Welcome to the fourth quarter and full year 2014 earnings conference call. My name is Lorraine, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Ms. Alicia Charity. Ms. Charity, you may begin.
Thank you. 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'll be happy to take your questions. During the call, you will hear references to various non-GAAP financial measures, which we believe provide insights into the company's operations. Reconciliation of the non-GAAP numbers to their 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 2013 annual report to shareholders, and our 2013 10-K report. We take no obligation to update publicly or revise these forward-looking statements. With that, I'll turn it over to Jim.
Good morning. Thank you for joining us for today's earnings call. I'll spend my time discussing what I'm seeing in the business. Walter will talk to the numbers. Then we'll be happy to take your questions. In terms of the quarter and 2014 overall, I feel good about Ameriprise and our position. The fourth quarter we delivered was a continuation of a strong year. We're executing our strategy well and generating good results. For the fourth quarter, operating net revenues continue to grow, up 5%, with good growth in operating earnings, up 16%, and operating earnings per diluted share up a very strong 23%. For the full year 2014, operating net revenues grew 7%, with good movement in operating earnings up 14% and operating EPS up a very strong 21%. We also had solid growth in assets under management and administration, which increased 5% to $806 billion.
This was driven by continued good advisor client flows and market appreciation. Our strong growth in earnings allows us to generate significant free cash. We're able to consistently deliver differentiated shareholder return while maintaining our financial strength, all while investing in the business. In the fourth quarter, we returned $444 million to shareholders. For the full year, we returned $1.8 billion to shareholders, which is 109% of our operating earnings. In fact, 2014 marked four consecutive years that we've returned more than 100% of our operating earnings to shareholders. We expect to continue to return strongly to shareholders and have targeted a 90%-100% range annually. We will evaluate based on circumstances. With strong business results and significant capital return, operating return on equity reached another high. Excluding AOCI, we ended the year at 23%, up from 19.7% at the end of 2013.
Very few financial services companies are generating this level in growth of ROE and capital return. We've consistently grown these measures at a meaningful rate. Let's move to the business, starting with Advice and Wealth Management, where we had another terrific quarter in terms of financial results and executing our strategy for continued growth and margin expansion. We had strong growth in our key measures. Revenues, earnings, client assets, inflows, and advisor productivity were all up nicely. Operating net revenue increased 11% to $1.2 billion, reflecting our strong fundamentals and positive markets. We're seeing good levels of client activity. Total client assets grew 9% to $444 billion, with continued strong net inflows of over $3 billion into our investment advisory programs. Our total wrap program is one of the largest in the industry at $175 billion, growing 14% for the year.
With good revenue growth, we've also increased profitability in AWM up 33%. We've also significantly expanded operating margin to 17% for the quarter. We have delivered this with interest rates at all-time lows. In AWM, we continue to focus on growing the business and delivering an excellent client experience. We feel good about our ability to help our advisors build productive practices. With millions of boomers moving to retirement, we're at the heart of the opportunity with our Confident Retirement approach. You've seen it in our commercials, which we just brought to market in early 2014. Confident Retirement works well for the mass affluent and resonates well with the affluent. We think there's a terrific opportunity for us to serve even more affluent investors as we move forward. Another opportunity that we're focused on is around accumulators.
We're expanding Confident Retirement to use with clients in the accumulation stage. In addition to the affluent and to those who are closer to retirement, the Gen Xs and Ys who are building their wealth also fit within our sweet spot. We continue to invest significantly in our brand and our leading capabilities to help our advisors grow their practices and increase efficiency. As we ended the year, brand awareness reached an all-time high. In fact, we were recently awarded the Gold Midas Award in Financial Services Retirement category for our Real Questions, Real Answers advertising campaign that is currently in the market. The campaign includes commercials, digital advertising, social media, and the three-minute Confident Retirement digital experience. With that in mind, we continue to invest significantly in our brand and leading capabilities that help our advisors grow their practices.
We're helping our advisors to ensure they fully benefit from the investments we've made, especially in our brokerage platform, online and mobile capabilities. As we help advisors take advantage of these capabilities even more with greater uptake, our advisors can grow productively and serve more clients. Our advisors who are taking advantage of our technology platform find that it helps them save time, increase efficiency, and productivity. At the company level, we're realizing operating cost efficiencies from our technology investments and upgrades made over the past several years. Because we're providing good value and service, client satisfaction with Ameriprise is at an all-time high in the 90s. With that, Ameriprise was rated number 1 in customer experience across investment firms in the 2014 Forrester Customer Experience Index. We also have strong relationships with our advisors.
Our culture of support and helping them achieve good growth in their practices has led to good engagement and retention that is very high, on average in the mid-90s. I spent time at the start of the month with all of our field leaders. They're feeling motivated about helping our advisors to continue to grow. The Ameriprise value proposition and culture is attractive in the industry. In terms of recruiting experienced advisors, we brought in another 73 in the quarter. The productivity of the advisors we're attracting continues to grow. Our recruiting pipeline for 2015 looks good. As a result of the actions we're focused on to drive growth, advisor productivity, a metric we consistently grow and continues to increase. Compared to a year ago, it's up 13% on a trailing 12-month basis to $496,000 per advisor. Overall, it was another terrific quarter and year for AWM.
We have deep relationships with our clients and advisors and excellent satisfaction. We're focused on continuing to drive client engagement and serve more people, especially in the affluent space. This leads to strong results. We're delivering nice growth and profitability with the ability to continue. The business consistently delivers the results we're targeting, and we feel good about our opportunity for future growth. Now let's move to asset management, where we have generated good earnings growth and continue to build our positions in the U.S., the U.K., and Europe. Net revenues were up 1% year-over-year, with pre-tax operating earnings up a solid 6% and adjusted net pre-tax operating margin increased to a strong 40%. Assets under management were up slightly to $506 billion as market appreciation offset net outflows over the past year.
