Ameriprise Financial Inc (AMP) — Q4 2015 Earnings Call Transcript

Thank you, and good morning. Welcome to Ameriprise Financial’s fourth quarter earnings call. On the call with me today are Jim Cracchiolo, Chairman and CEO; and Walter Berman, Chief Financial Officer. Following their remarks, we will be happy to take your questions. During the call, you will hear references to various non-GAAP financial measures, which we believe provide insight into the company’s operations. Reconciliation of non-GAAP numbers to the respective GAAP numbers can be found in today’s materials available on our website. Some statements that we make on this call may be forward-looking, 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, our 2014 annual report to shareholders and our 2014 10-K report. We take no obligation to update publicly or revise these forward-looking statements. And with that, I will turn it over to Jim.

Hello, everyone, and thanks for joining us for our earnings call. This morning, I’ll provide my perspective on the business and Walter will discuss our financials. Ameriprise, like the industry, was impacted by a more volatile market environment during the second half of 2015. Overall, our fourth quarter results were solid. We are executing our strategy and have more work to do in certain areas that I’ll discuss. For the quarter, operating net revenues and operating earnings were largely flat with operating EPS up 7%. And for the full year, operating net revenues were up 1%, operating earnings grew 3% and operating EPS increased 9%. In terms of operating return on equity, Ameriprise continues to deliver at a differentiated level. We generated a new record return of 24.3% up 130 basis points, which is one of the best in the industry. Ameriprise continues to demonstrate strength in our ability to return capital to shareholders, returning another $569 million in the quarter. In fact, 2015 represented the fifth consecutive year we returned more than 100% of operating earnings to shareholders through dividends and share repurchases while investing for growth and maintaining our capital strength and flexibility. Very clearly, our financial foundation remains in excellent shape. In total, assets under management and administration were $777 billion as solid Ameriprise retail client flows were dampened by asset management outflows, market depreciation, and an unfavorable foreign exchange impact. Let’s move to the business results in the quarter. In Advice & Wealth Management, we have a strong business and I feel good about our ability to continue to help advisors build productive practices. The strength of our Advice value proposition is even more attractive in this environment. Ameriprise is well-positioned to help clients and prospects in every stage of their lives and to address the full spectrum of their needs across both market cycles and their lifetimes. We’re helping advisors uptake the extension of our successful Confident Retirement approach that we launched last quarter for those who are still building their wealth. Wealth Builders, as we call them, represent more than half of our target market, consumers with $500,000 to $5 million in investable assets, and they value a financial planning relationship. So this is a real opportunity for us going forward as we introduce it to our entire field force over the coming months. We continue to invest significantly in our brand and marketing programs that help our advisors spend more time with their clients and grow their practices. Our Be Brilliant advertising campaign tells our story by illustrating the everyday movements of brilliance that they can realize by working with the right advisor in the right firm. The campaign is doing well and outperforming competitive norms with all of our key audiences, consumers, clients, and advisors. We’re complementing our broadcast activity with digital channels like social media and online ads to expand the Ameriprise message and increase engagement with our brand. Our advisors are taking advantage of Be Brilliant in their local communities online to gain new clients and assets. Overall, client assets remain strong at $447 billion. We also had solid flows into fee-based investment advisory accounts and cash positions increased to more than $23 billion. Clients are naturally taking a more conservative position, which is a typical pattern in this environment. But regarding our advisors, Ameriprise’s value proposition and culture are attractive in the industry. It was another strong quarter for recruiting as more advisors are recognizing the strength of the Ameriprise value proposition. 82 new experienced advisors moved their practices to Ameriprise. For the year, nearly 350 advisors joined Ameriprise in both the franchise and the employee channels. And so far, the pipeline for this year looks strong. Advisor practices are more productive because of the combination of excellent retention of our most productive advisors, very strong recruiting results, and our investments in growth. The advisor productivity, a metric that we consistently grow, increased 4% year-over-year to $514,000 on a 12-month basis. We’re well positioned in the marketplace in generating good profitability. In this environment, we’re working closely with our advisors to handle the effects of market volatility with clients. As clients pull back, it’s important to keep them focused and engaged on their goals. People need to plan for their future and that doesn’t change based on market conditions. As we look ahead, the U.S. Department of Labor’s pending fiduciary rule will add additional requirements that will have implications for our industry as well as Ameriprise. We’re hearing the DOL will be issuing the new regulation in the coming months. With that in mind, we’re very much focused on putting together our plans and resources to effectively meet the DOL’s requirements, but we need to understand what the final rule will be and how it will impact our clients. We have the resources, compliance infrastructure, and capabilities to respond to the DOL’s objectives. And we believe that our value proposition, satisfying client needs for the long-term, has been, and will continue to be very appropriate. Let’s move to Annuities and Protection. I’ll focus more on the underlying business and Walter will cover the financials. In terms of annuities, we continue to see solid sales of our variable annuities with and without living benefits in our channel. While we are experiencing outflows, it reflects our close third-party book and we remain focused on serving our clients. Within fixed annuities we continue to have a level of outflows given the book is in runoff as we have not been adding to it, given the current rate environment. Our focus remains on working with advisors to help clients understand the importance of guaranteed income in a well-diversified plan. It’s integrated within our Confident Retirement framework and