay. Let me start with the expenses.
We do have the ability to manage the expenses and flexibility around it. As we have mentioned over the last two years, we upped our level of investment.
We think was critical to take advantage and some of the opportunities that we saw and closed on gaps that we had in our infrastructure. Significant part of those investments particularly were in the Advice and Wealth Management and particularly in places like the technology area for what we have been implementing over the course of this year, I mean of last year.
So, we do have the ability to differ some of the any incremental expenses if necessary, but our overall investment agenda we have actually brought down any way, because we really was planned to do so as we moved into 2008. From an expense perspective, we have also upped our focus on reengineering, and so we have even a more aggressive plan for reengineering opportunities in 2008 over 2007.
And we were quite successful in 2007. And we have the ability to manage some of the near term expenses for various programs depending on market conditions.
And we already put in place our flexible spending plans today. And we will be able to pull those levels depending on market conditions.
So we feel are able to navigate and generate some savings there and reduce our costs moving forward, and depending on how long the market stay the way they do and impact the revenue, we can even make it that more aggressive and cut investments further. So, that's in that area.
And I would also say in the Advice and Wealth Management, as I said some of the investments clearly work in that area in 2007 and to a heavy extend. We have also made some changes in the management and in structure of that business and some of the slowing of the new P1s and the activities of how we reduce some of the cost will give us some benefits in 2008.
So that we are continuing, and we are looking continuing for some productivity improvements, and that's why we are going to some of this aggressive training right now in the first quarter of this year.
Walter S. Berman - Executive Vice President and Chief Financial Officer
Okay, on the second part of your question; the tax rate for any item that you basically increment that you are taking...we use the statutory tax rate, 35%. So we have been doing that and I think it's fairly traditional for most companies to do that.
So if a reconciliation acquired, you can well do this more, but that's the basis of indoor effective tax rate is at a lower rate as you are taking off or adjusting, you usually use the 35% tax rate, because that's the impact it will have. As related to the...
Jeffrey Schuman - Keefe, Bruyette & Woods
I want to follow-up, because you placed 35% to the $63 million. I don't you think get the $0.13.
I can follow-up later on that.
Walter S. Berman - Executive Vice President and Chief Financial Officer
Yes, okay. Let's see where we are off.
I think we feel pretty confident on that one. The...on the DAC; what we are saying it since the DAC, we adjust for the movement and equity marks, then in each month and obviously each quarter as it affects the gross profits as we evaluate the insurance activities.
So that's the impact of it. We are adjusting now for the future gross profits as the market moves.
Jeffrey Schuman - Keefe, Bruyette & Woods
So, essentially mean reversion refers to some degree of unlocking in DAC because of the market; is that correct?
Walter S. Berman - Executive Vice President and Chief Financial Officer
Absolutely, due to movements in equity market. Yes.
Jeffrey Schuman - Keefe, Bruyette & Woods
Okay, thank you.
Walter S. Berman - Executive Vice President and Chief Financial Officer
You are quite welcome.
Operator
Our next question comes from Suneet Kamath from Sanford Bernstein. Please go ahead.
Suneet Kamath - Sanford C. Bernstein
Thank you. Two quick questions hopefully.
First, in your 2006 10-K in the footnotes there you discussed the earnings impact from a 10% decline in the equity 500, and I think...in the equity markets. And I think you sited the number as of 2006 yearend at $127 million pretax.
I was wondering first if you could provide an update of that...for that number for 2007, or is that $127 million still a good rule of thumb to use. And then secondly, could you just provide an update of what you are seeing in terms of third party distribution of the RiverSource funds, that was something that you had talked about in the past, I am just wondering where you are with that.
Thanks.
Walter S. Berman - Executive Vice President and Chief Financial Officer
This is Walter. Let me take the first one.
It is a good rule of thumb to use. It's still pretty close, that's what we have used in our filings.
And that assumes...it happens to the full year on day one. Okay?
and then for second part...
James M. Cracchiolo - Chairman and Chief Executive Officer
Okay on the second, on the distribution of RiverSource funds externally; we did put in place the infrastructure, we have wholesalers on the ground. And over the last part of last year, we generated a few hundred million dollars of inflows.
And we feel good about the progress we are making to ramp that up with feet on the ground in 2008.
Suneet Kamath - Sanford C. Bernstein
Can you provide any color in terms of number of channels that you are in or number of wire houses or anything like that just to give us a sense of how it's going?