In institutional, we're seeing good growth and making good progress in third party with $1.7 billion in net inflows in the quarter. We continue to win key mandates from clients in North America, Europe, and Asia, including in certain strategies like Contrarian Core and investment-grade debt. We have a solid pipeline and feel good about our capabilities as well as our global growth opportunity. However, some of our growth was offset by the regular outflows from Zurich and our ex-parent relationships. Excluding these previously disclosed items, we would have had stronger net inflows. For the quarter, we reported retail net inflows as a result of strong reinvested dividends. However, we still experience a level of outflows in one of our large funds in the DCIO channel, as well as former parent company-affiliated distribution and a sub-adviser.
We have seen some traction in a number of our retail channels. We know we can make further progress this year. We're focused on a number of enhancements that we're making in retail distribution. As an example, we installed a new leadership team. We're revamping our wholesaling, and we're making greater use of business intelligence in our improved segmentation strategy. At Threadneedle, we experienced retail net outflows of about a half a billion dollars, largely from a single client who is a frequent asset allocator. That said, the underlying rate improved from the last quarter. The recent ECB action should be a catalyst for European investors to see opportunities in the market. We would expect to benefit as investors put money to work.
You may have also seen our announcement from a few weeks ago that Columbia and Threadneedle are rebranding in the spring to Columbia Threadneedle Investments. The teams have been working together to increase the depth of our offering for the benefit of our clients and the business. Introducing our global brand is a natural next step for the business. The new global brand will represent the global capabilities, resources, and reach of these two well-established investment firms. We're focused on expanding our distribution and global presence and continuing to add high-performing products to our mix. Together, Columbia and Threadneedle have 118 four and five-star Morningstar-rated funds. We delivered another good quarter of investment performance as many of our equity and fixed income funds were positioned with a quality bias, which helped as equity markets were volatile in the quarter.
In terms of product, we're looking to build off our strength in traditional products. We're investing in a number of areas, including in multi-asset solutions. We just recently launched a Columbia Adaptive Risk Allocation Fund, one of our key new products. I'm pleased with the response it's getting in both retail and institutional channels. In fact, Jeff Knight and his team were recognized recently with an innovation award. We think that over time, we can gain good traction that would further add to our flows and complement our core business as we build our track record and awareness of these products and capabilities. Another example is Columbia's Adaptive Alternatives Fund, which we launched yesterday. It's an innovative collaboration with Blackstone Alternative Asset Management, an example of the steps we've taken to broaden our solutions. Overall, we have good talent and expanding distribution footprint and a growing product line.
We're very focused on gaining traction in these key areas. Let's move to annuities and protection, which are important to our Confident Retirement approach, helping to protect our clients' wealth and generating retirement income. We're achieving good returns in our annuity business with lower risk and volatility as we continue to grow at the moderate pace we want. In variable annuities, client account balance were up slightly to $77 billion due to market appreciation. Sales were $1.2 billion. As we work with clients to help ensure their retirement lifestyle through tax management and protection, we're selling more variable annuities without living benefits. In December, RiverSource Annuities launched Income Guide, a new income monitoring program for clients with a variable annuity without a living benefit. This complements sales with living benefits as a way for clients to cover essential living expenses.
In fact, sales of variable annuities without living benefits increased to 28% of total variable annuity sales in the quarter. In fixed annuities, underlying results were solid as the rate actions we undertook in 2014 have improved spread income. As we've stated, our focus remains on the overall profitability of the book, while the size of the book will gradually shrink given the overall sales environment. Overall, we're focused on making it easier for clients and advisors to understand the benefits that annuities can provide in terms of reliable retirement income. In life insurance, VUL/UL sales picked up a bit year-over-year with our RiverSource TrioSource product. VUL/UL ending account balances were up 3%, largely from the markets. TrioSource is an interesting UL product that combines a tax-qualified long-term care rider that fits well within our financial planning approach. In auto and home, we're seeing steady growth.
Auto and home has been experiencing higher claims that resulted in us adding $60 million to reserves in the quarter. Walter will cover this area in more detail. I did want to mention that we've been taking action throughout 2014 and into this year in the areas that have increased our loss ratios and caused exposures. We're working to further enhance claim processing, underwriting, and pricing to improve performance. This remains a very strong business model. We're seeing steady growth in policies from our focus on affinity channels and reputation for excellent service. Our auto and home business was rated one of the best firms for client satisfaction in 2014. Overall, Ameriprise had another strong quarter with good financial results adding to a strong year overall. I believe we're positioned well for the year ahead.
We continue to have a very strong financial foundation that will give us the flexibility to navigate the markets ahead. We are very focused on delivering the strategy we've discussed with you. We continue to invest and generate good returns. We've set Ameriprise apart in terms of the strength and the consistency of our results. We're focused on continuing the strong growth we've had in AWM. We're addressing areas where we can gain traction and improve our flows in asset management. Our ability to generate significant free cash flow enables us to continue to return to shareholders as we have and maintain our excellent financial foundation. As I mentioned at the start, we delivered record return on equity. We think we can take it even higher. With that, I'd like to hand things over to Walter for a detailed review of the numbers.
