Jan 29, 2009
Executives
Laura Gagnon - IR Jim Cracchiolo - Chairman and CEO Walter Berman - CFO Ted Truscott - CIO
Analysts
Suneet Kamath - Sanford Bernstein John Nadel - Sterne, Agee Andrew Kligerman - UBS Thomas Gallagher - Credit Suisse Jeff Schuman - KBW Eric Berg - Barclays Capital Colin Devine - Citigroup
Operator
Good afternoon, ladies and gentlemen, and welcome to the fourth quarter 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'll now turn the call over to Ms. Laura Gagnon.
Ms. Gagnon, you may begin.
Laura Gagnon
Thank you, and welcome to the Ameriprise Financial fourth quarter earnings call. Presenting the call today are Jim Cracchiolo, Chairman and CEO; and Walter Berman, Chief Financial Officer.
Ted Truscott, Chief Investment Officer is also here for your questions. After their remarks, we'd be happy to take your questions.
During the call you may hear references to various non-GAAP financial measures, which we believe provide insight into the underlying performance of the company's operations. Reconciliations to the non-GAAP numbers to respective GAAP numbers can be found in today's material available on our website.
Some of the statements that we make on this call may be forward-looking statements reflecting management's expectations about future events, operating plans, and performance. These forward-looking statements speak only as of today's date and involve a number of risks and uncertainties.
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 2007 Annual Report to shareholders and our 2007 10-K report. We undertake no obligation to update publicly or revise these forward-looking statements.
With that, I'd like to turn the call over to Jim.
Jim Cracchiolo
Thank you. Good afternoon and thanks for joining us for our fourth quarter earnings discussion.
I want you to take away three key messages from this call. First, this was a disappointing and extremely difficult quarter because of the financial crisis we're all experiencing.
Second, we have taken action to prepare the company for what we expect to be another challenging year in 2009. And finally, I want you to understand the continued strength of our balance sheet business model in advisor-client relationships.
Let's begin with the numbers. For the quarter, we reported a net loss of $369 million, or $1.69 per share which is primarily driven by the market impacts and our outlook for 2009.
Excluding these impacts, our core operating earnings for the quarter was a $176 million, or $0.80 per share. I am aware that our results are complicated, but we wanted to provide as much detail as we possibly could, so that you can get a better understanding of our business, as well as the conditions of the company.
The accelerated deterioration in the environment has affected our business and our balance sheet. The S&P 500 was down 23% for the quarter and 38% for the year, the largest full year decline since 1937.
And it wasn’t just the equity markets that impacted us. The slowdown in client activity, the widening of credits spread and near zero interest rate, short time environment also affected our asset levels and revenues.
The non-core impacts reflect not only the severe deterioration during the fourth quarter, but also our outlook for 2009. For example, the impairments and DAC charge we recorded include significant adjustments to our valuation models.
We increased our discount rate on certain securities to reflect the possibility of continued dislocation in the credit markets and we adjusted the DAC for the equity market declines. So, we've observed significant impacts from the market conditions we've experienced at the end of last year, while preparing for an economic scenario in which there could be more possible corporate bankruptcies and other credit market dislocation, further weakness in real estate markets as well as no meaningful near-term recovery in equities.
Well, these changes are significant. We believe it is more appropriate to be prudent and proactive now.
On the other hand, if the economic and market trends stabilize we expect to regroup a significant amount of the other than temporary impairments overtime. Walter will provide extensive detail on this impact shortly.
Clearly, the fourth quarter was exceptionally difficult but our financial foundation remains sound and continues to provide stability for our clients, advisors and the company. We are maintaining our strong capital ratios, our balance is solid and we continue to hold excess capital of approximately $700 million.
Keep in mind that earlier in the year before the severe market downturn, we repurchased over $600 million of common stock, made all three cash acquisitions and increased our dividend by 13% on a per share basis. While we are maintaining our financial foundation, we are also significantly increasing our reengineering efforts in response to the environment.
Last week, we announced the restructuring that will result in run-rate savings of over a $130 million and savings above the $80 million in 2009. These expense reductions are in vision to our regular reengineering agenda and we expect overall reengineering sales in 2009 of approximately $280 million.
Now, let me give you some insight into how our core business is performing. Many of our metrics including asset flows and client activity have been impacted by the market environment, and we expect this to continue until conditions improve.
Still our business remains in solid condition. Like everyone else, our clients are worried about the economy and many have sort safety; but, they are still working closely with their advisors in maintaining a long-term focus.
As a result, our advisor and client retention remained strong. Our business is based on comprehensive financial planning.
Our client relationships endure over time, even in such challenging conditions. In fact, our branded advisor financial plan net sales were up 6% over a year ago and 17% over last quarter.
We think this is part of reaction by consumers to very volatile conditions. Market dislocation is causing people to see the value of advice in long-term planning.
And we think this demand for our basic value proposition will continue. In our advisor force, the acquisition of H&R Block Financial Advisors has given us the opportunity to build a new model for employee advisor group.
Approximately 950 advisors came to us as part of that transaction and they are productive and tenured. We are capitalizing on their strengths to create a platform that is more efficient and more profitable.
At the same time, our franchise advisors remain very stable with little attrition and remarkably high satisfaction, given the external environment. We're also beginning to experience success in our experienced advisor recruitment efforts, in part because of the dislocation in the industry, but also because advisors are recognizing the value of our culture, corporate stability, and our financial planning focus model.
Another factor in our high value and advisor satisfaction is the work we did around the reserve funds. Well, that matter has impacted us financially, we supported our clients by providing short-term liquidity and mitigating their losses in the primary fund, and our clients and advisors had been very appreciative of that work.
Now, I'll move on to the product areas. Owned, managed, and administered assets decline by 25% compared to fourth quarter of 2007, driven by market depreciation.
We've also experienced outflows at RiverSource and Threadneedle. In general, despite the extremely low interest environment, clients continue to move from variable products like Wrap, and mutual funds and variable annuities to fixed products like certificates FDIC in short, banks products and fixed annuities.
This migration has impacted certain areas of outflows as well as our overall profitability. Overall, RiverSource fund flows were negative $2.1 billion, primarily due to low sales as clients resisted putting money to work in equity funds.
Redemptions remain stable. We continue to believe that Seligman acquisition will provide meaningful benefits.
The transaction brought us $13 billion in assets including about $3 billion in hedge funds and very strong technology growth and value teams. While assets in those funds have suffered with the rest of the market, we believe the strong performance track records will prove valuable as markets recover.
We also now have a much stronger third-party distribution organization as a result of this acquisition. Threadneedle continues to deliver competitive investment performance.
In fact, Threadneedle won multiple awards in 2008, including the U.K. Lipper Fund award for Best Overall Fund Group.
Outflows have resulted from the continued outflows of Zurich funds as well as the overall lower level of equity investment in Europe and the U.K. Just as we have in the U.S., Threadneedle has taken steps to adjust its expenses, while pursuing targeted pockets of opportunity for growth.