James M. Cracchiolo - Chairman and Chief Executive Officer
We have actually...I don't have the exact number in front of me, but we have a good number of agreements signed and of both in the broker dealer channel as well as in the bank channel, and we are continuing to make good progress. So, we are able to now distribute to a good number of reps; we will provide that detail on our coming quarter.
Suneet Kamath - Sanford C. Bernstein
Okay, that would be helpful. Thanks.
James M. Cracchiolo - Chairman and Chief Executive Officer
Thank you.
Operator
Our next question comes from Andrew Kligerman from UBS. Please go ahead.
Andrew Kligerman - UBS
Hi, good evening. I have a question, and then I will do two quick follow-ups.
First question is on the hedging related effects on one part of your release. You say that you generated $56 million in income from variable annuity related hedged and then later on you say that there was a $67 million expense due to market variable annuity leaving benefit riders and the impact of the application of SOP 3-1.
So, it really kind of washed out pretty nicely and as you said earlier in the call, you had completed the hedging program. Remind me if I am right, I think before you had delta hedges and you needed to get the ROE and Vega [ph] in place and that's the first part.
And the second part of it is, is the outlook...with the market down 11% year-to-date or I can even keep up with where the market is quite frankly. But with it down roughly that amount year-to-date, do you think the hedges will continue to work, if I understand correctly the way they did in the fourth quarter?
Walter S. Berman - Executive Vice President and Chief Financial Officer
Sure, Andrew. What we had actually was the trend...which as we mentioned, we started migrating from the customized hedges that we have with government to more industry standard hedging.
And we are in the mid stand of trying to adjust to the liability characteristics as the walls were changing and we said in the quarter that we did not have the GMB hedges fully in place. We have now migrated to cover the position on the GMAB and we have made full conversion following our basically using the industry standard hedging approach.
So, from that standpoint the delta approach was not really what we were doing. The...as relates to the hedges right now and you saw where the long-term of walls are going, we believe that they will be performing and we will be monitoring.
It is a tough market to certainly hedge positions. But the group is feeling that we have our hedges in place and we will just...we will monitor through.
Andrew Kligerman - UBS
Great. So Walter, are you hedging the hedge comments or do you feel pretty good that these hedges will kind of wash out again this quarter?
Or you are just not sure at this stage of the game?
Walter S. Berman - Executive Vice President and Chief Financial Officer
Well, as you are saw where with the walls went, it's actually almost gotten back to November's level in January. And on that basis, I am not trying to hedge my bet, no point intend.
But the...I do believe as we said in the quarter, there was a $9 million impact and certainly we are targeting to operate feeling at the hedges are being affected.
Andrew Kligerman - UBS
Okay. And then, following back on that comments earlier about the decline in distribution fees of about 7% and you highlighted the REIT liquidations, what was the effective that last year.
And maybe just to get a sense of what that impact was on the distribution fees?
Walter S. Berman - Executive Vice President and Chief Financial Officer
Well, the interesting thing last year it becomes...that's something, we changed the way we do our reporting. So, it's going to try shift for us as we evolved it.
But I had...on the distribution impact it had, the range of that was about $60 million.
Andrew Kligerman - UBS
$60 million...6-0.
Walter S. Berman - Executive Vice President and Chief Financial Officer
60, 6-0.
Andrew Kligerman - UBS
60. Okay, great.
Walter S. Berman - Executive Vice President and Chief Financial Officer
On revenue, that's on revenue of the U.S.
Andrew Kligerman - UBS
Right on revenue.
Laura C. Gagnon - Vice President Investor Relations
This was planned...it's within the range, Andrew. Because we can't track it specifically as reinvestment of cash proceeds; and once it becomes cash, it's tangible.
Andrew Kligerman - UBS
Got you. And then, the last question just on your franchisee advisors, I have been reading that you may have lost one or two big ticket advisors recently to some of your competitors maybe with Linsco [ph] or another, I can't remember.
But, are you concerned about retention of some of your big ticket advisors and why might you have lost one or two of them recently there?
James M. Cracchiolo - Chairman and Chief Executive Officer
Our overall retention and I mentioned advisor satisfaction is quite strong. I think you are always going to have an individual decision made by an advisor.
I actually believe that we are in great stead. I think people really feel good about the progress we are making in the investments.
We have also able to bring in a few good advisors from experience, which is the first time ever that we are at reasonable size. So I am not over concerned as one thing that we always monitor and watch, and we are always concerned about anyone leaving.
But I think there are individual circumstances that people make decisions on, and we are not unhappy with the situation we are in. I actually think if you look that our productivity is quite strong compared to any of these firms that you are talking about and our satisfaction is quite and our retention is quite strong compared to all of them.
