Feb 3, 2011
Executives
Laura Gagnon – VP, IR Jim Cracchiolo – Chairman and CEO Walter Berman – EVP and CFO
Analysts
Alex Blostein – Goldman Sachs Andrew Kligerman – UBS Securities Suneet Kamath – Sanford Bernstein John Nadel – Sterne Agee Tom Gallagher – Credit Suisse
Operator
Thank you for standing by for the Ameriprise Financial fourth quarter and year-end earnings conference call. Your conference will begin shortly.
Thank you for your patience. Welcome to the Ameriprise Financial fourth quarter and year-end earnings conference call.
My name is Christine and I will be your operator for today’s conference. 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 Laura Gagnon. Ms.
Gagnon, you may begin.
Laura Gagnon
Thank you and welcome to the Ameriprise Financial fourth quarter earnings call. With me on the call today are Jim Cracchiolo, Chairman and CEO; and Walter Berman, Chief Financial Officer.
After their remarks, we will take your questions. During the call, you will hear references to various non-GAAP financial measures 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 materials 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 and 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 and related presentation slides, our 2009 annual report to shareholders and our 2009 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
Good morning. I know a lot of companies are holding their earnings calls today, so we appreciate your taking the time to join us.
This morning, Walter and I will update you on our performance for the quarter and for the full year of 2010. Let’s begin.
We reported good fourth quarter earnings and we finished the year with our best full-year results ever as a public company. For the quarter, we generated $2.6 billion in operating net revenues, a 19% increase over last year.
Our operating net income was 312 million, which was up 30% over a year ago. I should point out that the earnings includes two notable items.
A $28 million expense related to FAS 157 impacts in variable annuities and $7 million in auto and home claims from a single hailstorm in Arizona. For the year, on an operating basis, we recorded earnings of $1.2 billion or $4.47 per share, and we achieved record net revenues of $9.6 billion, an increase of 24% compared with 2009.
Our return on equity reached 12.6%, an increase of 340 basis points over the last year. Well, that’s also an all-time high.
We focused on driving further improvement in our returns. We’re making continued progress towards generating a higher percentage of our earnings from our less capital-demanding, higher-returning businesses.
For the quarter, we generated 54% of operating earnings from advice and wealth management and asset management compared with 30% a year ago. Given the environment, we’re pleased that we have already surpassed our previous high watermarks which we reached back in 2007.
Remember, the S&P 500 was 20% higher then and interest rates today remain extremely low, so we feel good about the path we’re following. We came through the crisis untarnished and in excellent condition.
And we’ve used our relative strength to grow the company both organically and through the Columbia Management acquisition. Owned management and administrative assets reached a new record at $673 billion, which was 47% higher than a year ago.
Our prudent operating principles continue to serve us well. Our balance sheet and capital are stronger than at any time in the past, which gives us a competitive advantage and allows us to return capital to shareholders.
In fact, we’re still one of the very few firms in the industry that’s buying back stock. For the quarter, we brought back 3.8 million shares for $200 million, and since we’re starting our buyback program in May, we repurchased a total of $573 million.
Including dividends for the year, we returned two-thirds of our earnings to shareholders. We intend to continue the buyback program in 2011.
At the same time, we’re maintaining our expense discipline. We achieved over $240 million in re-engineering savings across the company in 2010, and we used a portion of the savings to fund investments for growth while delivering much of the savings to the bottom line.
While expenses have increased as a result of the stronger business activity, we remain very comfortable with our expense management. In total, we feel quite good about the position we’re in.
The business is performing well and we have good earnings leverage for improving conditions. Now, I’d like to discuss our segment performance.
First, advice and wealth management delivered another strong quarter. The segment generated a record $1 billion in operating net revenues and $90 million in pretax operating income, nearly triple its earnings over a year ago.
Margin improvement has been an area of focus for us in the segment, and we made good progress in 2010. In the fourth quarter, the segment’s pretax operating margin was 8.9%, nearly 5 percentage points higher than a year ago.
Advisor productivity is an important measure of our progress in this segment and is improving nicely. Operating net revenue per advisor reached new highs at 88,000 for the quarter and 326,000 for the year.
Several factors led to the stronger productivity. First, client activity continued to tick upward.
While clients still haven’t returned to pre-crisis activity levels, clearly confidence in the markets and the economy is improving. You can see the stronger activity in our client asset metrics.
We continue to generate good net inflows into wrap accounts and our total retail client assets reached a new high of $329 billion. Second, over the past several years, we’ve significantly strengthened the advisor force and its economics.
We had good success at recruiting with approximately 800 experienced advisors joining us over the past two years. It takes a while for new recruits to bring over assets and clients, and now we’re starting to realize the benefits of their established books of business.
The transformation of the employee advisor continues. Advisor retention has increased dramatically and we reduced cost substantially even as we continue to invest in the business.
So while a total number of advisors has continued to decline, we’re more than making up for it with stronger advisor productivity, both on a per advisor and total basis. In fact, on average, the advisors we’ve added had five times the trailing productivity of the advisors who have left.
Finally, we’re continuing to make major investments in the business. We’re building our brand through advertising and we’re continuing to add to the tools and technology available to advisors.