Thank you, Jim. Ameriprise delivered strong results at the aggregate level in the fourth quarter with solid underlying performance in our Advice and Wealth Management, asset management, annuities, and life and health businesses. We had double-digit growth in earnings and EPS in the quarter. The auto and home reserve increase and the significant business-driven tax benefit were largely neutralized on an EPS basis. We continue to strengthen our balance sheet fundamentals. Our investment portfolio is solid, hedging is effective. We have $2.5 billion of excess capital and strong liquidity. Let's turn to slide four. Ameriprise had strong aggregate shareholder performance. Top-line performance was good with operating net revenue up 5% to $3 billion. Operating net revenue without investment income was up 7%, which is very strong. Overall, operating EPS was up 23% to $2.30.
Our strong earnings, free cash flow generation, and capital return drove an operating return on equity of 23%, which is at the upper end of our target range. The operating effective tax rate was 20.3% in the quarter, which is lower than we had anticipated for a couple of business-driven reasons. About half of the benefit was related to the dividends received deduction being higher than expected. The other half of the benefit was state taxes being lower, which reflected a shift in the states where business activities are occurring. Going forward, we expect the higher DRD benefit and lower state taxes to continue, but the impact would be spread across the year rather than being recognized all in one quarter. Looking into 2015, we expect taxes to be in the 26%-28% range, up from 25.4% in 2014.
As you can see on slide five, the strong financial performance we had in the fourth quarter was consistent with the excellent year in 2014. Operating net revenue grew 7% to $11.6 billion, well within our target range of 6%-8% on average over time. Without net investment income, operating net revenue was up 9%. Operating earnings were $1.7 billion, up 14%, and operating EPS was up 21% to $8.52 for the year. Turning to slide six, our business mix shift is a direct result of the strategy we are executing. Advice and Wealth Management and Asset Management represent 68% of pre-tax operating earnings this quarter. The mix was impacted by the auto and home reserve increase, but without that, AWM and Asset Management are still over 62% of the total. Going forward, the mix shift will continue and should reach 70% from these businesses.
We continue to expand margins in Advice and Wealth Management, reaching 17% this quarter. As we bring in experienced advisors and help transfer their books, their productivity ramps up over time. This benefit, combined with the improving productivity of a legacy advisor base, is driving margin expansion and profitability improvement. Margins in the employee channel were approximately 10% in the quarter and were almost 19% in the franchise channel. We feel good about the improvement we are seeing across this business to drive profitability even higher. Asset Management margins were a solid 40% in the quarter on an adjusted basis, up from 38.8% a year ago. I'll get into the segment results in detail now, beginning on slide seven with AWM. The business is performing extremely well, leading and lagging indicators as well as financials.
Client assets are up 9% as we've seen good flows in our wrap platform, new accounts acquired, and market lift. Our experienced advisor recruiting is on target with 73 hires in the quarter, and productivity is at an all-time high of 496,000 for the trailing 12 months. Revenue is up 11% to $1.2 billion on strong sales and flows, as well as markets. We kept G&A expenses flat year-over-year. This resulted in earnings of $212 million, up 33%, and margins of 17%, up from 14.2% last year. It should be noted that we had over $20 billion of brokerage cash that was earning 20 basis points, which is still near all-time lows. Overall, the business continues to deliver consistent good results, demonstrating the strength of our business model. We continue to invest for future growth, building on our brand and adding capabilities to support our clients and advisors.
Turning to Asset Management on slide eight. Revenue increased 1% to $830 million, primarily from market appreciation, which was essentially offset by the cumulative impact of outflows and lower performance fees. During the first three quarters of 2014, we enjoyed the benefit of robust equity markets, which more than offset the cumulative impact of net outflows on revenues. In the fourth quarter, markets pulled back, especially in Europe. As a result, the lift we enjoyed from equity markets decreased and provided less of an offset to the impact of net outflows as it relates to revenue growth. In the quarter, earnings were up 6% to $198 million, which was impacted by the market pullback, lower performance fees, and additional expenses for rebranding Columbia Threadneedle Investments and relocating Threadneedle to a new office space. G&A was very well managed.
This is reflected in the margins at 40%, up from 38.8% last year. Turning to flows on the next slide. We had net inflows of $5.7 billion in the quarter with inflows across retail, institutional, and alternative. Retail inflows of $4.9 billion benefit from reinvested dividends. However, Columbia had outflows in a number of areas we have previously discussed, namely the former parent-affiliated distribution, the RIA channel, a sub-advisor, and one of our large funds in the DCIO channel. Threadneedle had retail outflows as a result of the industry-wide slowdown from geopolitical and economic concerns in Europe, as well as a mandate that shifted from retail to the institutional channel. The global institutional business is performing well with $300 million of net inflows. We had outflows in the form of parent-related mandates at both Columbia and Threadneedle that partially offset the strong third-party inflows.
We continue winning global mandates and have a good pipeline as we move into 2015. We have also launched a new CLO in the quarter, resulting in $500 million of net inflows in alternatives. Turning to annuities on slide 10. Annuities pre-tax operating earnings were $159 million, down 8% from last year. However, the prior year results included a significant benefit from clients moving to our managed volatility funds, as well as a higher mean reversion benefit last year. Without these items, underlying annuities earnings were up 15%. Variable annuity pre-tax operating earnings grew 5% from a year ago to $114 million without the benefit of clients moving to managed volatility funds and mean reversions in both periods. This was driven by higher account values. Fixed annuity pre-tax operating earnings increased 71% to $36 million.