I feel good about how we’re managing the business, developing and enhancing our competitive products and features while managing risk. Within Protection, Life & Health, we closed the year with a nice increase in sales driven by UL products. And while Life claims were higher than a year ago, we recognize there will be fluctuations quarter-to-quarter and these movements are within our planned ranges. We have a good book and we’re working with our advisors to serve clients' protection needs. The environment does create growth challenges for these longer-term products, but at the same time, it reinforces the importance of protecting what matters most to clients. In Auto & Home, we were disappointed with the financial results in the quarter. As you saw, we did increase reserves this quarter for higher claims experience in some of the older business. New business is performing in line with our expectations. Walter will explain that in more detail. We continue to make a number of enhancements to improve the financial performance and risk characteristics of the business. We brought in significant resources and leadership to continue to enhance our pricing, underwriting, and claims management. We feel that we are making the progress necessary, but we recognize it will take time for the benefits to work through the book and be fully realized. Importantly, we continue to maintain our strong client satisfaction of affinity relationships in Auto & Home. In asset management, we’re generating solid financial results and executing our strategy focused on gaining market share and profitable flows. With $472 billion in assets under management, we have an at-scale business with a diversified base of assets and earnings and we are focused on serving more individual and institutional clients in key markets globally. For the quarter, operating earnings were $193 million, as revenues were largely flat and earnings were down a bit year-over-year from the timing of a few expense items and investments in the business, including supporting our new Columbia Threadneedle Investments brand in our key regions of the U.S., UK, Europe, and Asia. Investment performance remains quite strong. I’d highlight U.S. and European equities, asset allocation, and tax-exempt fixed income as particular strengths. Our investment teams in the U.S., London, and Singapore are demonstrating the importance of active management, both in terms of capital appreciation as well as preservation, given the volatility we’re experiencing. On the product front, in Europe we’re seeing good sales in our UK and European equity products. Here in the U.S. we’ve had good traction with sales in large-cap equity products as well as in our strategic income fund. And within the solution space, our carrier strategy continues to gain interest. From an overall flows perspective, we had about $700 million of net outflows in the quarter with reinvested dividends. This did include a higher level of outflows at U.S. Trust. However, underlying flow trends are improving and I’ll take you through it. Let’s start with institutional. Total outflows were driven by about $6 billion in net outflows of former parent assets, largely driven by outflows of low-fee, fixed income, common trust funds in IMA’s at U.S. Trust given the changes they have made. We mentioned this last quarter and expect continued IMA outflows of several billion dollars at U.S. Trust in the first half of 2016. In addition, we and others in the industry continue to experience outflows from a large client who redeemed from strong performing strategies to address liquidity concerns. That was approximately $1.4 billion in the quarter, and we expect at least $1 billion of additional outflow in the first quarter. These two components, low-fee, former parent assets in a single large client, muted continued progress in third-party institutional flows. We have strong client and consultant relationships, a solid list of one not funded mandates, and a good pipeline, which we expect will drive flows this year. Let’s now move to retail. In the U.S. we’re seeing positive trends from the work the team has done to focus our sales strategy. However, this was muted from a flows perspective given continued outflows in the Acorn Fund. The fund's short-term performance has improved from the changes we’ve made, including adding an experienced lead PM, who came onboard at year-end. We expect outflows will continue to near-term as the team reestablishes the fund's longer-term track record. Additionally, in the quarter we made the decision to end the sub-advisory relationship with Marsico Capital Management, given the strength of our global investment capabilities. This resulted in a few hundred million in outflows in the fourth quarter. We plan to ask shareholders to support our plans to merge certain funds in 2016. In addition, we expect outflows of about $700 million in Marsico managed institutional SMAs in the first quarter. Based upon the previous servicing relationship with them, these outflows will have no financial impact. Overall, we’ve been able to grow gross sales and market share in the larger broker-dealer and independent channel in the past year at a time when gross sales declined for the industry. This bodes well as industry sales may pick up down the line. We recognize we need to do more to increase both gross and net sales in U.S. retail, but I feel good about the business, the team in place, and our strategy. We’re seeing early results. Regarding European retail, we continue to build on our strong presence in the UK and serve more clients in key markets on the continent. At $1.4 billion in the quarter, European retail flows bounced back strongly from a tough third quarter. The market environment so far this year is clearly challenging, but we’re focused on what we can control. We’re generating strong performance for clients. We have a good product line and distribution. I feel good about the team in place, the moves we are making, and the traction we have in key initiatives and asset management. Overall, the company is performing well and our core businesses are strong. Ameriprise delivered solid earnings in a more difficult environment. Higher market volatility and declines have clearly shaped the start of 2016. We’ve managed through difficult market cycles before and we’re very much focused on executing our strategy, connecting with clients and advisors, and driving results. Ameriprise has the ability and long-term perspective to continue to invest as we navigate the environment, capture our opportunities, and generate shareholder value. We have a strong track record of returning capital to shareholders and intend to continue returning to shareholders as we have, as well as maintain our excellent financial foundation. We’re focused on keeping the company strong as we look for further growth opportunities. With that, I’d like to hand things over to Walter to review the numbers.

