美國信安金融集團 (PFG) 2001 Q4 法說會逐字稿

Good morning and thank you for holding. All lines have been placed on a listen-only mode until the question and answer segment of today's conference. Today's call is being recorded at the request of Principal Financial Group. (Company: The Principal Financial Group; Ticker: PFG; URL: http://www.principal.com/) If you have any objections, please disconnect at this time.

At this time, I'd like to turn the call over to your conference leader, Mr. John , Vice President of Investor Relations. Thank you, sir. You may begin.

Thank you.

Good morning and welcome to Principal Financial Group's fourth quarter conference call. If you do not already have a copy of our earnings release, or the financial supplement, they can both be found on our Web site at www.principal.com. Following a reading of the Safe Harbor provision, Chairman, President and CEO, Barry Griswell, and Executive Vice President and CFO Mike Gersie, will deliver some prepared remarks. Then we'll open up the call for questions.

Others available for the Q&A portion of the call include Mike Daley, Executive Vice President responsible for marketing and sales; John Aschenbrenner, Executive Vice President responsible for the life and health insurance and mortgage banking segments; Larry Zimpleman, Executive Vice President responsible for the U.S. asset accumulation businesses; and Paul Bognanno, President and CEO of Principal Residential Mortgage.

Some of the comments made during this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. There are a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied. Factors that could cause actual results to differ materially are discussed in the company's registration statement filed with the SEC.

With that, I'll hand the call over to Barry Griswell.

Thanks, .

Let me also extend a very personal welcome to each of you on the call. Mike Gersie will be following my comments with an overview of financial results, so I'll cover this area very, very briefly, and I'll do so in the context of answering two questions: Did our results meet the targets we communicated to the market? And, did the execution of our communicated strategy position us to achieve our future goals? I'll also briefly discuss our outlook for 2002 and our expected write-down of goodwill under FAS 142.

Let's start with our EPS target, a long-term operating EPS growth target of 11 to 13 percent. Clearly, we were very pleased with our third straight year of record operating earnings. We delivered a nine percent improvement for the quarter and a 13 percent improvement year over year. This, again, demonstrates the benefit of our strategy; offering a diverse portfolio of our products and services, with a particular focus on retirement services for small to medium businesses.

In our U.S. asset management and accumulation segment, operating earnings were up five percent for the quarter. While segment earnings for the year were flat, we view this as a very positive result given the considerable declines in the equity markets for the full year. In our international asset management and accumulation segment, Principal continued to show solid progress, with $2.1 million in operating earnings; an improvement of $2.2 million quarter over quarter and $21 million year over year.

While BT's (Company: British Telecommunications plc; Ticker: BTY; URL: http://www.bt.com/) operating earnings declined for the year, we expect that changes implemented in 2001 to address investment performance and cost issues will begin to improve BT's performance in the latter part of 2002.

In our life and health insurance segment, we continued to make solid progress. And the mortgage banking segment had a banner year, record production, record earnings, and a $25 billion increase in our servicing portfolio.

While we were very pleased with operating results, it's important to acknowledge difficulties during the year with some of our investments and the significant impact on net income. Like a lot of financial services companies, we recognize losses on investments in companies that were viewed in the marketplace as very sound, such as Enron. (Company: Enron Corporation; Ticker: ENE; URL: http://.www.enron.com/) Two comments here.

We continuously evaluate our investment processes to make sure that the way we manage our investment portfolio appropriately addresses and spreads risks. I'll also point out that over the last three years we've recognized approximately $1 billion in capital gains, but we certainly don't view 2001 difficulties as systemic.

Moving now to ROE, we communicated targeted improvement of 50 basis points per year and a 12.5 percent ROE by the end of 2003, which reflects the impact of the non-amortization portion of FAS 142 guidance. Our operating return on average equity, excluding other comprehensive income, was 10.9 percent for 2001, just short of the targeted improvement. We're confident that we're still on track to achieve 2003 goals. Given two straight years of equity markets, we also review our current year improvement as a solid result.

In terms of executing on our strategy, I'd like to point out a number of important initiatives. Looking at our efforts to leverage our leading position in the 401(k) market, we entered a number of key alliances throughout the year, opening new distribution channels with banks, broker dealers, CPAs and third-party administrators.

We've also established some important non-traditional alliances, with Intuit being a prime example. It is an exclusive arrangement that gives us access to three million small to medium businesses used in Intuit's (Company: Intuit Inc.; Ticker: INTU; URL: http://www.intuit.com/) QuickBooks product. We will be highly focused in 2002 on making this and other alliances work, and expect them to deliver incremental revenue growth and profitability in 2002 and beyond.

Enhancements to our distribution systems in early 2001 are already driving strong results. New full service retirement sales were up 63 percent for the year, reflecting not only refinements to our model, but also market demand for our full service offering. This was definitely a key accomplishment in our efforts to accelerate growth in our contribution businesses. And I'd also like to point out our success in asset retention, where we retained over 49 percent of at-risk assets for the year, up 23 percent over 2000 results.