In fact, we’re in the process of our multi-rollout of the new industry standard brokerage platform, which is one of the largest investments we’ve made in the advisor technology. I should note that our financial performance in this segment still faces the headwinds of extremely low interest rates, which obviously depresses the spread we earn on client deposits.
We don’t expect rates to rise sharply any time soon, but an increase in rates would give us nice additional earnings leverage. The asset management segment also delivered another strong quarter.
We generated pretax operating earnings of $163 million for the quarter, more than double a year ago and 35% higher than the sequential quarter. The segment’s pretax operating margin was 21.1%.
These results, which includes $22 million of net income in hedge fund performance during the year, demonstrated the improved profitability and scale of our combined asset management business. Global retail flows improved sequentially and was essentially flat for the quarter.
Strong retail net inflows at Threadneedle were offset by retail and institutional outflows in the domestic business. Domestic retail flows improve with the sequential quarter, but we remain in net outflows.
While we’re starting to see a pickup in equity fund sales, we saw our outflows in municipal and taxable funds. In our institutional business, flows were eschewed by the loss of two relatively large but low-margin mandates.
In fact, of the 5.7 billion in global net institutional outflows, approximately 4.7 billion came from low-margin pools of insurance assets including Zurich outflows. While we expect some of the outflows of low-margin institutional assets to continue, the pipeline of more profitable mandates is solid.
In fact, the Columbia mandate sold in the fourth quarter that we expect to be funded early this year were more than offset revenues lost from the fourth quarter’s net institutional outflows. Threadneedle reported another strong quarter with revenues, assets, and profitability, all increasing significantly compared with a year ago.
European investors began to return to equity funds during the quarter, and as a result, Threadneedle’s retail flows improved substantially. Investment performance remained strong with particular strength in equity funds.
Threadneedle continues to manage its expenses well even as revenues have increased significantly, so the international business is generating increasingly solid margins. The Columbia Management integration remains on schedule.
Fund mergers will mostly be complete by the end of the second quarter and the new lineup will include strong performing funds in every style box. In fact, on a pro forma basis, our funds are performing above the 60th percentile in Lipper performance rankings in every category.
We believe the combination of strong performance and a clearly defined fund lineup will help us to start the turnaround of asset flows as we move through 2011. In annuities, we reported pretax operating earnings of 128 million which represents a 9% decrease compared with a year ago.
The decline was driven by the impact of FAS 157 which has no impact on the underlying economics of the business and which we recognize in operating earnings. Walter will explain this item in more detail.
The underlying business continue to perform well as our new variable annuity product helped us generate variable annuity net inflows of approximately $400 million. We continue to feel good about the variable annuity business, especially now that we have focused our efforts and resources on our advisor force where we have a very good understanding of client behavior and can generate strong returns.
During the quarter, we made a strategic decision to stop selling variable annuities to clients of other firms. The decision was based in part on the fact that our outside distribution generated 12.5% of our variable annuity sales with a count of over 25% of the equity we invested in the variable annuity business.
Just as important, we knew that achieving scale in outside distribution of annuities will require substantial additional capital, so we chose to focus our resources on our system where we can add real value to the client’s long-term financial plans. The fixed annuity business remains stable with net outflows resulting from our decision not to rate new business because of the rate environment.
Lapse rates remain low and asset persistency high in the fixed book which continues to generate stable spread earnings and good returns. We’ll continue to pursue opportunities in fixed annuities when market conditions become more favorable.
The protection segment produced pretax operating earnings of $86 million, down 26% compared with a year ago. We had weaker performance during the quarter due to claims from the hailstorm I mentioned earlier and because we increased reserves related to bodily injury coverage claims.
The results also include 10 million in higher variable universal life reserves related to SOP 03 which Walter will explain. Aside from these impacts to the quarter, we continue to feel good about the health of our insurance business.
Our underwriting performance has been strong and our large book of insurance business generates solid recurring earnings. In auto and home, policy counts grew by 9% over a year ago, driven in part by a promising partnership we’ve established to provide homeowners insurance to customers of Progressive Insurance.
In the life and health business, clients across the industry continue to be somewhat reluctant to commit cash required for new insurance contracts. That said, our advisors are finding their clients are beginning to be more receptive to a conversation about insurance.
As a result, our full-year cash sales were up 14% compared to 2009. To summarize, I feel very good about the progress we’ve made and the results we’ve delivered, both in the fourth quarter and for the full year.
We’re succeeding at driving higher margins and a greater percentage of earnings from our less capital-demanding businesses, and we’re deriving real benefits from the scaling trend of all four of our operating segments. Our asset management and distribution acquisitions are paying off.
At the same time, we continue to manage our finances prudently, our balance sheet and capital positions are as strong as ever, and our expense disciplines will not waver. These actions are contributing to higher returns, which is a long-term focus for us.
We’re pleased with the upward trend in our ROE and we’re confident that we have the right strategy as well as the business and financial strengths to drive increasing returns. Overall, we produced an excellent year with record results and we feel good about our ability to continue making progress.
Now, I’ll turn it over to Walter and later we’ll take your questions.
Walter Berman
Thank you, Jim. We continue to report strong performance with operating EPS of $1.21, up 33% from the prior year.