Thank you, Jim. I’d like to build on what Jim shared with you, as we review the financial results. As context, markets were volatile and on a downward trend in the second half of 2015, which impacted revenues for our growth businesses. However, the results we delivered in the quarter were strong. The one exception is the Auto & Home business, where we were disappointed with the results, which I’ll cover in more detail when I review the segments. We remained opportunistic in repurchasing our stock at an elevated level in the quarter given the pullback in the valuation and still believe our stock is undervalued. Our capacity to buy back stock remains strong given our balance sheet fundamentals and the business mix generates strong free cash. We are committed to maintaining a differentiated level of capital return. Let’s turn to Slide 4. Macro conditions impact revenue in a few ways. We had limited equity appreciation which impacted asset under management. Volatility also suppressed client activity and contributed to asset management outflows. Low interest rates remained a headwind for our insurance and annuity businesses and foreign exchange translation impacted asset levels and earnings. These impacts were felt across all financial services companies and we are not unique in this regard. As you can see, total revenue growth was not at the level we had seen in the past. All the markets and lower interest rates which decreased AUM and client activity, slowed. This muted the impact of areas where we successfully built the wealth management business through increased wrap flows, growth in insurance and annuity sales and building cash sweep levels as clients wait for a less volatile environment to make investment decisions. Let’s turn to Slide 5. Ameriprise delivered solid growth in EPS and return on equity, demonstrating the multiple leverage we have to manage the business and variety of market environments. Specifically, we managed G&A expenses, investing for growth in targeted areas but remaining disciplined. This combined with solid tax planning and share repurchase, supported good 7% EPS growth. The operating effective tax rate was 20.1% in the quarter, which is lower than we had anticipated driven by the level of dividends received deduction coming in harder than we expected. Turning to segment performance, starting with AWM on Slide 6. The Advice & Wealth Management business continues to perform well, delivering solid financial results. Operating net revenue was $1.3 billion in the quarter, up 1% from last year. Our revenue growth slowed due to the impact of market levels of volatility and didn’t experience the typical lift we have seen from markets. Wrap net flows were quite good at $2.1 billion, despite the deterioration in the markets and flat client activity levels. Total expenses increased 2% year-over-year, driven by higher distribution expense. G&A expenses in the quarter were flat year-over-year and also flat for the full year 2015 versus full year 2014. On a sequential basis, we had a normal uptick in G&A related to elevated advertising spend and other timing-related items in the quarter. This resulted in earnings of $210 million and a strong margin of 16.6%. Margin for the full year was up to 17.1% from 16.5% in the prior year. Results were achieved with little benefit of increasing short interest rates. We had $23.5 billion of brokerage cash balances. We anticipate a more material benefit in the first quarter from this fed rate hike, with a majority of the first 25 basis point increase flowing to the bottom line. Asset management continues to provide a solid contribution to our revenue and earnings, as you’ll see on Slide 7. Operating net revenue is essentially flat at $833 million, reflecting marginal growth in equity markets and the cumulative impact of net outflows, partially offset by strong CLO benefits and the performance fees in the quarter. Expenses were up due to elevated performance fee compensation, as well as the timing of certain project-related costs. We remain committed to delivering strong profitability by tightly managing expenses. Pretax operating earnings were $193 million, down 3% from last year. Again, this reflects the impact of marks and outflows, partially offset by elevated performance fees. Turning to annuities on Slide 8, the segment is performing in line with our expectations. Variable annuity pretax earnings increased $6 million from a year ago to $129 million. We are maintaining good profitability in this book. Fixed annuity pretax earnings declined to $23 million due to elevated lapses as the block runs off as it comes out of the surrender charge period. Given the current interest rate environment, there are limited new sales and as a result, this book is expected to gradually run off and earnings will trend down. Turning to the protection segment on the next slide. Pretax operating earnings were $35 million in the quarter. Let’s focus on Life & Health first. Pretax operating earnings benefited from $28 million from an assumption change related to our waiver reserve. Underlying earnings were pressured by elevated life and long-term care claims, which were at the higher end of our expectations, as well as continued low interest rates in the mix shift from VUL to iUL. Moving to Auto & Home, we were disappointed with the results in the quarter. We built reserves by $57 million, primarily in the auto book from the 2014 and prior accident years. Driving this was elevated frequency and severity experience for auto injury claims, which is in line with the trends the industry has experienced. Additionally, we did not see the level of impact in improving the outcome of 2014 and prior accident year existing claims as much as we’d previously expected. We’ve been focused on operational improvements this year, including our pricing to risk. We have begun rate actions on almost 95% of the Auto base and approximately 80% of the Home, which will take time to be seen in the financial results. These actions have been effective in slowing sales across product lines and performance for 2015 accident year is in line with our expectations. While results in the quarter did not meet our expectations, we are aggressively pursuing additional business improvements, anticipate better profitability in 2016. Let’s turn to the balance sheet on Slide 10. Our balance sheet fundamentals remain strong. Our excess capital is approximately $2.5 billion with an RBC ratio of approximately 640%. Our hedging program has been quite effective and the investment portfolio remains strong and I will get into our energy exposure momentarily. We continue to return over 100% of operating earnings to shareholders with $569 million distributed through dividends and share repurchase in the quarter. For the year, we returned $2.1 billion to shareholders, which was 125% of operating. Looking into 2016, we plan to return 90% to 100% of earnings to shareholders as a baseline. But we will be optimistic based on valuation. There has been a lot of interest in the energy sector given our oil prices. So I’d like to take a few minutes to give you more detail on our portfolio. As you’ll see on Slide 11, we have approximately $3.3 billion of energy sector exposure. The duration is short on these energy holdings with over 35% maturing in less than three years. We feel quite comfortable with our holdings for the following reasons. We have a consistent rigorous research process behind our investment decisions. As we analyze investment opportunities, we consider low commodity prices when we analyze, stress test, and purchase energy company volumes. Our analysis focuses on key variables such as a company’s core structure, balance sheet health, flexibility of CAPEX budget, asset coverage, and our assessment of management quality and behaviors. Approximately $1.2 billion of our energy exposure is to pipelines, which are essentially the infrastructure to move oil, oil products, and natural gas from the producer to the end-users. The vast majority of our exposure is with a handful of the largest U.S. pipeline operators. These pipeline operators are highly regulated and receive most of their revenues from contracts where the customers pay a reservation charge regardless of the quantity and price of product being moved. In many cases, these pipeline assets originate at the wellhead, making this pipeline infrastructure essential to the producers. Additionally, contract terms with producers and customers are generally multi-year in duration. The rest of our energy exposure focuses on large diversified North American-based companies. While we anticipate that some investment-grade holdings may be downgraded to high-yield by the rating agencies, we do believe that these companies have the financial flexibility to weather this extreme pricing environment. We have already seen these management teams taking aggressive actions that we would expect of them, reducing their cost structures, cutting capital expenditures related to future production growth, reducing or eliminating dividends, undertaking asset sales, and even issuing equity, all with an eye towards living within cash flow as these distressed commodity prices continue. So far we have only two downgrades from investment-grade to high-yield in the energy space. The last thing I’ll mention is that the team we have in place today is the same team that managed our portfolio well during the global financial crisis. In fact, approximately 30% of our overall energy exposure was purchased in 2008 and 2009 when commodity and bond prices were last near these levels. Overall, I feel very good about our financial performance in the quarter and in the year. We delivered solid earnings growth in the face of challenging market conditions. 2016 is off to a difficult start with continued market deterioration and volatility, which will pressure results if it persists. However, we have managed through challenging environments in the past and we have the levers to do so this year. We have an excellent track record of returning capital to shareholders in a meaningful way and will continue to do so opportunistically. With that, we will take your questions.