Behind the scenes, we continued to focus on delivering the kind of exceptional service that drives strong retention. During the year, "Plan Sponsor" magazine recognized us as one of three standout providers. In the survey, 97 percent of our customers indicated they would recommend us to a colleague; a resounding affirmation of our success.

In terms of driving growth and profitability in our international businesses, as I pointed out earlier, Principal continued to show solid progress with $2.1 million in operating earnings; an improvement of $2.2 million quarter over quarter and $21 million year over year. We continue to have great success in building in these operations, including the addition of 800,000 new pension customers in Mexico, and reaching nearly a half of assets under management in our first full year of operation in Hong Kong.

We believe we've done the right things at BT to address investment performance and cost issues. And we're particularly pleased with BT's increasing penetration of the Australian corporate superannuation market and BT's success in the business, where assets under administration doubled in 2001 to $2.7 billion. We'll continue to focus on these areas as new growth engines for BT going forward. While the turnaround won't occur overnight, we do expect to see BT's fund and earnings to trend positively in the second half of 2002.

In 2001, we also initiated an enterprise-wide operational excellence program to maximize cross-business unit efficiencies. And in our ongoing efforts to enhance shareholder value, I'll point out three other important accomplishments: The share repurchase program currently in place; our agreement to sell our remaining stake in Coventry Health Care; (Company: Coventry Health Care Inc: Ticker: CVH; URL: http://www.coventryhealthcare.com/) to focus our capital on core businesses, which has now been completed; and our agreement to reinsure the group medical business, which is now in place.

Before handing off to Mike, I'd like to express my continued confidence in our abilities to successfully execute our strategies and deliver excellent shareholder value. We believe we are effectively positioning the organization for strong growth, when equity markets resume normal growth patterns.

Now I'd like to provide some guidance on our outlook for 2002. We expect first quarter 2002 operating earnings to range from 49 to 51 cents per share, with full year operating earnings in a range of $2.12 to $2.20 per share. These estimates are based on certain assumptions, including more normal domestic equity market performance of 1.5 percent per quarter in the first half of 2002, and three percent per quarter the second half of the year.

The 2002 earnings projection includes a 10 cents per share operating earnings benefit associated with the non-amortization portion of FAS 142 guidance. In addition to this impact, because we've reached substantial completion of our impairment testing of all the entities impacted by the adoption of FAS 142, I'd also like to share our write-down expectation under the new rules. We expect the write-down to be approximately $300 million. We expect to complete our testing, implement the new accounting standard and take our write-down in the first quarter of 2002.

Now, I'd like to turn it over to Mike for his comments.

Thanks, Barry.

I'm assuming everyone has had the opportunity to review the earnings release and financial supplement. I'll spend a few minutes covering our current results and providing some commentary I believe will be helpful in understanding our outlook for 2002 and beyond.

As Barry mentioned, we are very pleased with our record operating earnings for the year. Fourth quarter was also strong, up nine percent to $182 million, compared to $167 million for the same period last year. Fourth quarter operating earnings per diluted share increased four cents to 50 cents from 46 cents last year.

There are several things worth highlighting here at the segment level. Within U.S. asset management and accumulation, pension earnings improved for the fourth quarter and for the year. This improvement is despite two consecutive years of declines in the equity markets, which have clearly impacted our asset-based fee revenues. We believe pensions earnings increase bodes well for us when equity markets resume normal growth.

We had record single premium group annuity sales during 2001. Our single premium group annuity sales increased $237 million or 32 percent to a record $750 million. Pension was the primary contributor to very strong cash flows for the year for our asset accumulation businesses, which were up $3.1 billion from 2000. Pension also delivered a 63 percent increase in new full-service retirement sales. We define new sales as first year annualized deposits and assets transferred to us. Our emphasis, on generating new business and retaining existing business, producing real meaningful results.

Within our international asset management and accumulation segment, while results were basically flat, we did incur a higher pre-tax loss. BT had a difficult year offsetting solid improvement and a $5 million profit from Principal International.

In looking at BT's results, it's important to recognize that this has been a difficult year for asset managers in general. Further, net fund outflows continued, stemming from BT's relative under-performance during late 2000 and most of 2001. Although BT saw some improvement in retail Australian equity performance in the second half of 2001, it will take some time for fund performance and fund flows to return to strong levels.

For the year, BT's assets under management were down $3.8 billion or 15 percent, which resulted in a decrease in investment management fees. It's worth noting that more than half of BT's decline in assets under management was due to the impact of foreign currency translation. As Barry mentioned earlier, we remain confident about BT's future contributions to operating results. We do want to be clear here, that changes made during 2001 will not deliver overnight improvement. We don't expect to begin seeing improvement in BT's earnings trend or positive fund flows until the second half of 2002.