The operating earnings include some notable negative impacts which I will describe shortly. These negatives were offset by strong growth in our low-capital businesses and continued solid performance of our annuity in life and health businesses.
Our low-capital businesses, advice and wealth management, and asset management, generated 54% of operating segment pretax income compared with 30% a year ago. That shift, combined with prudent capital management resulted in an operating ROE of 12.6% of 340 basis points from last year.
In addition, our balance sheet fundamentals remain strong in all areas. On the next slide, I’ll provide some detail on the quarter.
Operating results exclude the impact of consolidated investment entities realized gains and losses, as well as integration and restructuring charges. These items and the segment impacts are detailed in our certificate supplement.
Operating net revenues grew 19% to 2.6 billion in the quarter while net operating earnings were 312 million, up 30%. Operating earnings per share increased 33% to $1.21, reflecting growth and improved margins in advice and wealth management and asset management.
Our results included $0.12 per share in mean reversion benefits and hedge fund performance fees trimmed primarily by the markets. We believe this $0.12 is embedded in your estimates, whereas, there were three unanticipated negative items included in the $1.21 that we believe are not reflected in the sell side analyst expectations.
First, we recorded $0.11 for the negative impact of credit spreads narrowing on our variable annuity liability. Its impact is not economic, and consequently, we do not hedge it.
In fact, many of our insurance companies do not include it in their operating earnings. Excluding this, earnings were $1.32.
Second, we recorded a $0.03 for auto and insurance claims related to an unusual hailstorm in Phoenix. And finally, we recorded a $0.04 loss for increased auto and liability reserves in the quarter.
Our results were also impacted by increased general administrative expenses which are booked in each segment. We had to catch up in our (inaudible) due to strong business performance during the year and we incurred some increased legal expenses.
On a full-year basis, we reported record operating earnings. Operating net revenue grew 24% to 9.6 billion and operating earnings were up 56% to a record 1.2 billion, which includes eight months of Columbia acquisition results.
Operating EPS grew 45% to $4.47 for the full year, which includes the impact of the higher-weighted average share account for the equity we issued in June of 2009, partially offset by the share we purchased in 2010. In the fourth quarter of 2010, low-capital businesses generated 61% of our operating segment net revenues, up from 54% compared with the fourth quarter of 2009.
This strong revenue growth, combined with margin expansion, AWM, and asset management, resulted in 54% of operating segments earnings from our low-capital businesses, up from 30% last year. Now, I move on to our segment performance.
In advice and wealth management, you can see that we generated a nearly threefold increase in segment PTI year-over-year. The segment reported record revenues surpassing 1 billion.
These strong results were driven by recovering (inaudible) activity, growth in assets under management from markets and inflows and retail client assets, as well as continued good expense management. Interest rates continue to impact our earnings with our brokerage cash spreads marginally down sequentially.
Expenses also continued to be well managed on a sequential basis. G&A expenses increased mostly due to higher business volumes and an increase in compensation expenses, reflecting strong overall company performance.
We also incurred higher than normal legal expenses as a result of our ongoing litigation at Securities America. On the slide, I’ll discuss asset management.
The segment had another very strong quarter with operating net revenues up 66% year-over-year and with a pretax operating margin of 21.1%. Net (inaudible) revenues, margins increased to 34.1%.
Hedge fund performance fees primarily from Seligman generated 22 million of pretax earnings in the quarter compared to 30 million last year. As Jim described, we saw our increased net outflows driven by low-margin insurance portfolios in the institutional business.
Retail net flows improved sequentially. The Columbia Management integration is proceeding according to plan.
We remain on track to deliver our financial projections we provided when we announced the transaction and we feel very good about the business synergies we are realizing. Let’s move to the next slide.
For annuities, operating pretax income declined 9% year-over-year. However, the underlying performance was strong.
In the quarter results included a $43 million expense relating to variable annuity living benefits. This expense resulted in a FAS 157 impact which we do not hedge, namely, non-performance risk, and which many companies do not include in operating earnings.
The business continued to generate strong sales while our new annuity product, RAVA 5. The overall book of business continued to generate strong, stable earnings and returns despite absorbing the volume-driven increased course of distribution.
We believe these returns will be further enhanced by our decision to exit outside distribution of variable annuities which Jim described. Our next slide will discuss the protection segment.
The life and health segment business continue to generate consistent results. DI and LTC claims returned to expected levels after a higher-than-expected third quarter and we continue to reserve at higher levels for our universal life products with secondary guarantees.
As a reminder, I mentioned on the third quarter call that we’re expected an increased run rate in these reserves. That said, our results for the quarter were impacted by several notable items, including the hailstorm in Phoenix.
We’ve already reached our retention limits and are 100% reinsured for any future development from the storm. We also increased our auto liability reserves by $16 million in the quarter.
Aside from those items, the insurance business continue to generate good results with increased VUL sales during the year and good continued growth in the auto and home business. On the next slide, we continue to manage our financial foundation well, which has enabled us to return capital to our shareholders.
During the quarter, we repurchased 3.8 million shares for $200 million. This brings our total repurchases in 2010 to 13.1 million shares for $573 million.