So, we are going to continue to focus our efforts, and in fact to ramp up our efforts to bring in experienced people.
Andrew Kligerman - UBS
Great. Thank you
Operator
Thank you. Our next question comes from Tom Gallagher from Credit Suisse.
Please go ahead
Thomas Gallagher - Credit Suisse Securities
Hi, let's see first question is I just want to be clear the $9 million negative impact from the living benefit guarantees, with...did that hurt earnings this quarter? Or was that offset by the positive mark on the hedge?
Walter S. Berman - Executive Vice President and Chief Financial Officer
No, the $9 million was as a result of net after DAC after tax impact and that was an event. Then we had...we adopted SOP, which will offset that.
Thomas Gallagher - Credit Suisse Securities
Okay. So, the SOP 05-1 offset, I thought your SOP 05-1 from other companies has been in negative, that was a positive for you?
Walter S. Berman - Executive Vice President and Chief Financial Officer
Yes, it was.
Thomas Gallagher - Credit Suisse Securities
Okay.
Walter S. Berman - Executive Vice President and Chief Financial Officer
Approximately the same as the $9 million I mentioned.
Thomas Gallagher - Credit Suisse Securities
Can you expand on...
Walter S. Berman - Executive Vice President and Chief Financial Officer
Okay. So 3-1.
Thomas Gallagher - Credit Suisse Securities
Right.
Walter S. Berman - Executive Vice President and Chief Financial Officer
Not 05.
Thomas Gallagher - Credit Suisse Securities
Sorry, can you just expand a little bit? I just want to understand without spending too much time, but just if it can be done in simple terms, how that's a positive, the SOP 03-1.
Walter S. Berman - Executive Vice President and Chief Financial Officer
When we basic... when we went through our validations and trying to transfer over to looking it from 133 and then what goes in for the life contingency elements of it.
The revaluing just created from that standpoint the amount of liability was reduced based on the way we have been carrying and it's that we have been a prudent...the way we have been accounting for our liability and on that basis it generated small profit.
Thomas Gallagher - Credit Suisse Securities
Okay.
Walter S. Berman - Executive Vice President and Chief Financial Officer
It's...we...like I said, we have always taken a pretty rigid approach on valuing our liabilities and therefore when we transferred over and move the portion over to the light side of it, it actually then resulted in small net change.
Thomas Gallagher - Credit Suisse Securities
Okay. Next question is...
Walter S. Berman - Executive Vice President and Chief Financial Officer
The book is quite large, so $9 million is not that big number.
Thomas Gallagher - Credit Suisse Securities
Sure. The next question is the comment on DAC amortization and hedge funds and seen investment weakness.
I appreciate you sort of strip that out as a one timer. Given what's happened thus far in 1Q, is it likely...it seems pretty likely that we are going to get some kind of returns to that.
Is that fair assumption unless you get...we get a pretty substantial recovery in the market or am I not thinking about that the right way?
Walter S. Berman - Executive Vice President and Chief Financial Officer
The way the mean reversion, the way the markets are that would have an impact.
Thomas Gallagher - Credit Suisse Securities
Okay, next question is on...I just want to understand order of magnitude. Jim, you talked about the Advisor and Wealth Management, there are some flexibility on the expense side.
If I look at what you reported there from a pretax earnings standpoint add back, the disclosed items I get $55 million of earnings, which is clearly on the low side. Can you talk a little bit about how much expense leverage were actually is assuming the sales numbers in the revenues remain under some pressure here.
Is that...is $55 million going to be kind of an abnormally low number considering that you kind got hit by spending a lot while the market turns south, or as you're going to take a while to kind of really move of this level?
James M. Cracchiolo - Chairman and Chief Executive Officer
I think to what Walter discussed in his talking points, there are few things that did happen in the fourth quarter. One is some extra expenses based on the level of some of the investments including remember what's in that segment is the new Ameriprise Bank as well as the certificate business that there were some impacts there in the quarter that's in that Wealth and Advice segment.
The second is seasonally the fourth quarter just based on some of the expenses and how they are recorded and expenses have come in a little more heavy in the fourth quarter than in the other quarters. So from a perspective, I can't talk about what the level of advisor client activities depending on the markets are, but I would say that we are not expecting that type of level to continue at that level.
We think that there would be some bounce back in that based on the things that we have mentioned to you. Of course given the various markets I can't dictate, what the level of activity, but as you saw in the fourth quarter activity remained pretty good through a very volatile period.
Thomas Gallagher - Credit Suisse Securities
Okay. And then the...also a question on Protection.