This reflects the repricing of our five-year guarantee block early in the year, and our lapse rate was in line with expectations. Let's turn to the protection segment on slide 11. Protection pre-tax operating earnings were $30 million in the quarter, impacted by a $60 million reserve strengthening at Auto and Home. Underlying earnings are in line with prior periods and our expectations. The life and health business is performing well, with cash sales up 3% over the prior year and insurance in force of $196 billion. We saw marginally higher life claims than we have in recent quarters, though still within expected ranges. Earnings were also impacted by an unfavorable DAC model correction. As a reminder, we reinsure half of our long-term care block to Genworth, and they process and pay all of our claims. We carefully monitor and evaluate the information and processes.
However, based upon recent events, we have begun a more detailed non-routine review. We feel good about our block, particularly the risk characteristics from selling it only within our channel and the pricing actions we have taken since the mid-2000s. As I mentioned, we are increasing Auto and Home reserves by $60 million this quarter, of which 96% is related to several products in our auto book. There are a couple of key drivers of the reserve increase. First, we had an additional frequency and severity experience on book years 2012 and prior, representing approximately 15% of the reserve increase. These are based on estimated ultimate losses, but now have a higher probability of being realized as there are fewer outstanding cases and they are more vintaged.
Second, the remainder of the reserve increase was for 2013 and 2014 auto books , which are strongly influenced by 2012 prior years' experience, as well as preliminary 2013 and 2014 trends. We have minimal to moderate claims experience for these accident years and patterns are still developing. The reserve analysis was complicated by changes associated with claims re-engineering and unusual climate patterns this year. Earlier this year, we engaged outside consultants to review our processes. We are phasing in changes to our pricing to risk modeling, which will be rolled out fully by early 2016. We are making modifications to underwriting, claims, and operations, and we have made a variety of staffing change, including bringing in a new LFO, a new head of claims, and new actuaries. Turn to the balance sheet on slide 12. Our balance sheet remains strong with approximately $2.5 billion of excess capital.
Our risk-based capital ratio is estimated to be 600%, up from 450% last year due to an increase in the unrealized gains on our hedges from lower interest rates and higher volatility. We continue to return over 100% of operating earnings to shareholders, with $444 million distributed through dividends and a share repurchase in the quarter. For the year, we returned $1.8 billion to shareholders, which was 109% of operating earnings. This is down from the level returned in 2013, which did include the return of capital associated with exiting bank operations. Looking into 2015, we plan to return 90%-100% of earnings to shareholders as a baseline. With that, we will take your questions.
Thank you. We will now begin the question and answer session. If you have a question, please press star then one on your touch tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then one on your touch tone phone. Our first question comes from John Nadel from Sterne Agee. Please go ahead.
Good morning, everybody. A couple of questions, maybe two to start off for you, Jim. First, obviously, you've had a lot of pressure in the Auto and Home business over the past year or more, and the results are in stark contrast to what we're seeing from most industry participants, where underwriting results really are among the best in history. I guess can you help us understand exactly what you're doing to correct this? Do the results of this business alter your view on whether this business should reside as part of Ameriprise or be divested to a more traditional operator?
Okay. Very clearly, we have experienced increase in our reserve positions based on developments that have occurred, beginning probably in the 2012 period. We have grown the business tremendously over the last number of years. We've expanded in a number of areas. However, we still feel very good about the front end of the business, the affinity relationships, the ability to bring in good clients in a very cost-effective way. We had to tighten up a number of our various areas from the underwriting to more discipline around some particular areas in pricing, et cetera. We are making those changes. We think that we have the ability to improve that position over time. We did take the opportunity here to further increase our reserve positions based on some of those earlier trend lines. We don't have perfect information about them.
Having said that, clearly there are opportunities for us to improve. We think that we can make those improvements. We do believe that it is and continues to be a good differentiated model. In the future, once we make those improvements and those changes, we can evaluate the business on a go-forward basis.
Okay. If we looked out you had to peg, when does this business generate an underwriting profit, i.e., a combined ratio under 100%? Is that within your visibility in next couple of years or do you think it takes longer?
No. It is definitely within our visibility.
Okay.
We are looking to see some improvements in 2015 and beyond. Again, it'll be gradual improvements as we make these changes and they flow in. We really do feel that this is something that we can get back to a good level of profitability. As I said, we'll evaluate as we go along, but we are aggressively focused on it. It's unfortunate that some of these things have blipped up. It's something that we think we can definitely correct.
Okay. Really helpful. Then just overall on capital return. The slide this year in your presentation is very similar to last year, that your baseline target of returning 90%-100%, and obviously the last several years you've done above that. Can you just talk, Jim, maybe to the factors that would influence your decision to bring that down toward the 90%-100%, or keep it up somewhere well above that 100% level? What are some of the factors? I assume M&A opportunities would be part of that, share price would be part of that, can you speak to that in a little bit more depth, please?
Yes. I think to the point you referenced, there are always a number of factors, you go into a year not knowing exactly what all those factors are and how the environment is. Which is actually quite good, is that I think very few firms target at the beginning of the year to return 90%-100% of their earnings at the outset.
No doubt. Yeah.
We're doing that, even not knowing exactly how the environment plays out. As you saw in the past number of years, we've increased that over the year based upon those various circumstances. If there aren't any real good deals that we want to execute on, we up that buyback.
Okay.
If the market gives us even more opportunity, depending on certain circumstances, we can increase the buyback there as well. We sort of regulate that. We are still committed to return strongly to shareholders. We will evaluate again a dividend increase, as we always do in the first part of this year. It's a combination of factors, but I think the positive should be that we're probably one of the highest in targeting that at the beginning of the year based on a total of the earnings, and then we regulate it from there.