Including dividends, we returned 756 million to shareholders this year for over two-thirds of our net income. We continue to hold more than $1.5 billion in excess capital while our cash flow remains strong at $2.9 billion with $1.8 billion of free cash.
The quality of our balance sheet also remains strong. Our preliminary estimate of the RiverSource risk-based capital ratio is approximately 67% and our unrealized gain position is 1.5 billion.
Our balance sheet ratios continue to remain conservative, both in terms of leverage and coverage ratios. Finally, our variable annuity hedge program continues to be effective.
So to summarize, we generated strong earnings in the quarter as a result of very good underlying business performance in a challenging economic environment. Our actions have resulted in increased operating leverage and we are making good progress.
We are driving our mix towards the lower-capital businesses, effectively managing our excess capital, and driving our operating returns through the higher end of our on-average overtime targets. Our balance sheet remains strong, including our capital and liquidity positions.
And we are continuing to manage our risk exposures prudently, positioning the company for continued growth. Now we’ll take your questions.
Operator
Thank you. We will now begin the question and answer session.
(Operator Instructions) The first question comes from Alex Blostein from Goldman Sachs. Please go ahead.
Alex Blostein – Goldman Sachs
Great, thanks. Good morning, guys.
Well, there’re a couple of questions on expense, I guess, just to start. If you look at your G&A and asset management, even if you strip out, kind of like a normalized margin on performance, you basically take out the good amount, quarter-on-quarter.
So, yes, number one, can you tell us how much the catch up was due to, I guess, fourth quarter comp accrual? And then where do you stand with respect to savings and how much is already in the run rate today?
Walter Berman
Yes, Alex. On the G&A expenses for AWM – I’m sorry – I’m sorry, but you’ll have to repeat the question because I –
Alex Blostein – Goldman Sachs
Yes. So, if you look at the asset management, G&A expense jumped up quite a lot, quarter-on-quarter.
And then even if you stripped out, I guess, an assumption for comp associated with performances, it’s still up a good amount. So can you try to quantify maybe if there’s a catch up, I think you mentioned in your prepared remarks?
And then on top of that, how much of the savings is already in the run rate as of today?
Walter Berman
It’s actually both because there was a catch up on the comp in that segment, about 5 to $6 million. And then we did have pass-through coming through as related to which really drove the main expense.
And as a run rate, it’s obviously geared towards the growth that we have on performance. So at this stage, I would say that it’s representative.
Alex Blostein – Goldman Sachs
Okay. And then just how much of the estimated cost savings you, guys, already have in the run rate?
I think last quarter you said there is about maybe 50 of the 150 to 190 sort of range in the run rate, so where does it stand today?
Walter Berman
Yes. Right now, in the quarter, we hit a run rate that’s like a 112 in 75, if you take a look through the year to date’s gross synergies and we’re on target to achieve the 130 to 150 run rate that we talked about.
Now, we said that will be total and some of that will carry into 2012, but certainly, we’re on target.
Alex Blostein – Goldman Sachs
Got you. And then, Jim, a question for you on just a little bit of bigger picture.
The SEC put out a study, I guess a couple of weeks ago, on the role of investment advisors versus broker-dealers and the fiduciary role within that. How would that impact your business, if at all, and if you could just kind of update us where you stand on that issue.
Jim Cracchiolo
It does not impact our business because we sort of follow the fiduciary rule across our franchise today and we already have in place all of the compliance, controls, procedures, supervision necessary and appropriate for that. It actually makes it on an even playing field for us with others, and so I think it will impact others more than us.
I think it will do it in two ways. One will be the wirehouses will have to move to that standard that will change the way they operate a bit.
And then independence, because there’s been a call in now, if people did move to that, to have greater reviews by either the SEC or FINRA as well as the states, and in many cases, we have consistent level of those reviews because we’re a big house, but others sort of are able to dock a little bit below the radar and that may change as there is a call in for more of actual reviews by the regulatory authorities as we move to the standard. So I think, for us, it will be favorable.
Alex Blostein – Goldman Sachs
Got you. And then lastly, just to close, could you quantify, I guess, how much are the retail outflow in Columbia was due to the anticipated sort of fund merger versus core outflows due to either performance or just client reallocating?
And then you mentioned pretty strong pipeline in institutional, I was wondering if you could quantify that.
Jim Cracchiolo
Okay. What we have seen is a bit of a pickup in some sales and equities and that’s actually continuing in January.
I think as the industry felt a bit in the fourth quarter, one of the new outflows had occurred more in the tax-exempt area, particularly in a number of our portfolios with the US trust business and so that had affected some of our flows. Overall, we see an improvement, but it’s not necessarily where we want it to be yet.
We still experience some outflows in some key funds, some (inaudible) one or two of our that were Columbia funds that lower their star ratings last year or the year before. Now, that performance and those funds have improved dramatically over the last year, so hopefully we’ll see a slowdown in some of the outflows there.
But we have really good performance, I mean, over 51 funds now four and five star. As we merge the fund families, the overall performance will even improve.
I think if you look at some of our statistical supplement on (inaudible) basis, we’re well above 60% in a number of areas already. The merges will actually clean up that fund lineup a bit more for us, but we’re not through the fund merger yet.