In the domestic market, we continue to see the mix of annuity sales shift from variable to fixed, despite interest rates. Variable annuity net inflows slowed to $509 million during the quarter, while fixed annuities reached inflows for the first time in several years.
Certificate sales also increased significantly, which is another indication of client seeking safety. In the insurance business, cash sales have been impacted by client decision to hold on to cash and other liquid products.
We expect this sales trend to reverse as markets improve. Still life insurance in-force was up 3% over a year ago to $192 billion.
The Auto & Home business continues to perform well with policies up 6% over a year ago. To summarize, the fourth quarter clearly presented a new set of challenges for all of us in this industry, at the end of a very difficult year.
Our results were disappointing as the declining markets affected our balance sheet and income statement. We expect the tough conditions to persist through this year, so we're making the necessary steps to reduce our expense base, to be more in line with our revenue opportunity and to limit our exposure to continued market dislocation.
At the same time, I want you to know that we are executing our strategy and investing for future growth opportunities. We're confident that we have the ability to rebound when markets and the economy improve, and we're just as confident that we have the ability to withstand the tough current operating environment.
Our balance sheet continues to be well-positioned. We hold strong capital and liquidity positions, and our debt levels are very manageable.
Just as important, our model is intact. Our advisor-client relationships, the heart of our business model, remained strong and the comprehensive nature of those relationships continue to provide revenue diversity.
So overall, it was a difficult year and even more difficult quarter, and we expect more to come. But we continue to feel good about the decisions we're making, in our long-term prospects.
Now, I'll turn it over to Walter for more detail on the quarter, and after that we'll take your questions.
Walter Berman
Thanks, Jim. We understand that our results this quarter are complicated, so we post the slides on our website for you to follow.
These slides will be posted with talking points later tonight. If you turn to slide two, we do recognize that the fourth quarter results were quite disappointing.
The change in financial fundamentals significantly impacted our performance in the quarter. In the fourth quarter, the losses were $1.69 per share.
The market downturn generated $2.49 EPS impact in the quarter. And I'll provide more details as we proceed through the presentation.
In the quarter, activity metrics GDC in cash sales were dramatically lower as a result of the market dislocation. However, client and advisory retention remained stable.
And finally, our core balance sheet fundamentals remained strong despite the impact of the financial markets. Slide three provides more detail on the market dislocation in the quarter.
The S&P 500 dropped 23% in the quarter and 38% for the year, while EAFE was down 20% in the quarter and 45% for the year. Credit spreads reached records highs with the Barclays U.S.
high grade aggregate ending the quarter at 555 basis points up 114 basis points in the quarter. And high yield spreads ended the quarter up 642 basis points.
The Fed Funds rate dropped to a target of zero to 25 basis points reflecting the severity of the liquidity environment. We also received ample evidence that the recession is deepening, including a 7.2% unemployment rate.
In total, these non core elements resulted in losses of $2.49 a share in the quarter and $4.11 per share for the full year, which were predominately focused in the third and fourth quarters. The environment also impacted our core operating EPS to lower fee revenues, lower net investment income on high cash positions, and its impact on our client behavior.
The impact to core earnings will continue to challenge us in 2009. Let's turn to slide four.
The $2.49 EPS negative impact is comprised of four key elements. We recorded a pre-tax investment on the loss of $420 million or $1.24 on an EPS basis.
286 million of this was related to non-AMC, RMBS and 120 million relates to predominately high yield corporate investments. The other elements are GAAP at $0.75 EPS impact and various variable new charges of 26 per share.
And finally, restructuring and integration charges at $0.24 per share. I will discuss each of these elements on the following page.
On page 5, you'll get a perspective of how we evaluated the changes during the quarter. We continue to observe deterioration of our key drivers.
Specifically, credits spreads as I indicated widen, driving the discount rate on RMBS up almost 600 basis points to 20%. Mortgage defaults continue to remain high and severity trends accelerated as home values continue to decline throughout the country.
Finally, pressures associated with the deepening and extending recession on cash flows on liquidity positions within our investor base compounded our concerns. Based upon these observations and our outlook for the 12 to 18 month period, we reassessed the evaluations in our portfolio.
And that resulted in our actions to write-off $420 million of investment losses. Slide six is quite busy, so let me move through it.
From left to right, the amortized cost of our invested assets is $35.585 billion. The fair value as of December 31st is $33.770 billion.
Within the portfolio, our U.S. government credits aggregate $5.9 billion.
Our unrealized losses as of December 31st, ex these government assets are $1.9 billion or 6% of our portfolio. We believe the level of unrealized losses is one of the lowest percentages of equity in the industry.
Keep in mind that these unrealized losses also reflect our new discount rate assumptions on valuations and the wide-spreads in the corporate sector. Although half of the unrealized losses are in corporate credits, based upon continuing overall spread widening.
On our website, you will find the underlying details relating to each one of these categories. Our goal is to create transparency and value to form your opinion as to the quality of the remaining portfolio.
On slide seven, you will see a few facts about the investment portfolio. I would encourage you to look at the complete disclosures on the web.
The portfolio remains high quality; in fact, only 5% of portfolio is rated below investment grade. In our corporate portfolio, given our expectations that the recession could persist or worse, we stress-tested the integrity of the cash flows underlying each of the credits, specifically balance sheet strength, cash flow generating capabilities, current and near term liquidity or funding needs and other underlying metrics we'll review to reaffirm our outlook.
While we are not immune to further impacts, we are comfortable with these exposures. Next, in our prime MBS portfolio, we impaired three originally AA rated prime securities with poor level performance.
The remaining 92 million AA prime bonds have performed very well from a delinquency standpoint. In the Alt-A portfolio, it is clear that a portion of the investment portfolio has suffered the most during this quarter, as a result of the decline in the housing market.
We booked $261 million impairment, including 75 million of impairments booked on subordinate Alt-A ARMs. The remaining Option ARMs investments are super-senior and have credit enhancements.
Finally, we are quite comfortable of our CMBS portfolio, due to its vintage, its AAA profile, 20% to 30% credit enhancement and of amount of 41% of the portfolio that is agency-backed. Direct commercial mortgage underwrite were slowed in 2004 and stopped in 2007 completely as risk premiums began to look unattractive from a risk and returns standpoint.
These holdings continue to maintain solid average LTVs, coverage and performance characteristic. The portfolio has held up well in 2008.
Turning to slide eight, utilizing our normal mean reversion methodology would have resulted in a DAC charge of $0.24 per share, an additional $0.51 per share was realized due to the unlocking of future return assumptions. The market declines of 23% also caused a substantial portion of death and income benefits to go into the money, resulting in a negative impact of $0.19 per share.
In addition, hedge ineffectiveness resulted in a $0.07 per share loss. The $0.07 equates to a $25 million pre-tax loss comprised of three prime items.
First, spread widening led to a SFAS 157 benefit or said by basis risk, primarily laid to fixed sub-accounts for a net benefit after DAC of a $117 million. Underlying hedge ineffectiveness after DAC was a pre-tax loss of $76 million.