Totally appreciate that. Thank you. If I can sneak one more quick one in for Walter. If I look at the annuity segment, I generally see declining account values in both the VA and the fixed annuity blocks. In the face of that headwind, is it reasonable for us to expect any real earnings growth from this segment off of the sort of core 2014 results? I think the core number's about $590 million. It seems spreads are about as wide as we can expect, and with the headwind of lower long-term rates, I'm just wondering, without, of course, Walter giving any specific guidance directionally, how should we think about this segment's earnings potential?
Yeah, I think it certainly with the headwinds that you talked about, it will be muted, especially if you look at facing the fixed annuities coming out of surrender. You would see that we've made the adjustments on the rate, but we will see increased lapses there.
Okay.
I would say yes, it would certainly be less robust with the factors you referred to.
Okay. Thanks very much. Appreciate it.
Thank you. Our next question comes from Erik Bass from Citigroup. Please go ahead.
Hi. Thank you. Yes, first on Advice and Wealth. You mentioned a 19% margin for the franchisee channel this quarter, which I think is higher than even you were talking about at Investor Day of last year. Do you still see additional upside to this margin, excluding any benefit from higher interest rates?
Yeah. As we talked about, certainly as we vintage on the employee channel and certainly productivity improved that, we do. If you look at the two models, certainly from that standpoint, we see the employee channel increasing, and it has doubled from last year as we look. We've seen improvement, and I do anticipate some improvement. Again, interest rates is certainly a factor, and certainly markets will influence. We are getting good productivity improvement.
Okay. You still see from this point that the 19% could stay at this level or move slightly higher even without rates?
Again, yes. I do. Again, we're talking about environmental and other things, yes. Those into consideration, yes, we are making progress.
Thanks. Then is there any sensitivity that you can provide for how changes in interest rate assumptions or if we are in a low for long environment would affect your balance sheet? I know you obviously do the annual review in the third quarter, but kind of any help in terms of sensitivities to your, I guess, long-term rate assumptions would be helpful.
Yeah. I think from the standpoint, again, it's not so much the long-term rate. It's going to be the grading, and it's the start point where you are and then the grading from there, which will be the implication. I think the long-term rate, again, we think we're using is appropriate. We will then have to assess, just like we will now, the start point of where the rate is, and then what we do anticipate the long-term grading, depending on which product you're looking at. Obviously, long-term care has a very long window. Others have less. That would be the balance sheet impact. The other thing is the reinvestment. We're turning over mostly about 25% a year. As we reinvest, that's going to have a bit of a drag on it.
Got it. Can you just remind us what was the change that you made in the third quarter of 2014?
The change from what standpoint?
Sorry, for the interest rate assumption that drove the modest charge that you had in the third quarter.
What we did is basically we reset it obviously to the June rate, and then we basically readjusted the gradient, slowed it down. We kept the long-term rate the same, but we readjusted down, which of course, it did not hit the original target we thought that we set in 2013, so we did take that unlocking. We just graded it up out of basically more looking at, from our standpoint, the situation, which was a little slower in grading up.
Okay. Thank you.
Thank you. Our next question comes from Alex Blostein from Goldman Sachs. Please go ahead.
Great. Good morning, everyone. Jim, a couple of questions in the asset management business, and just a quick follow-up for Walt after. When I think about the rebranding initiative between Columbia and Threadneedle, and you guys will try to go out and market it as one, help me understand, I guess, a little bit, what kind of doors does this sort of approach open up relative to what you guys were doing before? What kind of new client pools are you targeting with that? And maybe just some sort of a tangible way to illustrate how maybe one plus one could equal three in that scenario, if that's the case.
We've made a number of changes over the last year and a half or so, really to put together a number of capabilities between the Threadneedle business and Columbia, and put together both core product that are managed by the capabilities of both to how we're even doing asset allocation on a global basis, and some of the managed type of activities we're doing, and the new solutions that we're launching. Very clearly, there's the underlying activities that already made some changes to what we're doing today and how we're doing it, including the ability to share research, the ability to use some of the capabilities of Threadneedle and Columbia combined to build the various portfolios and global products. The combination of the brand gives us an ability, a further ability to market our products across borders.
Today, we're already selling Columbia funds as part of the Threadneedle, and Threadneedle is part of Columbia. Particularly as I think about, as an example, I'll give you the first one, institutional. To go to market better as a combined firm makes it easier to work with global clients. It gives us the ability to talk about more of those products using our institutional sales force together. It also gives us the ability to use the combined resources for products that we're putting in the market, and to talk about that in a much more appropriate way. We do see good opportunity coming from the combination. We did a lot of work behind the brand already, and we will do continued more work to really leverage the combined capabilities of the two firms. We will launch this in the market in the spring, more formally.
The underlying for retail distribution in the U.S. or retail distribution in Threadneedle won't be as significantly impacted. It'll start more from a global positioning, an institutional basis, and then over time, take shape and form in the retail segments.
Got you. That's helpful. The recent product launch you guys announced with Blackstone, Eternal, looks pretty interesting given all the kind of chatter around retail liquid alts in the space. Help us understand, I guess, a little bit how this product will be managed, and how it will be marketed to clients. I guess, how long do you think it requires for us to see some sort of traction from an asset gathering perspective? Is that kind of like your typical, you seed it, then you market it 2 years down the road, it's going to be a few years until we see some meaningful progress here, or could that be done sooner?