Having said that, we did declare the new funds, that things are moving to the proxies are already starting to be nailed, et cetera. So I think it has some impact.
It’s hard for me to tell you after that’s over and we’re through that process what the full effect is, but we just announced the fund lineup in the fourth quarter and we have put the wholesalers on their territories as we adjust the activity. They’re very focused now.
We had our kickoff meetings. So, we’re going to try to work hard to improve the flows, but I think it will take some time, but we’re optimistic that we can get a turnaround.
The institutional side, you know, that’s a bit lumpy. Because as we said, we’ve lost these two large accounts domestically.
There were only a few (inaudible) in account. One was Bank of America or Bank Cline (inaudible), another was insurance from the Columbia.
So I think, the revenue side of that is not going to be material but on a volume basis, it looks significant. On mandates, are starting to come in institutional now that the consultants are getting more comfortable that we’re making our way through the process.
We’re picking up some nice winds. There’s a lot more to do but the pipeline is building.
So we hopefully will start to see some traction there as well as we go into the New Year.
Alex Blostein – Goldman Sachs
Got it. Thanks for taking my questions.
Operator
The next question comes from Andrew Kligerman from UBS Securities. Please go ahead.
Andrew Kligerman – UBS Securities
Good morning. Do you hear me?
Walter Berman
Yes.
Andrew Kligerman – UBS Securities
Good morning.
Walter Berman
Yes, good morning.
Andrew Kligerman – UBS Securities
Okay. Sorry about that.
Just two quick ones just to make sure I understood it. Walter, when you were talking about the run rate getting to 130 to 150 in sales, do you add 50 or 112?
I just wasn’t clear on that.
Walter Berman
Right now, if you just take a look at where we are at the quarter in the fourth, it’s about a 112 run rate. As we talked about when we did the transaction, we’d be, on the net basis, 130 or 150, and I’m saying we’re on track, but that is, as I related, for the full run of the program and that will carry – some of that will carry into 2012.
Bulk of it will be realized in 2011, but you’ll get the normalization factor coming into 2012. So, we’re on track, and I just gave you the run rate right now.
Andrew Kligerman – UBS Securities
That’s perfect. And then, could you quantify the total amount of comp accrual adjustments that you experienced throughout the company?
I think your answer before was just for the assets management division. I was curious, you know, if throughout –
Walter Berman
Yeah. Andrew, quarter over quarter, if you look at the third quarter versus the fourth quarter, it is about $20 million of incremental as we’ve looked at the performance and we accrued of , that’s what the impact was in the fourth quarter over the first to third quarters.
About 20 –
Andrew Kligerman – UBS Securities
Got it. And then just in terms of excess capital, the RBC, I think it rose at like 590 in the quarter.
Yet every quarter, Walter, you say that your excess capital remains at 1.5 billion plus. So my question is, what’s the real excess capital number?
I mean, is there a certain capital margin of that that you has to absolutely keep? What is that?
And then what are you planning to do with the excess capital? Is it to keep pushing this buyback or I continue to read about your interest in asset managers.
I think I read about Pioneer recently, so what’s your interest in buying an asset manager and at what size? I know I throw a lot of questions, so what’s the excess capital?
What’s the capital margin you absolutely need to keep? And thirdly, what are you going to do with it?
Is it buy asset managers, is it to buy back stock, and if you buy asset managers, fourthly, who are they, what’s the size?
Walter Berman
All right, so let me take those questions. The plus has gotten bigger, and yes, if you look at the RBC and you do your calculations, from that standpoint you can see that using, obviously you don’t want to use the 350 because there’s (inaudible) see the full logic on it, if you would calculate that there’s approximately a billion dollars in excess sitting at the insurance company level.
And throughout the company, we have, as we indicated, excess in certainly at corporate. We are certainly on target as we’ve talked about to do our repurchase within the levels of authorization.
And we’re evaluating the circumstances as we look at the environment and certainly the opportunities to best return that to shareholders. As Jim had said, we certainly explore our potential acquisitions as they come along and we’re optimistic about it.
And certainly in the category of asset management, that would be one of the categories in distribution.
Walter Berman
But we are now just progressing to have our share buyback program look at other ways to return that effectively to our shareholders.
Andrew Kligerman – UBS Securities
So, Walter, just in terms of that 1.5, so you’re not going to give me how much the plusses. But how much do you need to keep?
Do you need to keep 500 sitting there? Do you need to keep a billion of it sitting there and never use it?
How much do you need to keep?
Walter Berman
Listen, it’s a great question. It is about situation-driven and you evaluate it.
As a definitional issue, you would say that, technically you use the excess, but you will assess it as you evaluate situation review at that particular time. And on this particular – the way we look at it today, the excess is getting, as we moved out of the OD, certainly that will put less pressure on having any sort of contingent element within it and so we are – we evaluate it.
And at this stage, I would say technically it’s all usable and then, depending on when we go to use it, we will assess the environment and assess the best use of sharehold and how quickly we can replenish. And I think you know that where the earnings are coming from, it’s less capital-intense, so that gives us capability and that all goes into the evaluation of it.
And that’s why we talk about the plus because you really do have – it changes the circumstances but certainly, within our definitions, it is that we have excess that is usable.