And finally, we wrote-off $66 million in DAC based on the assumption that credit to full spread would narrow and not contribute to future profitability levels. As you know, that our hedge program was 95% effective, which we believe is strong performance given the severity of the market declines.
The issue is that our liabilities in the quarter increased $1.6 billion and that's 95% effectiveness as it relates to that performance. On slide nine, you can see some detail on the two charges we announced previously.
Our restructuring charges of $39 million after tax were $60 million pre-tax was predominantly severance in benefits. This charge will result in savings of over $130 million annually on a run-rate basis, and we expect to achieve approximately $80 million in savings in 2009.
In addition, our total re-engineer saves in 2009 are expected to be in the range of $280 million to $300 million. As a result, and added against our continuing investment [agenda], we expect pretax acquisition G&A expenses to decline by approximately 10% this year.
Note that our acquisition-related charges are $12 million lower than originally has been. That’s primarily because we were able to negotiate a favorable lease termination as relates to Seligman acquisition.
Let’s move to our capital slide 10. We continue to maintain strong liquidity with $6.2 billion in cash and cash equivalents; a free cash of about $4 billion with $700 million of cash at the holding company level.
A portion of the cash balances, about $1.5 billion, relates to collateral on our VA living benefits hedge program. This portion of the balance will vary with market conditions.
As we previously indicated, we have no debt coming due until 2010. And as I said, our asset portfolio remains well-diversified and high quality.
I encourage you to compare our investment assets to our peers. We believe we are positioned well to weather this environment.
As we exist 2008, we are facing substantial challenges that will impact our earnings. These are reduced fees based upon lower asset valuations; a client shift away from traditional products, which will impact activity levels and margins; and a continued uncertainty as relates to the economic outlook.
To offset these challenges, we are prudently managing our expenses and will be maintaining a strong balance sheet that allows us to continue to focus on business fundamentals and our strategy. In addition, in 2009, we will continue to: focus on our re-engineering to line our expenses with revenue opportunities, re-visit our variable annuities product, design and pricing, develop new products to address client needs and invest in the medium long term infrastructure growth and franchise.
And finally, maintain strong enterprise risk management decision support to manage these challenging times and position our company to grow. With that, let me turn it over to questions.
Operator
Thank you. We will begin the question-and-answer session.
(Operator Instructions). Our first question comes from Suneet Kamath from Sanford Bernstein.
Please go ahead.
Suneet Kamath - Sanford Bernstein
Sanford Bernstein, yes. Just a couple of questions, if I could.
First, with respect to the impairment charges that you've taken in your press release, have you taken those on a statutory basis as well? In other words, are they fully baked into that 450 RBC ratio as of year-end?
Question number two. I guess $280 to $300 million of expense savings that you've talked about.
I think in the past you've sort of given us an indication of how much of that could fall to the bottom line. Just wondering if you could give us that range on that?
And then, lastly for Walter. If we go back to the Investor Day presentation, I have this chart that was almost a schematic where you showed 2008 forecasted core operating earnings, and then a bunch of other earnings considerations, leaving you with sort of flat 2009 core earnings.
Is that still valid? And then can we put sort of 394 number as the core estimate for 2008 or something close to that?
Thanks.
Laura Gagnon
Suneet, this is Laura. I'd like to take the impairment versus debt and we do treat our statutory impairments to same as GAAP.
But what you have to realize is that the impairments that we show the aggregate amount are across the company. So it's in the bank certificate company and other legal entities aside from the RiverSource Life Company.
Walter Berman
Yes, on the second one. I am trying to actually remember the question.
On the reengineering we should anticipate. Also, we have expense growth and other things but approximately two-thirds of that will flow right to the bottom line.
And as we said, we will manage these situations and that's what we are planning for as of this particular time. I am not going to be in the forecasting mode right now as it relates to 2009.
Clearly, as we carry into 2009, we are going to be carrying a substantial headwind as relates to the equity markets, we are anticipating at least in our planning that we will be down close to 20 some odd percent on an average basis in 2009 versus 2008. And again, from the standpoint of looking at core ,we do not anticipate, from a standpoint looking forward, that there will be continued deterioration in the changes; but, we certainly think we would be starting off at a lower base, both from our revenue and standpoint.
So, on that basis, we feel that we are sitting in pretty consistent what I outlined in the chart without putting in the numbers.
Suneet Kamath - Sanford Bernstein
Okay. Thanks.
Operator
Our next question comes from John Nadel with Sterne, Agee. Please go ahead.
John Nadel - Sterne, Agee
That's close enough. Good evening, everybody.
I guess maybe two or three quick ones. One, could you give us a sense or an estimate on the statutory capital or the total adjusted capital that goes with that comment on the 450 or in excess of 450% RBC ratio?
Walter Berman
We are still working through the statutory. We haven't filed, but I am not sure specifically what you are referring to.
John Nadel - Sterne, Agee
Just the numerator of the RBC ratio. When you are talking about being at around 450% or thereabouts, can you give us a range?
Even not necessarily a nailed down number, but a range on what the numerator of that ratio will be?
Walter Berman
We'll look that up, all right.
John Nadel - Sterne, Agee
Okay, second. Just to go back to Suneet's question on the chart.
If I think about your Investor Day on November 12th, S&P was sitting around 850 at the time. We rallied actually to close the year at 900, so things were actually better at the end of the year than they were on November 12th, when you spoke to us.
We are sitting here today, obviously, we've got a lot of volatility, but we are sitting here today slightly better than the 850. Just wanted to get a sense for not necessarily forecasting 2009, but I really want to have a better sense for what you characterize since there is so many ins and outs in the 2008 numbers you guys used the term on that slide called core operating earnings.
I'd just like to know what the 2008 core operating earnings were?
Walter Berman
Okay. If you take a look from the standpoint when we were looking at core operating, we are basically excluding the impact as it relates to the debt and looking at the impact of the impairments, and looking at the reserve fund, and looking at the element as we made up on the 287 paper.
So, on that basis, that's what we're excluding from that standpoint. So, one element...
John Nadel - Sterne, Agee
So, we're looking at net income less realized investment losses, less your DAC hits, year-to-date, less the charge to pick up the reserve fund and less the element derivative set. Were there any other items?
Walter Berman
Yes, if you take a look on page three of our earnings, you will see that we've listed the items that we're saying, again, are making up the change factors that are driving and impacting our earnings in the fourth quarter and in the year.
John Nadel - Sterne, Agee
Okay.
Walter Berman
Let me clarify. The one thing we do not factor into that is the deleveraging as it relates to impact above revenue from management fees and distribution fee.
That is not a factor in that as the variance discussion or as an opponent that we are trying to explain the change that took place relating to the momentous movements in the year.
John Nadel - Sterne, Agee
Okay. So core 4Q is the $0.80 number and add that to the year-to-date through nine months core number.
Walter Berman
Yes. And again, when we got into from that, yes, because the thing we were saying is the drop in management fees and impact on our activity levels is something that is part of the way we manage the business.
But, we are trying to...
John Nadel - Sterne, Agee
Yes.
Walter Berman
...are huge impacts that we've gotten from the investment gains, re-structuring and other elements in the DAC.