Well, we do believe that there is an appetite for this type of product in the retail space today. It's more of a convenience of a traditional mutual fund with daily liquidity in multiple share classes that will give investors access to Blackstone's advised multi-strategy perspective with leverage in their underlying hedge fund advisers that they select. It will combine that with alternative beta strategies and non-traditional assets, including commodities, REITs, inflation-linked bonds, private equity managed by Columbia. The combination, we think, of the types of capabilities that we're bringing to bear put into a wrapper of a retail fund with daily liquidity, we think will have some appetite as advisers look to diversify their portfolios, and get some alternative means based on the market conditions. I think it gives them a greater access to these alternative type of strategies.
It has the combination of benefits of the 2 strong firms, and the diversification that they can get from alternatives. We think it will take shape. We don't think it's something that we'll wait to see flows over a long period of time. We think there's an appetite there over the course of the year. Hopefully, later in the year, we'll be able to report some of the sales that we're seeing from the product.
Got you. Just to follow up to that 1, how are the economics in this product work? What's the fee split or the sub-advisory fee that goes to Blackstone?
Well, I think, again, based on the combination of the fund and the makeup, there is a fee structure as part of the alternative side that will go to Blackstone, then there's the fee for the other part of that managed fund that we share so that we have. There's a sharing, truly, of the fee structure underneath it. Of course, with the combination and being on the alternative side, there is a higher fee for that type of product than the normal mutual fund fee.
Got you. Great. Thanks. Walter, just one for you quick. When we think about the currency fluctuations over the course of last quarter and certainly continued dollar strength so far in 2015, when I think about Ameriprise holistically as an enterprise from a pre-tax income perspective, is it fair to assume you guys are pretty currency neutral given expenses and revenues from Threadneedle obviously, and pounds?
Well, I would say it's currency neutral because obviously we make a profit, we'll take a translation there, if that's what you're referring. That's with the translation.
Got it. Yeah. The revenue-
That is the majority of the exposure is out of the U.K. Obviously, there's some offsets, but it would impact the PTI, is it?
Any sense on the sensitivity if it does? If the dollar strength is another 10% or so.
Well, the dollar strengthening is, again, the pound has moved from last year or somewhere in the 160s, and now it's in the 150s. On that basis, I think we talked about it last year. It has impacts that it's certainly manageable. I would say on the translation basis, it's probably in the $10 million-$15 million range when you dropped it down that way. Actually, on that drop, you're probably talking say around $20.
Got you. Okay, great. Thanks so much.
You're welcome.
Thank you. Our next question comes from Ryan Krueger from KBW. Please go ahead.
Hey, thanks. Good morning. First I had a follow-up on the rebranding of Columbia Threadneedle. I certainly understand the long-term rationale and the benefits that it could have. In the shorter term, should we expect any meaningful costs associated with that rebranding over the next few quarters?
There'll be, there was some incremental costs in the fourth quarter. There'll be some incremental costs in the first quarter of this year. We're not looking at real sizable amounts here. What we are doing is repurposing some of our current marketing and branding costs for the new brand. There'll be some incremental as you change the various materials and signage and some other aspects of it. It's something that we think is very manageable, but it will increase cost slightly based upon the rebranding. Again, as I said, we think it's the right thing to do that can be leveraged over time.
Got it. Okay. Given the, I guess, lower long-term interest rate environment we're in today, do you have any updated sensitivities you can give us in terms of the earnings headwind that that gives you in the fixed annuity and protection businesses?
Sure. Let me break it out. The first one obviously is going to be on DAC. When we set our DAC rates, the rates back down, we're in the 250 range. Now, the start point is in 170 as we look at, we were grading up. That's going to be one impact we are constantly monitoring. That will have a non-cash impact when we look at unlocking in the third quarter or if we see there's a situation we have to unlock earlier. As it relates to the long-term book with the fixed annuities, we reset on the guaranteed minimum rates, in this space, it's the earning rate. The earning rates on both that and the life and health will be impacted because of the duration of the situation as we turn it over. Like I said, it's about 20%-25%.
On that basis, you're talking about 40, 50 basis points in differential as we look at it on average as you go through it. That's the sort of activity levels that you see. The numbers themselves are manageable. It's just we are defensive, it's a defensive posture there, it will have an impact, but the impact is manageable than the number.
Okay. Last one on the tax rate. You gave the 26%-28% tax rate guidance for 2015. As we think about the mix of your earnings shifting over time, specifically, you seem to have a lower contribution from variable annuities and the DRD benefits that that provides you. Would you expect your tax rate over a longer period of time to gradually rise as a result of the mix shift?
Yeah. Within the current legislation, that's exactly what you're going to have. We are starting to derive into DRD benefits, as you saw. Again, the tax rates associated with the AWM business and the asset management business don't have some of the benefits that are derived, therefore, they're at the more marginal, the statutory rate. Yes, it will erode, but again, it's good profitability.
Got it. All right. Thanks. Bye.
Thank you. Our next question comes from Yaron Kinar from Deutsche Bank. Please go ahead.
Hi. Good morning, everybody. I want to go back to the P&C results or the auto results specifically. I guess one question I still have is looking at PIF count growth. Why are we seeing growth, which I think is above industry average, while there's still turmoil and while you're still kind of trying to clean up the claims experience and previous legacy premiums.
Okay. First of all, we do have good growth. We actually have very strong growth in the home side of it. The auto side has slowed down a little bit that we've made some adjustments over the course. We'll probably adjust a bit more as we go through and put in some of the tighter underwriting and repricing in certain areas. We did experience some good growth based upon the expansion of some of our channel activity in the affinity area. It's one of the things that we're closely monitoring right now. We have slowed down a bit of that growth. We might slow it a little more in certain sections where we've experienced some of the blip up in the exposure. We do feel like we can continue to add good new clients based upon the relationships that we have.