Hey, thanks, good morning. First question is can you give us a rough sense of the fee rate differential between the former parent related outflow that you’ve referenced at the low fee and new sales at this point?

If you’re looking for the differential from the – the differential that we had on from a basis point on fee that’s what you’re talking about?

Yeah, or even distressed roughly…

Okay roughly approximately again for the inflows and outflows again looking at that as we talk about the low basis points it was about a nine-point differential between the inflows were about nine points higher than the outflows. And obviously, the U.S. Trust element was substantially lower than – at the lower end of flow basis points revenue.

Okay, got it. That’s helpful. And then secondly have you seen any improvement in the M&A environment given lower property valuation in the asset management sector?

I would say that there seems to be a bit more activity going on. I think the stuff that was out there a little over the course of this year was still at a bit more elevated price. But I would probably see if we continue in this environment that things would probably either come forth more or be in a better valuation basis.

Okay. And then just last quickly. Do you have a tax rate expectation for 2016?

Yes. Right now we – it should be in the range of 24% to 26%.

Okay. Great, thank you.

Good morning everybody. So I realize, we ended the year with a pretty challenging environment with deteriorating and volatile markets, but it seems like this is continuing this year. Can you give us any sense of how the first month of the year is looking for you?

What I would probably say is, with the increased volatility at the beginning of the year we’ll probably see client activity slow a bit, as people sort of get to a better perspective of where the markets are balancing out to put more money to work. I think, as you saw in the fourth quarter even though we had good client inflows, we did build cash balances. Usually what you find is, you begin the year those cash balances will go to work a lot quicker in the first quarter. We’re probably seeing and being held more now until the volatility sort of calms down there’s a little more direction to the markets.

Okay. And then, if we turn to the Auto & Home business. I understand it was a little disappointing on year end as well. Do you still expect it to be profitable in 2016 as you had indicated earlier?

Certainly from the standpoint, the action we’ve taken in and certainly looking at the 2014, we – our expectations are that it should, but it’s going to be at the real low-end of that profitability.

Okay. And I guess I am surprised a little bit to see the continued – the continued prior-year reserve developments and now I guess going back to 2014 as well. I haven’t really seen that coming from other auto players in the industry. And I’m just curious what is it that really makes this business so difficult to get the reserves right for, particularly in Ameriprise’s case?