John Nadel - Sterne, Agee
Absolutely, okay. I understand what you are feeling with that.
And then the last data point is what's your goodwill balance on the GAAP balance sheet at fourth year end?
Walter Berman
With the new acquisition it's $1.1 billion.
John Nadel - Sterne, Agee
$1.1 billion, okay. Is there some...
Laura Gagnon
John, the current estimated tax that show a capital of about $2.5 billion at year end.
John Nadel - Sterne, Agee
Great, thank you. The only other one I have for you just in the flows in the domestic retail, domestic institutional and the international side.
Where does Seligman show up? Because I guess it looks like it's in the market appreciation and other line.
But could you tell us sort of by each one of those items, where it is?
Laura Gagnon
What we've done is, instead of including the acquisition of those assets as net flows, we brought in the original acquisition and other. And then the flows, actually they were brought in showing up in the flow line.
John Nadel - Sterne, Agee
So, which line item is it in? If you roll forward, beginning assets to ending assets?
Laura Gagnon
It's in three different roll forward. It would be in the institutional, in the retail funds, and in the alternate asset classes in the domestic page.
John Nadel - Sterne, Agee
And it's in the market appreciation and other, or it's in the net flows?
Laura Gagnon
When we acquired it, when we brought it in as an acquisition, we put it in other flows that have transpired since we owned it are in the net flows.
John Nadel - Sterne, Agee
Got it. Okay.
And what was the dollar amount in each one of those, the contribution then institutional retail in alternative just to get the level set on getting into the $13 billion?
Laura Gagnon
Yeah, I don't have the breakdown right in front of me, but I can get back to you with that, John.
John Nadel - Sterne, Agee
That will be terrific. Thank you.
Operator
Our next question comes from Andrew Kligerman from UBS. Please go ahead.
Andrew Kligerman - UBS
Hi, good evening. A few, I think, quick questions.
First, on the asset management you generated approximately $2 million of earnings versus $108 million in the past year quarter and obviously, with revenues down almost 50% and assets down by a third. There is that reduction in earnings, but was there anything unusual in that $2 million or should I be thinking that, that's your earnings space going forward?
Walter Berman
No, in the fourth quarter, we have obviously the market impact as a big driver and then we had the gain on the sale is in that number. And we also then lost the hedge fund earnings of a much lower in Threadneedle than they were last year.
Those are the big changes. And the final thing, Andrew, as we told you, we are investing substantially this year in a higher OD costs as it relates to wholesaling to build that base.
And obviously, we're not getting the flow through on the revenue.
Andrew Kligerman - UBS
So, with regard, with the hedge fund earnings. Was it a negative impact this year or it just was…?
Walter Berman
It was lower this year, than last year at Threadneedle.
Andrew Kligerman - UBS
With some of your investing and so forth, I don't know that there would necessarily be any change in the near-term quarters. Is that a fair view on asset management?
Walter Berman
I think, the deleveraging is certainly going to have an impact with (inaudible). And as we indicated a portion of the re-engineering phase relates to that activity, but it's certainly tough to deal with the deleveraging as in those equity marks.
That's the driving point.
Andrew Kligerman - UBS
I got it. I tried on that one.
And then just shifting back over to the excess capital $700 million and the RBC base of greater than 450% is that 700 million in excess capital? How is then RiverSource Life?
If it's not, what's the mix between that and the parent company?
Walter Berman
Actually, there is a substantial portion being housed at the parent company, somewhere in the broker dealer and a smaller portion in Threadneedle and a small portion in the Advice & Wealth Management.
Andrew Kligerman - UBS
So you have a 450% RBC ratio, despite the fact that given you said substantial, I'll assume more than half is outside of the life company. Is that a fair?
So that's a pretty strong RBC. And if you needed to, you could actually downstream more money to strengthen it.
Am I thinking about this the right way?
Laura Gagnon
This is Laura. I just want to remind you we've said that the capital requirements that we set aside for each legal entity is the greater the regulatory, the rating agency or the economic capital.
So, RBC is used as a proxy in this environment because of the differences in all the rating agency models. I am not sure I would go there.
Andrew Kligerman - UBS
Okay. Given that capital position has declined a fair amount, what's your thinking on M&A going forward?
Walter Berman
Listen, we are always looking for opportunities. Again the most important thing to us is to preserve our rating with the agencies and the environment here are needed to be gauge and it's a situation that is challenging and even though we prudently managed the balance sheet and managed our capital.
We will evaluate but the determination will always be made on preserving the safety and soundness in our ratings.
Andrew Kligerman - UBS
Got it. And one last one.
53% average loan to value is that as of the end of the fourth quarter as it would be appraised the real estate values in the fourth quarter. What else?
Walter Berman
Yes, it is.
Andrew Kligerman - UBS
Okay, perfect, thank you. Thank you very much.
Laura Gagnon
Operator, before we take the next question. The Seligman assets of approximately 12 billion that are in the domestic role forward are split 6.3 billion retail, 3.2 billion institutional and 2.5 billion in the alternative role forward.
Next question?
Operator
Our next question comes from Thomas Gallagher with Credit Suisse. Please go ahead.
Thomas Gallagher - Credit Suisse
Hi. First just a point to clarification.
Laura, I think you said in response to John Nadel's question that the Seligman assets were included in net flows when?
Laura Gagnon
No.
Thomas Gallagher - Credit Suisse
It appears that they are in market appreciation. I just wanted to clarify that.
Laura Gagnon
When we acquired the assets. So when we bring them on as a block.
The block comes into the roll forward as market depreciation and other, it's the other. Flows that they experienced after we've acquired them do flow through the net flow line.
Walter Berman
Subsequent activity is in net flows?
Thomas Gallagher - Credit Suisse
Okay. Just wanted to confirm that.
Walter, go back to the earnings run rate question. Let me just attack it a different way.
So, understandably, when you define your core run rate for 2008, things have changed dramatically in terms of the levels that we're at now. Are we better off thinking about it from the standpoint of, if your core run rate was $0.80 in 4Q when the S&P was in average of just above 900, and we're a bit below that now, that would be starting off somewhere in the $0.80 below level before we start considering other offsets, or are there any other major adjustments that you would make to that $0.80 number as we begin 2009?
Walter Berman
Again, we don't really focus. The issue is the run rate; we weren't trying to get to a run rate.
We're trying to demonstrate some of the elements that impacted us that converged in the fourth quarter. And certainly from that standpoint, but what I laid out at the conference in our Investor Day was clearly on the basis that these elements, we believe, again, if the market stabilize, will not re-occur at the levels that they did in 2008.
And certainly, will give us the ability to go forward, but at a much lower base as I indicated because of the deleveraging in our fees and other things of that nature. There are other factors that will impact the $0.80 and so from that standpoint to get into reconciliation is going to be problematic.
But, the key thing I would say, we have taken actions, we have looked at this, we certainly understood the impact as of the fees and we have not anticipated a significant turnaround and we've therefore moved into do our reengineering on margin management accordingly to manage within that. The other element, which is an unknown, is the continuation of basically the defensive posture of our customers in this environment and the mix therefore that will pursue in the activity, which of course drives revenue for us.