Andrew Kligerman – UBS Securities
So the last clarification on it would be then, so you could indeed or you would be comfortable this year using up your authorization which I think is around a billion, or if the right asset management operation came along, you could use a billion toward that. That would not be something out of the realm of possibility.
Is that a fair observation on my part?
Walter Berman
I think that’s a reasonable observation.
Andrew Kligerman – UBS Securities
Excellent. Thank you much.
Walter Berman
You’re welcome.
Operator
The next question comes from Suneet Kamath from Sanford Bernstein. Please go ahead.
Suneet Kamath – Sanford Bernstein
Thanks and good morning. Just a couple of questions.
First for Jim on the property and casualty business, the auto and home business. I don’t want to make too much out of one quarter but clearly, your higher-margin, lower capital-intensive businesses are increasing.
I think that’s a big positive from a shareholder’s perspective. I’m just wondering at some point, does it make sense to retain this auto and home business?
I know that in the past, the returns on it were accreted to your consolidated return, but I think that was in part because some of the asset management advice and wealth management businesses weren’t quite at their full earning potential. But as those businesses get there, is it time to maybe reconsider whether or not you need to keep this auto and home in-house?
And then I have another question.
Jim Cracchiolo
Okay. It’s a good question.
Up until, again, you have a freak hailstorm. I should note that we have coverage so above $10 million that’s reinsured and handled, and so there’s a cap to what that is, but again it was a loss in the quarter.
I would also say that over the last few years, not that we didn’t suffer this as a little bit of a setback, but over the last number of years, we’ve had very good loss rates. In fact, we are releasing reserves all the time based on what the accounts needed for us to do.
So, we did have a pickup here. We think we have a very good, reasonable and appropriate book.
We have good underwriting standards. We have a low-cost model.
I think as you look across the industry, it’s one of the very good, strong direct players out in the industry that I think is a very good asset. I think it’s complementary in a number of areas.
We are deepening our penetration within our own client base a bit more. The client profiling we’re picking up from our affinity partners.
I think it’s quite good, so I think from a perspective of the company, we don’t think it will be a drag. We think the returns have been pretty good and reasonable and appropriate against where we want to take the total returns for the business.
But having said that, we always have flexibility long-term if that doesn’t work the way we think it should. Walter, do you want to –?
Walter Berman
Yes. Also, we did increase our reserves for the bodily injury.
We noticed a trend on severity that took place and the actuaries they decided to take the reserves up. I can say that in the fourth quarter, the trend lines improved, but again, we felt it was prudent to take the reserves up.
The business does return a good return for us and is a good diversifier.
Suneet Kamath – Sanford Bernstein
Okay. I guess I just kind of look at where your stock is today, and I think one of the big reasons it’s down despite pretty good trends in your asset management advice and wealth is because of this noise at P&C and we’ve seen this with other life insurance hybrid models before when something goes wrong in the insurance side, the stock tends to take a hit.
So, I would just, you know, put in my vote that you could reconsider that at some point. My second question is related to this non-performance risk FAS 157 thing.
Walter, I think you referenced in your prepared remarks twice that other life insurance companies put this below the line. Clearly it’s very difficult to model.
Is there anything that you can do to help us think through how to model this on a quarterly basis such that it doesn’t become a surprise to us because obviously, it’s non-cash, non-economic as you say, and I think it’s a pretty big distraction.
Walter Berman
You know, we are really thinking about that and evaluating it because it is a non-economic impact and certainly as you look at the implications, it swings with the interest rates going up in the change and the liabilities. So we’re going to be discussing this quarter to come out and we are going to look at all options, potentially excluding it or giving some sort of indication as we get later into the quarter.
Because it is – there’s no way of estimating it until you get towards the end of the quarter, and – but you’re spot on. It really is problematic and it does drive differentials and the way people ask me, and so we will work at that and certainly pull and talk to people about what the best way of doing that.
We do believe there’s, as we said, this is the non-economic aspect. There are obviously transactional cause and other factors that we will reflect, but this is the one that we’re focusing on and now we’re going to work pretty hard to try and see if we can get the noise out of it and be able to get better transparencies so people can have an idea about what the impact is in the quarters.
So, we’ll get back to you.
Suneet Kamath – Sanford Bernstein
Great. Very helpful.
Just one quick follow-up to your prepared remarks. You had mentioned when you were talking about the annuity business that I think a larger percentage of the equity allocated to VAs is in the third party sales, those products.
Why would that be the case?
Walter Berman
I think that is the case because of the percentage of living benefits that are actually acquired or sold on the outside channel and that is the main driver of it. It was much higher percentage and that’s what drove it up and obviously, that is the prime reason in behavioral patterns to a degree.
Suneet Kamath – Sanford Bernstein
Understood. Thank you.
Operator
As a reminder for question, please press star then 1 on your touchtone phone. The next question comes from John Nadel from Sterne Agee.
Please go ahead.
John Nadel – Sterne Agee
Hi. Good morning everybody.
I have two questions for you. The effective tax rate, Walter, in 2010, it was just under 24%.