Well, okay. Let me try to answer it. Again, I can only take you through what we see in the industry statistics and other things. But when you’re looking as long date as you look at BI underinsured and fiscal damage, what you’re seeing there is, we had claims on the books looking at this and this is typical I think for the industry and as I go through their aging cycle, the environment has become a lot more litigious and I think that’s not just exclusively for us, I think that is an overall situation. And basically assessing as we looked at, we added the staff and certainly started looking at the claims performance and aspects, it realized and this was more and more our case reserves were we need to be bolstered as it relates to the 2014 and prior. And again if you look at up to 2014 you are looking at probably more severity and in 2014 combination of severity and frequency. So we therefore how do we increase our case reserves to do that we now believe we’re more confident that these reserves will be adequate particularly with the amount of staff. But I think, the reason why I don’t see some of it even though – again we talk about claims on liability have deteriorated I think there are other firms probably have high reserve capabilities basically or whether that situation and we did not as we were building. Last year when we built reserves we would built in more – we went into 2014 we were caught that what we reserving in that year as we indicated was – when we assessed it at the end of the day it was not adequate and that’s where the majority of that money went. We’ve seen for every deterioration like I said in BI and UAM and UM.

Great, thank you very much.

Hi. Thank you. I just had a couple questions about Advice & Wealth Management expenses. First, how much of your G&A expenses are variable costs? So if you do see revenue pressure from market conditions, how should we think about the impact on margins?

Again, as you look, as a rough rule of thumb, again, it’s three categories fixed – semi-variable and variable, I would say variable in that case would be about a third. And again from that standpoint, and certainly we’ve demonstrated in the past our ability to approximately assess the situation and see what expenditures provide this sort of return and we do so, we have flexibility.

Got it. And can you help us think about the level of expenses you may need to incur to comply with the DOL rules and is this something you may be able to offset through reengineering or should we expect some net impact in 2016 once kind of the final rules are out?

No right now we are assessing obviously from the standpoint the rules have not been distributed but certainly we realized that if we reread it, depending on there will be development expense and there will be some ongoing operational expenses. We hope to then certainly we’ve been in a plan for mode, at this stage trying to be proactive. But again, not having the full elements of that is difficult to put a number on. But it will – we will then look to what reengineering and basically repositioning we would have to do. And I think that is something as this comes out, we’ll be more direct about it. And again, it’s something that we are focusing on and be part of the development. I don’t know if Jim wants…

Yes. I think what I would say right now is we do – we have mobilized our resources. We’re looking at all aspects from the compliance to the technology, to training necessary for the advisor force. And we will go into the deployment of that as soon as we know exactly what the rule looks like. We’re doing some work already to prep for that and get various activities underway that we think based on some of the directions in the previous proposal, and that’s already in the functional requirements and stuff from a tech perspective. Depending on how significant that is and what the changes we think we do have the capabilities to accommodate that or adjust for it. There will be impacts and expense from it, we will offset some of that based on what we will tighten the range, and for some other things we might have underway as this takes priority. So there will be some offset there. Having said that, I couldn’t tell you, in the short-term depending on how aggressive the timetable for implementation is, what we would have to do to ramp up on some of the resourcing necessary. But as I said I think Ameriprise will be one of the companies that would have the ability to deal with this more effectively. We do have the resource capability and can move things around to try to accommodate that. And we will set up so that in the end hopefully we will be a place that would be a better able to serve.

Okay, that’s helpful. Thank you.

Good morning, everybody. First question is, related to Advice & Wealth Management, I’m curious, Jim, market volatility and maybe client activity slowing certainly make some sense. And it’s sort of a continuation from what we saw in the third quarter. I’m just curious whether you’re seeing, or you believe you’re seeing, any impact just yet in the results from the proposal – from the DOL proposal or are advisors already starting to adjust?

No. I would say as advisors are as curious as you all are, to what exactly this will mean et cetera. And we’re starting to give them a little better sense and communication on that. What I would just say is I think what you’re seeing more near-term is more of the volatility picked up in the market. And you have some – in our case, we run a lot of assets in the Management fee-based business and so you have that depreciation at the end of the third quarter. But as you saw we still got $2 billion into our outflows, our cash balances increased by a few billion. So I think at the end of the day, activities still going on. I think people are just like you and I probably looking and saying is there another leg down, what is it? What’s the level of volatility? I think on the other side, we are not seeing wholesale changes to client activity or people pulling money or anything like that, but I think people are more stayed in tune. There’s still money going to work and some people are using this as an opportunity. But I think at the end of the day, I think the increased volatility always gives people a little pause.

And then related to that, Jim, most of – I think at this point most of your competitors who have some sort of an advice-based business have really tried to quantify at least provide some sensitivity around where they might expect to see some of the impacts from the DOL proposal. Assuming it goes through as it’s currently written, and it seems more, more likely that there won’t be any significant changes to it. I’m just wondering now – many months to evaluate the proposal whether you can help us with some sensitivities on where you might see some impacts on your revenues and margins?