We're just going to be a little tighter in that regard.
Okay. Going back to the Advice and Wealth Management, there was an industry publication, I think, that spoke of Ameriprise as the second-largest independent broker by commissions from alternative investments sold. I think they come to about 20% of the segment's total commissions earned coming from alternative investments. Just given some of the problems that some of your peers have faced with high commission products, I was wondering if you'd be willing to talk about what percentage of the alternative investment commissions come from high commission products.
Well, right now it is a small percentage of obviously our revenue and profitability. Again, it's coming from REITs. We've talked about, from our standpoint, that we have not suffered the same situations, obviously, as certainly looking at the quality and what we bring on in our basically compliance processes. From our standpoint, it is important part of the solution set with our clientele and certainly go through a very elaborate due diligence process to ensure that. Like I said, the revenue contribution is under 5%, so like 3%. It's an important solution area, and adds value from that standpoint, and it's about the 3% range.
Okay.
Yeah, I think if you're talking about the REIT area, it's only a couple of % in our total mix of business across the firm. Of course, we have more alternatives that we offer, from hedge funds to other types of activities, commodities, various things like that. I think if you're referencing more of REITs, it's only a couple of %.
Okay. That's helpful. Quick numbers question, I may have missed it, I apologize. On the $20 billion of brokerage cash balances, can you tell us what the current yield is on those?
Around 20 basis points.
Okay. Thank you very much.
Thank you. Our next question comes from Suneet Kamath from UBS. Please go ahead.
Thanks, good morning. Walter, in your prepared remarks on protection, you talked about long-term care and the fact that you're conducting, I think what you characterized as a non-routine review. Can you just go into a little bit more detail in terms of what exactly you will be reviewing? Is it the reserve level? Is it GAAP versus STAT? Just any more color on that would be helpful.
Yeah, I think what we're doing right now, we're in contact with Genworth as it relates to their announcements and other things like that, because they do all the claims and the administration aspect. They feed the information to us. Obviously we're reliant on that information. We certainly try and do our own checks on it. Based on their reviews, we're cooperating with them to get really the performance aspects they've seen, both from claims and other, to revalidate as they looked at what they evaluated for their block, how that is applicable to ours. We are working with them just to get the additional information as it allows us to do the actuarial assessment.
Okay. I guess how should we be thinking about this in terms of a potential risk to the company? Is it that you might have to boost reserves because Genworth is telling you that they're seeing more aggressive claims or utilization? I just want to get a sense of.
Okay.
what the risk factor is.
Yeah. We think the risk factor is actually very contained because, again, it's small overall, but the reality is we have our own checks and we've been looking at it from our standpoint. There's different characteristics of our block versus theirs. We do believe this is a precautionary element to make sure that we are aligned. Again, them making a major announcement that they did make some changes to their actuarial assumptions. We felt it was prudent to work with them to get that applicability to our block. They did not do it. Again, it's our block and their block. It's a shared block. It is really precautionary, but we believe it's very containable and it's not a significant amount, if any.
Is that something that we're going to learn about sort of in 1Q results? Because that'll be after they put out their fourth quarter reserve review.
Yeah. We're obviously dependent on their time, effort, and everything. Yes, we are hoping to have that within that timeframe.
Okay, got it. I guess for Jim on the retail flow at Columbia. You've mentioned that it's work in progress and there's all sorts of, I think you used the word traction that you're gaining. Just really hard to see from the outside how the strategy is progressing. Is there any more color that you can give us in terms of what is exactly changing there, what's different this time, and why we should have some comfort that the flows can start to turn positive?
Yeah. I think labeling it to get more comfort, I think what we've been saying, and what we've actually been seeing is this. We will continue to have some of the type of outflows from some of the things that we've mentioned to you. As an example, when we made all the pricing changes in the RIA channel, we experienced more of those outflows. That's starting to slow and turn around, and we're starting to see some pickup in the inflow side. For the ex parent, we experienced more of that even in retail initially as things would change, and now that's starting to slow. It'll still be an outflow, but not as material as it was, and we think we can get some new product out there, hopefully over time.
I think in regard to the intermediary channels, we're actually seeing some pickup in a few of the areas as we get better penetration in some of the channels and get on some of the platforms. Having said that, I think it's been lumpy. We saw a nice improvement in October and November. We thought it would actually show positive, December was a little rough month, I think, for the industry. From a perspective, we still experience some additional outflows in a particular large fund that we had in the DCIO channel that actually sort of masks some of the improvements for some of the other product across the other channels.
I think with the changes we continue to make, with the new leadership we have in there, with how we're revamping the way we go to market with our product, with the wholesaling, with the disciplines we're putting in place. We're hoping that we can gain traction with more of our product across more of the channels in 2015. Of course, there's no guarantee. There's market environment, there's what the consumer is looking or the intermediary is looking based on market conditions. We think we have enough good product. We think that we have a good wholesaling capability and platform that we're applying better. We think that we're going to bring product to the market better, to talk about what that is and what the solution is and what we can provide.
There are some new solutions we're coming at, like our CARA fund that I mentioned to you, which is a risk parity allocation fund that we think can take some space. I think it's going to be a number of things that we can do to gain. We're still going to experience some of the outflows from some of the ex-parent ongoing, from some of the sub-adviser, from one of the particular large funds we have that will continue to bleed a little bit until we get that more fully turned around and get some other product in that channel. I'm not sitting here to predict quarter by quarter, but I do feel that we can gain some greater traction. I think Europe can come back again. I think, again, it was in strong inflows.