I think you’ve guided us in the past to think about the marginal tax rate, there’ll be in 35. Clearly, some of your tax-planning strategies are working a bit better than maybe you guys anticipated.
I guess my question is where should we be expecting that effective tax rate to move in 2011 and beyond? Walter Berman.
Okay. Yes.
As I indicated, I think actually it was in the second quarter and maybe in the first quarter also. As we looked out and determine that in 2011 that the range, we’re giving it 25 to 27, and certainly it will probably be towards the lower end of that as we look at it now.
It is difficult to forecast it on a quarterly basis. We have a better idea on our annual and we did get an adjustment coming through from – we’ve thought it was a little sour-rated but certainly we feel the rate for next year will be 25, 27 and at the lower end of that.
John Nadel – Sterne Agee
Okay. And then, a question on asset management.
I know you guys don’t want to give us necessarily the split of the revenue and the expense offset around the performance fees. Any help you can give us as to thinking about the pre-tax operating margin excluding the performance fees?
I know those performance fees are real, I get it, but there are also on- quarter events, so I’m sort of thinking about how do we look out to the next few quarters?
Walter Berman
That’s – okay – fair question. Yes.
If you back that out, it should be about between about 19.7.
John Nadel – Sterne Agee
Okay. Thank you very much.
Walter Berman
You’re welcome.
Operator
The final question comes from Tom Gallagher from Credit Suisse. Please go ahead.
Tom Gallagher – Credit Suisse
Hi. The first question is, Walter, if I understood you correctly, if 112 million of Columbia Synergy benefits are already in the number, that means, only 38 million remain in terms of the getting us to the 150.
So, to say it in another way, we only have 38 million of benefits still left on asset management margins related to expense synergy. Is that the right way to think about it?
Walter Berman
Well, that’s gross. And the other thing is, as we said, the year-to-date gross synergy was 75.
If you do a run rate on that, that’s a 112 as you look at the change between the quarter. So, that’s what we’re just trying to do, give you the run rate.
We said that we would do on the gross range between 150 and 190.
Tom Gallagher – Credit Suisse
Okay, so you’re talking about gross when you’re using that 112, not net.
Walter Berman
Yes.
Tom Gallagher – Credit Suisse
So I can take 190, subtract 112, and that would be the better way to think about what’s left to come? Is that (inaudible)?
Walter Berman
Again, it’s the range, 150 to 190 remember.
Tom Gallagher – Credit Suisse
Right. If I assume you hit the top end to your range.
I could have another – okay. And the timing on when you expect to get those, will those be front half loaded, back half loaded in 2011?
Walter Berman
They are actually, as we did in (inaudible), it’s certainly as we go through it. You could expect there will be a factor that would carry over because of, as we basically bring on the transitional changes and the elements of that.
So, there’s a back-loaded element to it which will have a carryover in 2012.
Tom Gallagher – Credit Suisse
Okay. And then, just a question on advice and wealth management margins there.
I know you had mentioned there was increase in legal expenses there. But if you look at just how strong revenue growth has been there, assuming there is a corporate objective to improve those margins into the double digits.
How should we think about timing? Assuming your revenue growth remains the way it was this year, do you think we will get to double-digit pretax margins in 2011 or is that further out?
Walter Berman
Again, did not forecast, but certainly as you look at the items that came in the quarter as we talked about the legal, the marketing, the bonusing, one could expect that you will get into double digits.
Tom Gallagher – Credit Suisse
Okay. Yes.
Just purely on – because it was definitely a higher expense load this quarter which suppressed margins despite the fact that you had strong revenue growth. So part of that is just seasonal with comp accrual or something like that?
Walter Berman
Yes, you had that as related to the bonusing and certainly we started up the marketing program and then we had the legal that I mentioned. Again, the legal, we would evaluate as we go through, but certainly those were the elements that came through in the quarter.
But we did have to catch up on the bonusing.
Tom Gallagher – Credit Suisse
Okay. Last question is, I think, if we try and at least identify the synergy related in that outflow in asset management which I think from a revenue standpoint if I remember correctly, it was expected to be 30-million loss approximately?
Where are we on that and should that all be behind us soon or how should I think about timing? Just, I understand you haven’t wanted to give any outflow guidance from an asset standpoint, but I know you’ve given in on revenues.
So I just wanted to know where we’re at on the revenue side.
Walter Berman
We’re still working through it. It’s still going through as related to the basis of emergency and in yield to client.
So that’s still working through and right now we see it within its ranges, so it’s on target.
Tom Gallagher – Credit Suisse
But Walter how, from a revenue standpoint, are we halfway done? Are we more than that?
I just, I don’t know if you can give some guidance on that.
Walter Berman
I just don’t have on that side of it, if you’re telling me, because the difference of the 20 to 40, I don’t have the exact numbers. I think, I don’t want to speculate.
I will get back to you on that, but the issue is, I think it is on target, but there is certainly more to come. And that was more on combining of funds and things of that nature, and not on dealing with the outflow, so Jim will give you some feedback.
Laura Gagnon
Before, let me clarify. We did say that 20 to 40 million in revenue decline is going to include the lower fees we expect to receive on the funds as they merge.
And that’s going to happen through the first half of this year. So that impact, that portion of the 20 to 40 is still to come.