That normalized earnings result as you all defined it was very strong and looks like auto and home produced a particularly favorable result with roughly an 85% combined ratio. Can you just comment on, I presume that was the result of some reserve releases or can you just comment on what's going on auto and home?
Walter S. Berman - Executive Vice President and Chief Financial Officer
In the auto and home at the end that we evaluate our E&O, we did have a release based upon the performance characteristics on that and that's the same thing that happened last year from that standpoint. So it is basically part of the process we felt and that was and also there was basically, general loss ratio reduction from that standpoint.
So it's performed those are two drivers.
Laura C. Gagnon - Vice President Investor Relations
I just want to remind you that E&O of our advisors, so it's an inner company E&O book that impacts the protection segment.
James M. Cracchiolo - Chairman and Chief Executive Officer
Overall just on the P&C this is Jim, just a comment is our overall business performed quite well and continues to be, so we feel good about the business and our position in it. So we don't necessarily see anything changing from the progress we have been able to make over the last year or two.
Thomas Gallagher - Credit Suisse Securities
Okay and Walter, what would be the level of the reserve fully extend for the quarter?
Walter S. Berman - Executive Vice President and Chief Financial Officer
On the based on E&O, it's $6 million.
Thomas Gallagher - Credit Suisse Securities
$6 million, okay. And last question just on your Alt-A exposure, I believe there have been a number of down grades recently just generically on all day the last few weeks the...have any of your bonds been down granted?
That's my last question, thanks.
Walter S. Berman - Executive Vice President and Chief Financial Officer
Laura?
Laura C. Gagnon - Vice President Investor Relations
This is...we have had a few loans that were downgraded from AAA to AA because of the Fitch downgrade one of the financial guarantors. But as we said earlier, we rely on the underling cash flows and not on the guarantee.
And those were in the asset-backed area, not the residential mortgage area.
Thomas Gallagher - Credit Suisse Securities
Okay, thank you.
Walter S. Berman - Executive Vice President and Chief Financial Officer
You are welcome.
Operator
Our next question comes from El Naufal from Nata [ph]. Please go ahead.
Unidentified Analyst
Hi, I just had a follow-up question on the one of the disclosed items. The hedge fund investment I am sorry to ask another question on this.
These are Threadneedle run hedge funds or these are your...assets of yours.
Walter S. Berman - Executive Vice President and Chief Financial Officer
These are basically our hedge funds, not Threadneedle.
Laura C. Gagnon - Vice President Investor Relations
Owned assets.
Walter S. Berman - Executive Vice President and Chief Financial Officer
Owned assets.
Unidentified Analyst
Got it, okay. Thanks very much, appreciate it.
Operator
[Operator Instructions]. Our next question comes from Darius Braun, from Citadel [ph].
Please go ahead.
Unidentified Analyst
Hey guys, quick question as just as it relates to the disclosed items; I would just like to confirm that in the text of the release when you are referring to earnings being impacted by $0.06 due to extraordinary levels of market movement, is that also highlighted in the disclosed items at the back of the supplement.
Laura C. Gagnon - Vice President Investor Relations
Darius,This is Laura. We actually give you the other income line in the supplement.
We have disclosed it forever, so you can see those trends overtime.
Unidentified Analyst
Okay, so this is not one of the disclosed.
Laura C. Gagnon - Vice President Investor Relations
It does not include those.
Unidentified Analyst
Okay, so that would explain the discrepancy between the 63 and the 47 people are getting to.
Laura C. Gagnon - Vice President Investor Relations
Yes. Thank you.
Unidentified Analyst
And then the next question as it relates to separation cost incorporate and other, there was an $11 million in severance cost, is that included in the disclosed items.
Laura C. Gagnon - Vice President Investor Relations
Yes, it's in the...what we called the legal and contingency reserves, the G&A line.
Unidentified Analyst
Okay, and that would be in the corporate.
Laura C. Gagnon - Vice President Investor Relations
In the corporate segment.
Unidentified Analyst
Okay. Thank you.
Operator
[Operator Instructions].
James M. Cracchiolo - Chairman and Chief Executive Officer
Okay. If there are no more questions, I just want to...Walter and I would like to thank you for taking the time today.
And if there are any other questions, Laura and team can follow-up with you.
Laura C. Gagnon - Vice President Investor Relations
I will be in my office for a while, yes, this evening; and the number is 612-671-2080. Thank you.
Operator
Thank you, ladies and gentlemen. This concludes the fourth quarter 2007 earnings call.
Thank you for participating. You may all disconnect.