What I would say is this – I think one of the things people have identified is the idea that if they’re unable to sell rates et cetera or some of the types of broker transactions into the qualified accounts and what would that do to revenue. I would just say over the course of this year based on changes in regulations and other things and where the market was, our advisors pulled back from that. So I think that pullback from that’s going to be less significant because it was already occurred in on numbers in 2015 in a large way. Because you know there are a level of changes happening there already. I think in regard to the business overall it really depends on where the DOL comes out with their best interest contract exemption. And if they truly are giving you the ability to do commission-based business within that and to satisfy your obligations there, that’s one method. If they’re saying, no, we don’t like that and we want to move more to fee-based. Yes, we can accommodate that as well. We’re trying to figure out which way that – as far as the actual final rule. You would imagine that there’s going to be some increase in compliance and cost disclosure and various things like that, but over time, we will get everything adjusted for it. It’s hard to really say, we probably see some adjustments that would happen in the idea of the commission type business for these accounts. We do see that – a lot of our annuity business. I know that was one of the things that people mentioned, but a lot of our annuity business today very, very little almost none of it is done without the extra debt benefits or living guarantees or something that. Again, the administration has said that’s still important. So we are still under the impression that under the best interest contract you can still actually do those things as long as you satisfy the requirements of the value provided and what that is and how you disclose it, et cetera. So that’s why I’m saying it’s kind of hard to give you an adjustment. But we have all the what ifs depending on where we go, what we’re planning on doing is as soon as we get that information, we’ll come out in a more informed way and let you know what that is. We already know that there are a number of offsets that we can do by adjusting things, including what fees we charge and don’t charge and where we do it. On the other side of it, it’s hard to tell exactly what is permissible at this point. I hope that – I wish – but I don’t want to get ahead of my skis on this.

No, I understand. And if I can just ask one more question on the asset management side. Just curious whether you could help us with what the underlying either the fee rate or the operating margin, what that looked like in the segment in the quarter if you adjusted out the performance fees in the CLO again?

Okay. Yes, on that basis it would be pretty similar to what you’ve seen before in the 53% range.

Good morning. So first just a follow-up on that last question, can you talk about priorities right now? Obviously you’ve upsized the buyback a little bit in the latter half of the year. But I know you’ve also discussed contemplating M&A. Can you talk about, just given where your stock is, whether M&A opportunities are still on the table? Or is your money better put to work just through buybacks right now? That’s my first question.

No. M&A is definitely on the table and if we see things that come along that are appropriate for us, we have the means to do it. I think having the capital position we do have gives us the flexibility. We won’t have to go out and leverage ourselves to do something bigger. We wouldn’t have to go raise equity in a difficult market, which doesn’t make a lot of sense. And over time, we also can return back in a more, what I would call stronger way so that you always have something there in addition to whether you’re in a weak market requirement to buy back more. So that’s the way we thought about it. I mean, I remember before the financial crisis a number of investors asked us to, and analysts why aren’t we returning more? Why don’t we go out in the risk curve? Why don’t we get more higher-yielding instruments, et cetera, et cetera? And I think they thanked me afterward in a sense that we kept the company on a consistent path, we did appropriately having the flexibility in the means to navigate and we did have the opportunity than to do a bigger deal even though we had to do, because it was a little bigger deal because the environment was still unsettled. We actually just did some equity at the same time. So I would just say Ameriprise is very well situated. And if this market gets even more difficult, I think we’re actually one of the stronger players to actually be able to capitalize on it. If it doesn’t, we’ll be able to continue to buy back our stock at good numbers and still be able to keep the company strong not knowing what the next step for the turn of the environment or an M&A comes along. So I actually think we’re situated well and this is actually kind of a good environment for Ameriprise in that sense.

Got you. And, Walter, just a question on Advice & Wealth margin. So, and I realize you may not have the precise answer this time but I just want to know if you can answer this directionally. A little better than 16.5% margins in Advice & Wealth in 4Q was lower than where it’s been trending lately. But if I consider the benefit you’re going to get from higher short-term rates, plus the seasonal expense reduction that you typically get from 4Q to 1Q, and then I consider the offset of the weaker revenues, assuming we don’t change a lot from current market levels, would you still expect margins to be lower than the 4Q level? Or I should just ask it this way, would you expect margins to come in below the level of 4Q or can you give us a sense directionally?

Directionally, certainly as Jim has indicated, the market reduction and the deterioration impacts it, but again you’re talking about margin. So the question is really getting to base profitability and then of course remember revenues going to be moving and also profitability and the actions we then take. I think the elements – the moving parts of the market both interest and with equity certainly compounds a little, but then the actions we will be taking as we look at that in the interest lift. Underlying direction of the business is solid, so I think and then – but the question is client behavior, so it is a difficult question. The fundamentals are there, but we do get impacted by these variables that we just can’t control. That’s the non-controllable side then we get to the action that we take to manage the business. So margins are tough one because you got moving – a lot of moving parts on it, but profitability certainly will be impacted by the drop in the equity marks offset by the interest lift. And then it’s a matter of how it affects the client activity both from the level and then the shifting, right? So that’s why it’s a tough one, really is. But the fundamentals where we’re going is solid certainly from that standpoint. As Jim has said, we’re attracting advisors, we’re certainly feel comfortable about the fundamentals of business. And so there’s no change from that standpoint.

Got you.