Jim Cracchiolo
But there is a portion that has come, it’s because it relates to it. But that’s why it will still come.
Tom Gallagher – Credit Suisse
So would that – maybe I misunderstood. Did that 20 to 40 not include any anticipation of net outflows as a result or did that also include that?
Jim Cracchiolo
There were some outflows that were definitely assumed that we knew as we combined at the very beginning and had overlapped in portfolio managers and some institutional accounts that would leave once we did the combinations. Some of that did take place in the third and fourth quarter.
I think what Walt is referencing as the other piece of it is mainly a merger of the funds that takes place that we will move to lower breakpoints based on level of assets or that the funds that the assets are going into may have lower fees in the accounts because there are larger funds. And so, with that, that’s the other piece of the tranche within the 20 to 40.
Regarding whether we suffer full outflows that we experience or not, we didn’t dictate every account, but we feel comfortable, with where we are today and the assets, et cetera, that we’re within those reasonableness as far as what we expected. Now, having said that, we would like to move into inflows to grow the business rather than continue to be in sort of the outflow area, and that’s where we’re going to work hard to try and turn that around.
But from what we originally estimated, from what we knew at the time, I think we’re within those bounds, with the last piece coming as we merge the funds.
Tom Gallagher – Credit Suisse
Got it. And then, I just have one last detailed question for you, Walter, just to put this to bed.
So if I assume you hit the top end of the range in terms of synergy-related benefits that would be 190, you’re at 112, this is all gross. The 30 that you expect to lose on this synergy has not yet come, so I really should be taking that off the 190 to get to a net number.
So on the net basis, we’ve gotten 112, we have not yet picked up in the 30.
Walter Berman
We have a 112 run rate leaving the year – 112 was not booked as synergies within the year for actual realization.
Jim Cracchiolo
Yes, 75 is the actual number that we have.
Tom Gallagher – Credit Suisse
So that’s an end-of-the-year that we – that’s not even in the – that 112 is not a run rate in the 4Q either, Jim?
Jim Cracchiolo
It’s a run rate out of 4Q, but if you’re asking –
Tom Gallagher – Credit Suisse
At the end of the 4th –
Jim Cracchiolo
– is it already in the P&L for 2010, the answer is no. Only 75 is actually booked in the P&L in 2010, but as we leave the year, that 75 turns into 112 for 2011.
Walter Berman
Right.
Tom Gallagher – Credit Suisse
I got you. Okay, that’s helpful, thanks.
Operator
That was the last question for today. Please go ahead with any final remarks.
Jim Cracchiolo
Yes. First of all, I want to thank you for participating in the call and asking for the various questions that helped clarify things.
I think one of the issues we do have which is very hard and we’ll try to figure out is how to deal with things like the 157 because it’s a noneconomic charge, but I know people can’t predict it and so the estimates that you come out with do not include and it does sort of get little noise in the system. I would also leave you with this thought.
I think for the things that we wanted to do in 2010 and what we told you back in 2009 and ‘08, I think is actually coming about quite well. I think we’ve had a strong business and a strong year.
I think we’re seeing improvements. We think we continue to drive margin improvements.
I feel very good about where AWM is and where it can go as well as with the Columbia deal and Threadneedle, that we can actually continue to improve there as well. Of course, we got work to do to change the flows around, et cetera, but I think we got good product line and good performance, which is something that we never really had completely in the past.
And I think we have a more substantial and fuller lineup. Yes, we’re still working through further levels of integration, but the savings are being realized.
I think we have a good business now, a sizeable business. I think if you compare it to other large independent managers out there, we’re quite sizeable, including our earnings and our ability to earn.
And the same thing with our advice and wealth management. We’re starting to come into the stream where this is really having a substantial impact.
We think we can continue to grow those margins even with low interest rates. Yes, we had some pickup and some expenses in the fourth quarter, but I think outside of the Securities America activity, our margins would have shown nice improvements as well in the fourth quarter for our core franchise business which is really the focus that we have.
So, I just want to leave you with the thoughts. I think we’ll manage our other businesses very prudently to drive returns and manage the risk, that’s why we chose to get out of the outside distribution of annuities.
I think we can generate good returns with good consumer behavior in the other annuities with strong hedging. And I do believe our protection business will start to improve.
I take the note regarding the auto and home, it has not been a problem for us, but we don’t want it to be a problem for us. So if we see anything substantially changing, we will evaluate, but we really think it can continue to drive margins because of some flexibility in case we don’t need to.
And overall, as Walter said, we do have a strong capital position. We will be looking to utilize that appropriately.
I will not use the money for acquisitions unless they really made sense and we can really get good synergies as we’ve been showing you for the last few that we did. And we will return to shareholders as appropriately, but we don’t need to do that all in one moment, but we can do that over time so that you can feel comfortable, we can feel comfortable and still have degrees of opportunity for growth and investment.
So I appreciate you taking the time. I do feel we had a good year and we tried to deliver everything that we told you about a year ago and we look forward to continuing to work with you in the New Year.
Thank you.
Operator
Thank you for participating in the Ameriprise Financial fourth quarter and year-end earnings conference call. This concludes the conference for today.
You may all disconnect at this time.