So it's a lot of factors to go into it and that we are managing through right now and evaluating. And certainly, as we look in this quarter, as I told you, as we got deeper and deeper in seeing the environment and accessing its impact on our portfolio and the impact on our model is changing.
So it's difficult to just come out of what a run rate is. But, those are the key drivers.
Jim Cracchiolo
Yeah, I think one of those things that we are trying to explain and we are not saying it's one way or the other, what we are trying to and I think what Walter is trying to explain is that the fourth quarter was a pretty significant meltdown including for retail client activity. I mean with the volatility, we're seeing what has occurred, people really pull back tremendously.
And so, we didn't get various flows, clients really stayed very short. They didn't want to invest and so there is a combination of factors.
I think one is we know the market is down on an average basis year-over-year from where it was that's in the full year 2008 results. We know that we have adjusted a number of our lines including DAC.
We take various levels of impairment based upon the credit dislocation as of the fourth quarter, which was pretty bad. We had a lot of volatility cost built into the numbers, based on the things that we've just disclosed for the hedging and other factors.
From a core business, we are still sitting quite liquid, not earning anything based on the liquidity positions with interest rates very, very, very low on the short-term basis. So if things stabilize and improve, we can put more money back to work, and that would help on the spread revenue.
From a market perspective, if the equity market stabilize a bit, and people feel comfortable where they are and they feel comfortable that, they understand a little more of the environment going out, I think our retail clients will get back to deploying some of their activity because they are sitting not earning anything. And so we think that could recover a bit as well.
So we are not making any predictions. So, we are trying to do, is sort of say, we are making adjustments in the expense base, we will continue to do that, if environment continue to weaken, we will take more cost out, if we have to do that.
We are still making investments, but we are doing that in a lower level in last year again, if things really get more significant, we will curtail that if necessary. But if things stabilize and improve, we think the core value propositions still holding.
There is advice being ahead, we are starting to integrate our advisors with H&R Block, we are starting to recruit, we think we can get some activity back. We are putting some of the fixed products back in the market that we were out of that one point in the variable.
So there are things that we're making along the way, so I think in trying to answer your question, I think we are trying to give you all the sort of input, so to speak, but because the environment is still one where, we can't see the line of sight to what we will be, we are trying to leave that sort of open and saying we are going to try to control and manage our destiny along the way, but there could be opportunities for improvement if things improve.
Thomas Gallagher - Credit Suisse
Got it, and Jim that's helpful to hear kind of the pluses and minuses, and I guess, just to ask, I guess in very simple terms, and the reason I asked was because I believe most of your variable revenue items are asset based not transaction based, the majority of them. Therefore, we are in a stable market where transactions let's say also are stable with sort of the depressed levels from 4Q.
Is there something else we are not thinking about that could put substantially downward pressure on $0.80? Like would you potentially have to really accelerate back amortization to meet the new lower level of profitability in the business or should we not be well below
Jim Cracchiolo
I think what we did. Again, no one can tell what the market will do, but I think we adjusted to where we felt comfortable with the markets in the fourth quarter and where they were.
And that was a reasonable size back adjustment that moved down sort of even the base level and so the same thing we feel on the credit impairments. We took the larger discounting factors based upon a negative outlook in sense of markets not getting better.
So, again, we cannot dictate what happens in each of these various credit markets for corporate or in the idea of what is happening in mortgage backs for everything that will go on. But from, as of the fourth quarter, based on everything we saw, would not necessarily having a positive outlook for 2009.
These are the adjustments we thought were necessary and appropriate.
Walter Berman
If you look at your RMBS, as we indicated was driven by certainly looking credit, but it mostly driven by the discount factor once you breakthrough the principal. And on a cash basis, it only represents round a third of the actual write-offs you would experience.
Two-thirds of it are coming from the discount rate being at high. So, obviously, the discount rate changed.
You would deal with that and even own them once that you are already impaired. So, technically if it went higher, you would have to even go in to impair it at a higher level.
So, there are a lot of variables on it. We've tried, as Jim said, take the most prudent approach; understand the fact about and looking at the outlook that we felt that we will be facing over the next 12 to 18 months and deal with that within the balance of being appropriate.
And so, that's where we ended up.
Thomas Gallagher - Credit Suisse
Okay, thanks.
Walter Berman
You are welcome
Operator
Our next question comes from the Jeff Schuman with KBW. Please go ahead.
Jeff Schuman - KBW
Good evening. I was wondering if we could talk a little more about cash and liquidity.
Obviously, at this point, we are used to company's building cash, but you added quite substantially $4 billion to your cash position this quarter. Those cash earnings have been dragged all year.
And as we look at your liquidity profile, there are not a lot of demands on the holding company in the foreseeable future. And at the operating level, your net flows and certificates and fixed annuities are actually positive.
So, what are kind of the contingencies that you are thinking about as you build cash and how much is enough, I guess?
Walter Berman
Well, I think your observations are correct. We have been building cash.
I don't know if it's exactly 4, but we've built cash. And yes, we have positive flows on certificates and fixed annuities.
We have fairly elaborate testing that goes on for cash contingency. We just noticed that any company that does get in trouble, it gets troubled first for its liquidity.
And we have looked at varying test of making sure that we can achieve pretty much all situations to bolster and floaters our basic cash needs. Looking at across the company and looking at both from the cash we have in liquidity pools, the cash that's available that we can sell if we had to at a profit and the cash that we have as back up, even back up lines or other things of that nature.
And we run through stress test each month to look at different scenarios that could impact us. Right now we feel very, very comfortable with our ability to meet our cash needs and to meet our cash prices fees and its expensive to do that, but we feel its necessary.
But, we are building cash and we are building liquidity, and obviously that gives us a chance to evaluate the situation and then determine the best alternative for applying that cash.
Laura Gagnon
This is Laura, Jeff.
Jeff Schuman - KBW
Go ahead.
Laura Gagnon
Unrestricted cash and cash equivalents on the balance sheet went from $4.0 billion to $6.2 billion. So it's up $2.2 billion and a loss...
Jeff Schuman - KBW
The release said it's up $4 billion.
Laura Gagnon
There is approximately $4 billion of free cash and what we were trying to get at is that there is $1.5 billion of cash that's actually collateral related to the Living Benefit Hedging Program, and that will varying with markets.
Walter Berman
It is cash. It is free cash, but again we understand the fluidity of that cash.
And therefore, we have different back ups on or we just continue with the components of it.
Jeff Schuman - KBW
Okay. Let's move on to another issue.
Walter, on page eight of your slides, for the Hedged Living Benefits item of $0.07, I think you decomposed that into some pieces for us but I really wasn't able to kind of write that down quickly, would you please just kind of hit those items again for us.
Walter Berman
Sure. The first element of that if you look at it is taking the two that really corresponding.
So it's the FAS 157 benefit and then net of the basis risk, which we've gone through which gives you your $117 million after-tax. The second one is the hedge effectiveness loss associated with the doings of these large movements in liabilities of $1.6 billion, that’s $76 million.