We got hit with a loss of a PM last year, but that has stemmed the tide there. Actually, the U.K., where we've lost a PM, that's actually turned around pretty quickly for us. I think with the ECB doing what they do, that can sort of turn around people's appetite back in Europe. We'll see. I got more high hopes for this year moving better in the trajectory. I can't predict, but hopefully we'll apply more time and attention, and hopefully we'll get some better results.
All right. Thanks, Jim.
Thank you. Our last question comes from Tom Gallagher from Credit Suisse. Please go ahead.
Good morning. I have a few questions on your Advice and Wealth business. I guess the franchisee advisor story has been a really good one. I just want to understand a little more about the outlook as you see it. How is the recruiting environment right now? Would you still expect to grow that channel over the next year or so? I noticed a little bit of a tick down there in terms of number of franchisee advisors. That's question number 1. I guess the margin, Walter, I think you had said the margin in that channel for this quarter was 19%, which is obviously a pretty robust number. Can you comment a bit about when you are hiring, making the new hires of the experienced advisors, what is sort of the margin you're seeing there? Is it above or below that 19% level?
Let me start with the overall channel. We'll talk through the margin. Very clearly, we feel very good about our franchise channel and the growth of the productivity of that channel. Part of it that you're looking at when you just look at a number per se, is there is a level of even consolidation going on in our own channel. As advisors hit certain points in time, they actually don't want to be running the practice as they continue to age at a certain level. What they do is make arrangements with other advisors. They sell their practice. They transition from an advisor to an assistant, and ultimately retire. We have some of that going on in our channel across the nation that we sort of help foster and develop.
Part of our attrition, or so to speak, that we report is part of that activity going on. The assets don't leave, the clients don't leave, but the number on the headcount does adjust. In addition to that, we also have assistants that advisors bring in as junior players into their practice, licensed practitioners, et cetera. Sometimes there is a higher rotation of those people, just like we do when we bring in new people that we're training and developing in the employee channel. Part of that turnover is also in those sort of numbers. We feel that the productivity remains in the channel, the asset growth is good and strong. We feel very good about that channel continuing to be a growing part of the total. In addition to that, we do have the employee channel.
Again, with that same adjustments that are occurring, we have much more productivity in the channel. We're bringing in good people that have much higher productivity than the people who were leaving or left. The pipeline to the first part of your question that you asked is very good. We saw it over the third and fourth quarter. We're bringing in high-quality people that are actually of higher productivities than even previous quarters. We see that they're occurring both in the franchise and the employee channel. We feel like we can continue to recruit on an ongoing basis and see quality people. Walter.
Yeah, on the second question, from the standpoint of the marginal contribution from a PTI standpoint for the experienced advisors in the franchise and actually in the employee channel are higher than the obviously, the 19% and our current margin in employee channel. Yes, that is accreting based on the correlated expenses that we associate with bringing in experienced advisors.
Walter, from just order of magnitude, and Jim pointed out that the new hires in the franchisee channel are actually more productive than the average advisor. What type of margin are you seeing for those new hires, let's say, by the end of the first year? If the average for that channel is 19%, is it 25%? Is it 30%? I just want to get a sense for the gradient of that and what kind of earnings kick you get as you hire people.
Tom, let me correct that. I think we didn't say, for instance, in the franchisee channel, we're bringing in good people, but we have very good, strong margins, very high productivity in the franchise. The people we're bringing in aren't necessarily of even higher margin than that. I think they're consistent with the type of productivity that we have in the channel. In the employee channel, what I did say is the people we are bringing in have higher productivities and will, over time, add to that margin, and will be higher than the average margin. As Walter said, a year ago, that margin was in the low single digits. We ended last year with it being now about 10% or so.
As we add even more productive people and utilize the capacity we have in the employee channel for better productive people, that margin will continue to accrete.
Understood. it's really the employer channel that you're-
Yeah
you're saying it's higher. Okay.
Right. then franchisee channel, just as we continue to bring in good client flows and good productivity and our advisor productivity increases, then that will help with the margin there. that's a very large channel. It's a very productive channel. Most of that will come from the productivity improvements continuing in that channel and the use of some of our capabilities to help them do that.
Understood. just one last one on the property casualty business. Based on the changes that you expect to make, can you give us a little bit of quantification? What are the levels of rate you're actually submitting to regulators in that business? Are we looking at double-digit rate or any quantification you can give there? would you expect that book to shrink as you implement the changes?
Well, number one, for each state, again, depending on both as we do the price risk assessment and then you deal with the states that are within theirs, that we are looking then to get that ratio. We filed in 2014. We had rate increases on auto of close to 3%, and this is now being evaluated state by state using the models that we're bringing up. The rate increases are going to vary all over. I couldn't really give you an average as it relates to because you're getting into weighting, you get into everything from that standpoint. The reality on shrinking the book, I don't think the book is going to shrink.
I think we're going to more intelligently manage through the application of the sophisticated models and the other things that we do from an operations standpoint and just extract the better pricing risk return from it. That takes time, as Jim said. It takes time to work through both the analytics as we roll out the filings and then the realization of it.
I would hope your rate's going to be significantly above three, if we're thinking about.
That was a 2014. I gave you.
You're right
price in 2014. I didn't say what was going to happen in 2015.
Okay. Can you give us any indication, or is it too early?
It's too, because they basically just started through rolling the states now, and those will progress, and they're focusing on auto, and then we're only through on home. I can't give you really the rate increases that will take place because they have to do the analytics for each one and then evaluate it on that basis, both looking at the new and then the existing block.
Okay, thanks.
You're welcome.
Thank you.