On the other side, interest may be a little more of a benefit because the short rate was up 25 basis points. So that will help us in the first quarter. I don’t know the actual numbers one versus the other, it depends on where the markets are.

Right. Jim, for the overall company in 2016 included there’s a benefit on EPS from the share buyback, but directionally would it be pretty reasonable to expect kind of a flat EPS in 2016 given pressures especially from equity markets?

I think, listen the markets as Jim said are certainly affecting us. And the thing that we then have to assess is the impact it has on the client behavioral aspects and then the actions that we think are prudent to sustain growth and everything’s in that and how you adjust it. So there’s a lot of elements there but it certainly is challenging…

About buyback and the EPS…

But the buyback, again, you will have an impact on it, but again, is it going to be able to negate, I can’t say at that stage as we assess the – those other variables.

All right. Thank you for the insight.

Hi, good morning. Just I wanted to go back to Auto & Home for a second. Is there anything structural about that business, whether the distribution relationship you have with Costco or anything like that that would preclude your ability to either exit it or use reinsurance to free capital?

From the standpoint of exiting free capital, there are no restrictions from that standpoint. And the other thing I would say, Suneet, the basic business fundamentals of this, and certainly looking at it – we’ve looked at it, and we’ve had outside consultants look at it, the basic fundamentals are quite solid. But in the contractual elements, I think we can certainly manage the balance sheet.

Yes, but Suneet, I mean, we do run a direct affinity business, and our partnerships are very critical to that business. And so very important is this is why our business is something we want to get back to a really good state. And we want to then ensure that we’re continuing to deliver. And we are and have been, and that really has reinforced the idea of our growth over the last number of years. Now with that as I said, the most appropriate for us, for shareholders, from a relationship, from a partnership, and the longevity of the business, is to get this back to a good strong state. And then that gives us a lot more ability to think of and how to continue to force the good partnerships or good arrangements for the future.

Okay. But I guess we’re looking at a difficult 2015, very low profitability in 2016. It doesn’t sound like there’s anything structural that would prevent you from exiting. We’ve run the math that suggests if you free capital from it, it would be more EPS accretive than turning it around. And that was when the stock price was, I think, I don’t know, $105 and now we’re looking at $20 lower than that. So why is that math wrong?

I can’t – our math and when we look at it, is we – as Jim has said the business, we believe is fundamentally a sound business. We believe it’s in the best interest from the shareholder perspective to take the approach that we are. And so I know certainly it’s taking this reserve increase certainly is impactful. We do believe the structural elements moving forward for us are good as we talked about them. And we do – we have a view that from a shareholder basis, fixing it and assessing is the best approach. You know it takes time to get these price increases, these price-to-risk elements adjusted through, and we certainly focus on the infrastructure, the investment we’ve made in people and capabilities will pay dividends for us. And relationships are unique and very valuable and certainly provide the capability to have good returns forward. And we certainly are trying to fix – we think we have addressed the old, now we are moving forward and putting in place, but it does take time to get there. And we did miss on the basis of how much impact we could have with the 2014 prior. That’s our view of it.

And Suneet, we do evaluate we’re not looking and we do evaluate all various options and ability. I would just tell you that based on everything including other people looking et cetera that this is the way to create the best shareholder value and to maintain the strength of that business for the future for whatever it may come than what we’re doing right now. So I know looking at it from just a mechanic and what you think, but I would probably say being a bit more in understanding it. Now that’s where we come out and we will get this back to where it’s in good shape and in some way creating a future shareholder value of greater means.

Okay. I guess we will revisit that. Then in terms of the excess capital and the buyback, maybe to follow up on Jay Gelb’s question, it just seems to me that you have – there’s $2.5 billion of excess capital. It’s a pretty sizable component of your total equity. The market doesn’t seem to give you any credit for that excess capital. So I know you want to be opportunistic but can you flush out a little bit more, just maybe the pace of buyback just so we get a sense of how aggressive you’re thinking about being?

Again, I think we’ve been – as we look to 2015 certainly looked at the latter half of 2015, we certainly accelerated the base and certainly from the dollar standpoint and certainly in the number of shares, as the elements there. So we do believe – as we assess that sort of positioning is the right one to continue with. But we look at it each quarter and assess the impact. So I think it’s a good gauge maybe – from our standpoint being optimistic about it what we did in the latter half of the year is something that is a barometer to start that we would continue with where the price is. And but again, we get into assessing the excess, the environment, we feel very comfortable about that. So I think it’s a pretty good barometer if you use the latter half of the year.

All right. So you filled in 425 for quarter and maybe there’s some opportunistic upside to that?

It seems like that’s latter half of the year.

Good morning. So first just a follow-up on that last question, can you talk about priorities right now? Obviously you’re – you’ve upsized the buyback a little bit in the latter half of the year. But I know you’ve also discussed contemplating M&A. Can you talk about, just given where your stock is, whether M&A opportunities are still on the table? Or is your money to better put to work just through buybacks right now? That’s my first question.