And then, we basically wrote-off $66 million in DAC based upon the assumption that credit full spreads would narrow in the future will not contribute to future profitability. So we wrote that off in fourth quarter 2008.
Those are the three major components that we are driving at.
Jeff Schuman - KBW
Okay. Thank you very much.
Walter Berman
You’re quite welcome.
Operator
Our next question comes from Eric Berg with Barclays Capital. Please go ahead.
Eric Berg - Barclays Capital
Thanks very much and good evening to everyone. Walter, why don’t I pick right up where Jeff was.
You mentioned credit default spreads and a write-off of $66 million? What do you mean by credit default spreads?
You mean, is that short-hand for spreads on credit default swaps or spreads on bonds in general?
Walter Berman
It's on 157.
Eric Berg - Barclays Capital
No, I am referencing the last.
Walter Berman
Okay. We have a 157 benefit as we look at our basically our credit default standpoint of valuing our insurance company, which is standard from that standpoint okay?
Basically, what happened, in those assumptions the spreads have been so large, as we move through its impacted the DAC as you estimate that those spreads would stay wide in the future. We said, we took more conservative posture and said, no those spreads will not stay that wide in future.
Therefore, you had to reclaim the DAC on it. That’s what we do.
It was relating to our home position nothing that as we revalue based upon mark-to-market on 157.
Eric Berg - Barclays Capital
Next there was a problem in the line earlier, a little bit of sort of cutting out of your voice when you were talking about the drop in earnings in asset management. I wasn't clear whether you were reconciling between reported earnings or core earnings.
What were you reconciling and what were the reconciling items? And in explaining the drop in earnings in the asset management, could you go over that, please?
Walter Berman
Sure, if you look at asset management for the fourth quarter, I believe it reports it at [2]. Last year it was a 108 and I was giving you the components that were driving that as it relates to obviously the biggest component is the drop in the equity markets.
And then you have a situation where we had the gain on the sale, but we have that offset by the lower thread yield hedge fund. And then in addition to that, we have the expense as we told you we were investing in building the outside distribution, wholesaling force which we explain would be a substantial investment in the 2008 timeframe.
Eric Berg - Barclays Capital
Just a couple of more quick ones. Next, with respect to the largest component of your OTTI in the quarter, which look like $261 million.
I guess it would be after-tax related Alt-A RMBS. You did go over it; I just didn’t get it.
I am sorry, it's pre-tax. You went over it I just couldn’t write it all down efficiently quickly.
What is the specific character of the Alt-A RMBS securities that you wrote off?
Walter Berman
We went through and analyzed it based upon these are the ones that are most affected by the housing situation. And when we evaluated both the continuing low rate and the severity implications of these, and then when we went through and we evaluated that we did break under various stress testing situations that we have put them through, they broke two principles.
That’s when the discount rate came in. And so it was pretty much the AA that were impacted and we are primarily letting out the AAA with one or two AA that we felt the collateral was quite strong on.
Laura Gagnon
This is Laura. Eric, I just want to repeat that, in addition to the investment asset schedule that was posted on our website, these talking points will be posted later this evening.
Eric Berg - Barclays Capital
Okay, that's helpful. Last question, either Jim or Walter.
Getting back to the larger discussion that we have been having about core earnings and run rate and all that, it sounds like, and my ultimate question is, am I hearing your message correctly? That while earnings may have been in the neighborhood of $0.80 in the quarter, excluding, let's call these items, one-timers.
It sounds like, what I am taking away is, it sounds like business conditions deteriorated as we went through the quarter, and that if we were to look at for example results for the month of December, and multiply them by three or we wouldn't get to $0.80. Or to put it differently, that the run rate is not $0.80.
I mean, that's what I am taking way. Am I taking way the right or the wrong message?
Walter Berman
I think you are basically factoring in what we are trying to tell you that there were huge impacts based upon change; change that took place in the quarter. The thing that’s enrolled, and like I said, in fact we are not factoring in the impact on our basic management fees and other things as it relates to that, as it will affect the full year look.
The other thing is, there are also expense elements within there. As we look our performance, we had lower G&A expenses and related to lower [balances]).
So there were elements, plus and minus, that go into it. That’s why we are very cautious about giving you a firm number on run rate.
We certainly are reflecting, and our strategies understand the implications of where the market deleveraging is taking us. And we're trying to explain to you these conversions of these other changes that have taken place.
As somebody indicated, if markets remain stable, a substantial portion will not impact us. But there are a lot going through it, Eric, and we're just trying to give you the roadmap to help you with that element of it.
But there is a lot of moving parts on this one.
Eric Berg - Barclays Capital
Yes, I respect that. Thank you.
This set of slides is very helpful. Thanks for Laura for putting it together.
Walter Berman
Thanks, Eric. No, credits?
Eric Berg - Barclays Capital
I know you helped out, Walter.
Walter Berman
Thank you, Eric.
Eric Berg - Barclays Capital
Thanks, everybody.
Operator
Our next question comes from Colin Devine with Citigroup. Please go ahead.
Colin Devine - Citigroup
Hello, there. I have a couple of questions.
First, with respect to, I guess, DAC adjustments. But I want to get a sense of how confident you are in the DAC now?
What sort of market return assumptions do we have? And also, with respect to the charge related to volatility and, taking that out, my mistake, and did that go into earnings in the third quarter?
And sort of why is the change? And then just a couple of other things.
I thought I heard you gave the goodwill balance and I missed it. If you could repeat it, that would be very helpful.
Walter Berman
1.1 billion, Colin?
Colin Devine - Citigroup
Do you feel you --? I am sorry, how much is that?
Walter Berman
1.1 billion. I am sorry, I thought you finished.
Colin Devine - Citigroup
Do you feel you've built enough liquidity now, or is this going to continue go up or maybe other on there? And then finally, there was a big jump in, a $2 billion jump in other liabilities on the balance sheet for the quarter.
I just wondered what that is related to.
Walter Berman
Let me try and take, what we factored in as we analyzed and we looked at this working with third parties and certainly working with how to be reviewed by our orders, was their turn around in markets over the last six or seven drops and how quickly once you determine the bottom, those turnarounds took place and what decides them. And based upon that, we're looking over our mean reversion period for the five years we came up with a factor, which helped provided us the compounded annual growth that would occur.
Am I comfortable, yes, I am comfortable also with a knock onto number, is we constantly evaluate it and if it's, as markets change, we will impact that so that's that.
Colin Devine - Citigroup
Walter, just to kind of end it up. Are you back then, sort of in the middle of your mean reversion assumption at quarter?
Are you still sitting at the top of it, and if we have another weak quarter first and second, are we going to be back with this? So, do you now have some mean reversion room if you like?
Walter Berman
Well, first of all. It's not linear and it's based upon, what we've seen in the pattern.
So certainly, in this current year, it is not expected that, I guess to use your term, it's probably in the middle of the pack using your element within it. But I think, you do know it does ratchet up if you follow the history patterns.
But certainly we did not build in that we were going to get huge reaction in the initial period.
Colin Devine - Citigroup
Okay.
Walter Berman
Okay, what was the second question?
Jim Cracchiolo
$2 billion and other liabilities.
Laura Gagnon
Yeah, I'll get the answer.
Colin Devine - Citigroup
Do you feel sufficient for what you need?
Walter Berman
Yup, the answer is yes. So let me just say on two basics.
One, we have more than ample liquidity today. And we preserve them and it's been due appraised to do that and I think you know that.
The other thing, we build substantial amount of liquidity during the year. So, what we now have is, and besides all the back up liquidity that we have.
So we feel that we have had liquidity, and we will evaluate the situation as we evolve through the year.
Jim Cracchiolo
Look, Colin this is also something that we can deploy as soon as we feel things have calm down a bit. Listen, we know you can't go to the debt markets as any in, and the cost is too high.
So we are just keeping it very good at the comfort level. But, at the same time, if we think things will settle and there won’t be greater marks against things that you buy, we can start deploying that back into the marketplace which we will overtime.
Walter Berman
And this is the first time in a long time that we actually feel would be compensated for taking risks and so that certainly is a factor.
Colin Devine - Citigroup
One just follow-up, to go back to the Investor Day. I think Jim and Walter made some pretty short statements there that you didn’t foresee a scenario where Ameriprise will go out and need to raise capital.
It's certainly the numbers I am looking at would seem to tell me that continues to be the case, but I think there are many of us listening to this call that would appreciate and reconfirmation of that.
Walter Berman
I can give you reconfirmation of that and I can say that on mean, the basis that of the capital, I believe we have the liquidity we have and the asset strengthen in which it rests on and the basic business model.
Colin Devine - Citigroup
Thanks very much.
Operator
Our next question comes from John Nadel with Sterne, Agee. Please go ahead.
John Nadel - Sterne, Agee
Even the second time around. Just two quick follow-ups for you.
One, is it fair for me to assume that the sequential jump in the allocated equity to the annuities division? I think it was up about 500 million bucks sequentially.
A huge fixed annuity sale. Is it entirely related to that, or is there some of that related to just be in the [moneyness of the VAS]?
Walter Berman
No, I think it is related too – certainly we've increased as it relates fixed annuity and I think that is primary. And then we're reallocating based on covariance, and this is just an adjustment on that.
But, right now, those are two prime drivers.
Jim Cracchiolo
Yeah. I mean we are getting good flows in our fixed annuities and we are actually, even though we are sitting with a lot of liquidity, we are able to invest that nice spreads now to give us good return.
So, that's something that we entered this year.
Laura Gagnon
I am sorry. This is Laura.
You can look in the supplement, and you can see exactly how much both variable and fixed increase.
John Nadel - Sterne, Agee
That's right. You are right.
Okay, so, then two more quick questions, maybe a bigger picture. TARP, is there any update you can provide?
I know, obviously, I had a change in the administration, change in secretary or treasury. I think talking to most life company is, they are still in the dark and haven't heard much.
But, I guess, can you update us on what you've heard, if anything? Second, around that.
There has been some new proposals to make it more stringent or more restrictive upon, especially the senior officers of company, if they participate limiting compensation, travel, various other things, and so, especially in conjunction with your comments about not needing to raise capital, are you thinking about TARP any differently if you were approved to participate?
Walter Berman
Yeah. It's a great question.
Let me tell you what we all do know. First thing is, we did apply.
Second, we passed through OTS and it's at Treasury. The purpose of us applying, we did feel that we are in good capital position but in a situation where environments are quite volatile or other competing companies are applying for it.
We felt it was essential that we did apply. It was meant to give us the contingent capabilities and evaluate other opportunities.
If those were changed dramatically, obviously that will go into our decisions and since we have not heard back, everything's been filed and it's been moved across, and we are operating on the basis that we have ample capital to move forward. If we hear from them, then we will consider it.
John Nadel - Sterne, Agee
Okay.
Jim Cracchiolo
Yeah. I think it's important to note, in last quarter there was something that only strong companies and so, you know, there is that whole thing that you don't want to be looked weak if you're strong.
On the other side, you never know what the situation arise. So we will look at it as again, something to explore.
We think that we were passed to Treasury but things subsequently as you're hearing and I am hearing things are changing and it's based on both the defensive posture as well as a posture that continued to invest and grow. So if those things change or Treasury changes the purpose of the program, or what they were looking to achieve, we would have to evaluate just as they are still evaluating what they're going to do with any additional funding.
John Nadel - Sterne, Agee
Okay. And then maybe somewhat related, but more recent.
There has been this talk about the good bank/ bad bank, and I am just wondering based on your understanding of at least what's been floated thus far and in your status at least as a thrift. Do you expect or do you know as you look at the proposals or what's been floated?
Do you expect that you'd be able to participate by selling certain assets if you so desired to the government at some price. And then, I guess also related to that, could you also just confirm whether you can, based on your current bank situation, are you eligible to issue if you needed to FDIC backed debt?
Jim Cracchiolo
Okay. Let me just start with the good bank/ bad bank first.
I think that’s evolving. So I think the question is, what is it?
What type of securities at what price? I think on our way of looking at it, we do hold securities, we have marked those securities, and we do think that many of those securities we mark will recover.
We do have the ability to hold for maturity, that’s why we also have a good liquidity position, so just because that’s set up wouldn’t necessarily mean we think it would make sense depending on what the price is.
John Nadel - Sterne, Agee
I appreciate that.
Jim Cracchiolo
And what will we do as an alternative, so that’s really the first thing. I'll let Walter come in.
Walter Berman
On the FDIC, the prime purposes for debt, that is if you have debt that’s maturing by June of 2009, you become eligible up to 125% of that. We do not have that debt that's maturing
John Nadel - Sterne, Agee
Got it. So you don’t have any of that?
Walter Berman
No, our first debt maturity is November of 2010, and then you default to a different logic which is a percent of your position at the bank. So we don’t feel that that is applicable.
We certainly, if it's open to the holding company aspect, if debt was valued on the liability of that, we would certainly entertain it but I don’t think that’s been determined yet.
John Nadel - Sterne, Agee
Got it. All right thanks very much, I appreciate it.
Walter Berman
You are welcome.
Operator
Our next question comes from Eric Berg with Barclays Capital, please go ahead.
Eric Berg - Barclays Capital
Thanks, just one follow-up. It seems like you have a very different view of the mortgage securities than you do of corporate debt.
I mean, there was a very significant loss in the high yield area corporate debt much less in percentage terms but quite large in dollar terms in your investment grade portfolio. Yet you seem inclined to classify what’s going in the corporate debt area as temporary.
What’s the difference in your judgment between what is happening to corporate bonds? And in particular, why do you view those reductions in value as largely temporary whereas you begun declaring as permanent, your Alt-A and to a lesser extend prime RMBS Thank you.
Walter Berman
Ted is here. Let him take attempt there.
Ted Truscott
Why don’t we both jump in. On the corporate side, look, its obviously credit-by-credit.