No. M&A is definitely on the table and if we see things that come along that are appropriate for us, we have the means to do it. I think having the capital position, we do have gives us the flexibility. We won’t have to go out and leverage ourselves to do something bigger. We wouldn’t have to go raise equity in a difficult market, which doesn’t make a lot of sense. And over time, we also can return back in a more, what I would call stronger way, so that you always have something there in addition to whether you’re in a weak market requirement to buy back more. So that’s the way we thought about it. I mean, I remember before the financial crisis a number of investors asked us to, and analyst why aren’t we returning more? Why don’t we go out in the risk curve? Why don’t we get more higher-yielding instruments et cetera, et cetera? And I think they thanked me afterward in a sense that we kept the company on a consistent path, we did appropriately having the flexibility in the means to navigate and we did have the opportunity than to do a bigger deal even though we had to do because it was a little bigger deal because the environment was still unsettled. We actually just did some equity at the same time. So I would just say Ameriprise is very well situated. And if this market gets even more difficult, I think we’re actually one of the stronger players to actually be able to capitalize on it. If it doesn’t, we’ll be able to continue to buy back our stock at good numbers and still be able to keep the company strong not knowing what the next step for the turn of the environment or an M&A comes along. So I actually think were situated well and this is actually kind of a good environment for Ameriprise in that sense.

Got you. And, Walter, just a question on Advice & Wealth margin. So, and I realize you may not have the precise answer this time but I just want to know if you can answer this directionally. A little better than 16.5% margins in Advice & Wealth in 4Q was lower than where it’s been trending lately. But if I consider the benefit you’re going to get from higher short-term rates, plus the seasonal expense reduction that you typically get from 4Q to 1Q, and then I consider the offset of the weaker revenues, assuming we don’t change a lot from current market levels, would you still expect margins to be lower than the 4Q level? Or I should just ask it this way, would you expect margins to come in below the level of 4Q or can you give us a sense directionally?

Directionally, certainly as Jim has indicated, the market reduction and the deterioration impacts it, but again you’re talking about margin. So the question is really getting to base profitability and then of course remember revenues going to be moving and also profitability and the actions we then take. I think the elements – the moving parts of the market both interest and with equity certainly compounds a little, but then the actions we will be taking as we look at that in the interest lift. Underlying direction of the business is solid, so I think and then – but the question is client behavior, so it is a difficult question. The fundamentals are there, but we do get impacted by these variables that we just can’t control. That’s the non-controllable side then we get to the action that we take to manage the business. So margins are tough one because you got moving – a lot of moving parts on it, but profitability certainly will be impacted by the drop in the equity marks offset by the interest lift. And then it’s a matter of how it affects the client activity both from the level and then the shifting, right? So that’s why it’s a tough one, really is. But the fundamentals where we’re going is solid certainly from that standpoint.

Thanks so much for working in here at the end. Jim, my questions really involve asking you to build on some of your earlier responses. First, with respect to the margin in the brokerage business and the Advice & Wealth Management. I thought, I heard you say that activity levels, while depressed from where they were at their peak, were roughly in line – did not change much from the activity levels in the September quarter. So my question is, if activity levels were in fact unchanged, if expenses were well controlled and if the stock market – I’m looking at the average level of the S&P and I believe I have it right when I say that it was actually up modestly compared to the average in 2014 fourth quarter – if the stock – if you got a little bit of a lift from the stock market, good expense control and stable client activity, why did that combination not lead to a further improvement in profit margins?

So, Eric I think what it is, is what we’ve said is if you look at the numbers in the fourth quarter, I mean revenue quarter-to-quarter was actually relatively the same little slightly up. There are two things one is, the revenue would have been higher if at the end of the third quarter the markets didn’t pull back. You remember the markets went into 1,800 in August, September. And so what happened is you have all your wrap assets under management that you bill fees starting in October, beginning of October through the quarter. And so, some of those fees being billed were at lower absolute production because the fee level was based on the assets level and that just climbed back towards the quarter to the end of the quarter. So you don’t just build at the end of the quarter. So that’s what took out some of the production that happened on the asset side of the equation, right? And so that’s part. The second part of it very clearly is and we’ve had it in the fourth quarter is we do have some other G&A expense even though we managed the G&A expense flat over the year, when we put our advertising campaigns, we usually go on the air at the end of September with the bulk of that being October and November beginning of December. And so, we accrue for that expense when we are actually on the air and that’s millions of dollars to run that campaign, which is not in the third and second quarter. Now over the course of the year, since we didn’t increase our advertising year-over-year, it’s the same fourth quarter to fourth quarter, if you look at the expenses and the supplemental you’ll see that expenses did not go up and for the full year were pretty flat on G&A.

Eric, it’s Walter. So let me just – one point because he was talking about rates and certainly if you look at and I can understand from your perspective that looking at the S&P and looking you would see it’s up marginally, but what we do is run a weighted index related to the assets that we hold. And if you actually look at that on both on average and on ending its down. So it’s not just the S&P again, we actually do the earning rate assets that we have and it’s down. So that is what Jim was explaining, that is certainly – it impacts the fee base.

And, Eric, if I could wrap up just by asking about the – further about the fiduciary matter, are you saying that there will be – should I take away from your comment that there will be an impact on revenue but that the impact will be muted by the fact that there is already been a pullback in some activity?

No, Eric.

No, if we’ve got limited pullback, impact is already being considered in the trend.