You can look at these things, but I will just give you the types of movements we are seeing and I will just take a couple of corporate bonds that are obviously in the higher grade sector. But, if you take a look at the AT&T's of the world and the Verizon's of the world, you go back in November these bonds are trading in the $80 range and they were trading in the $107 range a week or so ago.
So, I think part of the message on the corporate bond side is there are specific corporations that we may have an issue with that we may have to write down. I mean, you are going to take some hits in this environment, some bankruptcy...
But overall, as we look at particularly the high grade corporate debt sector, we think there is a lot of miss-pricing going on and, quite frankly, that's the opportunity that relates to the fixed annuity sales that we have been having. When you are talking about the Alt-A RMBS', you are talking about some specific securities that, I think, Walter can give you some specifics on.
Walter Berman
Yes.
Ted Truscott
And that's very specific in terms of work.
Walter Berman
Yeah, so, what happens, Eric, we get the specifics as it relates to the roll rates; the delinquency roll rates. We also get the analysis, the severity in arrangement, things going to delinquency, and then what they are ultimately liquidated at.
So, that's what gives us our initial factor and we then look at different classes within that and looking at our collateral position. So, we then modeled.
And this is where you get to the modeling which will go out for quite some long time. They are saying that we believe these severities will continue or ratchet and then you hit different reset points.
So, it's a lot more modeling that gets in. Once you get into that modeling you break your principal.
You then go on to over pile it on your discount rates. So, it is more the modeling and variability that is into those RMBS' that really give you the different impacts.
And you look at the pricing services and you look out there. They are all over the place.
So, you know, you can't even use those revenues. Once you get to corporate the pricing services, while they are still being impacted by discount rates or liquidity rate, there is still more analytics they are doing, because you are not there, just dealing with the model.
You are dealing with cash flows. You are dealing fundamentals in a corporation.
Ted Truscott
You kind of know a company that's going to have a problem and one that's not, right Eric? And mortgage is plus more modeling sensitivity and so, you can see the disparity between the two views you might have here, although quite frankly when you get to the slide.
And I think we have taken, there are specifics that we've taken these hits on.
Ted Truscott
And Eric, in some of the model here on the RMBS is we projected we're breaking through in 2015, 2017, 2018 and this becomes an interesting evaluation. But, like I said, we looked at it, we modeled it, and we looked like it was going to be breaking in, but that's when we took the impairment.
Eric Berg - Barclays Capital
That explains it. Thank you.
Ted Truscott
You're welcome, Eric.
Laura Gagnon
Operator, this is Laura Gagnon. We are now about 15 minutes over our allowed time.
So we will take one more question. Prior to doing that, I just want to follow-up that the other asset question of our other liabilities increased actually increase related to collateral for the Variable Annuity Hedging Program.
Walter Berman
On account, Laura.
Laura Gagnon
So, Operator, can we have one more question, please?
Operator
Sure. Our next question comes from Thomas Gallagher with Credit Suisse.
Please go ahead.
Thomas Gallagher - Credit Suisse
Thanks. Just a follow-up for Ted.
If I could, on the kind of what you're seeing on structured side, all day deterioration is pretty widely publicized. So that doesn't come as a big surprise.
I'm just curious on your prime non-agency RMBS, some small loses, but I think broader trends in the market have been big increase in delinquencies in prime. And it sounds like you've taken some assumptions of further deterioration on Alt-A, but what is sort of baked into your assumptions on prime in terms of how things play out?
Ted Truscott
Well. I'll let Walter jump in on some of this too, but I think the main message we give is that we tend to have older vintages here and we're feeling much more comfortable about those vintages and the types of deterioration that we're seeing or not seeing as the case maybe here.
And so, again, when we sit back and we talk about the high quality end of the portfolio, believe me my fabulous fixed income team has spent hours and hours and hours going over this. And we're feeling very comfortable with the non-agency prime RMBS.
And principally from the older vintages aspect, we're at the Alt-A, that we've gone over couple of times on this call. There is a lot of work that's going into looking at, quite frankly, the deterioration and the sensitivity of the model to that deterioration… So, we're feeling pretty good about it.
I don't know, Walter, do you want to add anything?
Walter Berman
No, I am not going argue to master.
Thomas Gallagher - Credit Suisse
If I could just ask one more question. The $1.1 billion of goodwill, is that largely Threadneedle and Seligman from those acquisitions?
And then, just broadly speaking, can you just talk a little bit about the process that goes into testing? I think the FASB is actually implementing new goodwill impairment standards for 2009.
I don't know if this is part of that or is this just due to the fact that AUMs are down so much that there could be impairments? Thanks.
Walter Berman
It is actually due to the three largest areas. Obviously, there was goodwill, when (inaudible), but that's not the bulk.
The bulk is really Threadneedle, Seligman, and H&R Block. Those are fee generators.
We are going through basically a two phase testing right now. It does relate to obviously the confluence of changes that have taken place.
It relates to the acquisitions in the fourth quarter and then the drop in our market value. So, we are now valuing the fair value of the firms that we have, an outside accounting firm is doing that.
Looking at the allocated equity that we have associate and seeing if there is any basic potential impairment there. If it fails that test then we have to go through evaluation like third-party evaluating deep drills to look at the value of the firm.
And but we are not there yet, we run through. And then the other thing is with the market drop you have to look at your control premium, when you aggregate all your fair values to see that you're within a certain factor that the SEC has prescribed is acceptable.
So we are in process of doing that and now we are working through and obviously as you've indicated we'll have done that done before February.
Thomas Gallagher - Credit Suisse
Thank you.
Walter Berman
In February.
Jim Cracchiolo
So, I want to thank you all for listening in tonight. I know it has been probably a long few days for you and a long year already.
But again, let me wrap up by saying even though it was a tough quarter, we wanted to recognize that in our financial results where we saw it would be prudent and appropriate so that we would position ourselves to deal with 2009 if it's difficult. But our core business is quite strong and stable still.
We'd love for activity to come back with markets being less stable. But we know that if that doesn't occur, we have to take the actions that we need to do, and we've been doing that both from an expense side, as well as looking at even opportunities as they come along here in the core businesses against our advised model.
And we will continue to manage prudently. We think that the decisions we make since we become public put us in a good position to do the things we have done, and maintain a strong balance sheet through one of the most difficult environments that we all have experienced.
So, we still feel good about our business and our company. We feel good about the position we are in on a relative sense.
We all would like to markets to improve or at least stabilize so that we can get back to more core business. But having said that, we think that we can continue to navigate these markets, and continue to make the right investments as we're doing today for the medium and long term for when things recover.
So we appreciate your time and if you have any other questions, please call Laura.
Laura Gagnon
I am actually not in my office in Minneapolis. I am residing in New York.
So if you'd please leave me a voice message on my number 612-671-2080. Or send me an e-mail.
I will reply to your follow-up questions approximately from 9 Eastern until midnight or whenever we get through with what you need. Thank you.
Walter Berman
Good night.
Operator
Thank you, ladies and gentlemen. This concludes today's conference.
Thank you for participating. You may all disconnect.