Moving to our life and health segment, earnings were up 24 percent. A couple of important things to point out within the segment. Our continued success in selling life insurance to the small and medium business market to fund non-qualified pension plans to our 401(k) customers and improvements in yearend group medical in terms of increased new sales, decreased member lapses and lower loss ratios.

As Barry mentioned, mortgage banking had a banner year. Operating earnings were $31 million in the fourth quarter, rising 274 percent relative to the year ago period. Record mortgage loan production of $11.9 billion for the quarter produced strong origination income. The $25 billion increase in our servicing portfolio in 2001, as well as a strong production pipeline, indicate that 2002 will be another strong year for the segment.

I'd also like to take a minute to further discuss net income. Net income for the fourth quarter of 2001 was $19 million or five cents per diluted share, compared to $201 million or 56 cents per diluted share in the fourth quarter of 2000. This decrease was primarily attributable to increased realized capital losses on fixed maturity securities, coupled with real estate losses compared to gains realized in the fourth quarter of 2000.

Enron holdings accounted for $90 million in after-tax losses. We also had combined after-tax losses associated with K-Mart, (Company: K-Mart Corporation; Ticker: KM ; URL: http://www.kmart.com/) Global Crossing (Company: Global Crossing Ltd.; Ticker: GX; URL: http://www.globalcrossing.com/) and Argentina holdings, in the amount of $31 million.

Calendar year net income was $359 million or 99 cents per share, compared to $620 million or $1.72 per share in 2000. The higher level of capital losses and impairments in 2001 reflects the general softness in the economy and some headline-grabbing events mentioned earlier.

We are confident, however, that our process for managing the investment portfolio is sound.

Moving to revenues, the fourth quarter was flat at $2.3 billion. Revenue increases in the mortgage banking segment offset lower sales in our pension single premium group annuity business. Single premium group annuity sales are made in large lump sums to fund a benefit plan termination liabilities. While sales were down in the quarter, reflecting a drop in single premium quote activity and our continued pricing discipline, our U.S. pension operations achieved record single premium group annuity sales for the year of $750 million.

Assets under management increased seven percent to $120 billion at December 31, 2001 from $112 billion at September 30, 2001, primarily due to a rebound in equity markets during the quarter. While assets under management increased slightly for the year, it's important to recognize that assets under management were down for most of the year. This decline created downward pressure on our fee-based revenues.

As Barry indicated, our ability to meet 2002 earnings expectations depends on a number of factors, including a more normal growth in the equity markets. Regardless of market performance, we will continue to work aggressively to meet our targets through new business and asset retention activities and a continued focus on expense management and operational excellence. This concludes our prepared remarks. And I'll ask the conference call operator to now open the call to questions.

Thank you. At this time, if you would like to ask a question, please press star, one on your touch-tone phone. Again, if you'd like to ask a question, please press star, one. You'll be announced prior to asking your question.

The first question today comes from Joan . You may ask your question, and please state your company name.

Thank you, Goldman Sachs. (Company: The Goldman Sachs Group Inc.; Ticker: GS; URL: http://www.gs.com/) Good morning.

Hi, .

Good morning, .

I just have a couple of questions, all right? The first question is about the earnings of and if you feel comfortable with the fourth quarter being a good run rate for next year or if there's any kind of seasonality or unusual items in that number? That's my first question.

The second question is, with your -- the realized losses and the write-downs that you're talking about -- and I guess it's true for seeing it everywhere, with every company -- is there -- can you quantify the impact of lost investment income? And do you think that's one of the reasons that your guidance for 2002 growth is modest?

OK. A couple of good questions, . I'll ask Larry Zimpleman to handle the first and we'll come back around to Mike Gersie on the second.

Good morning, . This is Larry.

In regards to earnings, there was nothing unusual, no particular seasonality in my view relative to earnings in fourth quarter. So I think it's a fair reflection relative to the assets under management within that segment. Nothing unusual there. I'll turn -- ask Mike to comment on your second question.

The second questions is a good question, . There's probably a dab of lost investment income, which would make our projections a little more subdued, but not enough to really notice. So ...

Yeah, it was a factor in our thinking, especially on the downside. But we think we can overcome any lost investment income and make some pretty good numbers.

Do you -- have you been able to quantify that?

I believe it's about $3 million to $4 million a quarter.

OK. Actually, I just have one other sort of technical question, which is your share count for the full year and sort of the earnings per share for the full year. So is there any particular rules that sort of dictate using the $360 as opposed to the -- ultimately the $375 share count that existed at one point in time, when the was exercised? Or if that's just normally the way things are accounted for.

on the fourth quarter, , we used the average number of shares outstanding and weighted, you know, by days outstanding. So that got us to the -- the fourth quarter number of shares. For the full year, I think I'll turn that to John , because was involved in that calculation.

Well I'll tell you why I'm asking. I'm asking because if you have a full year earnings per share number, as you have now reported, and you have this 11 to 13 percent target, are -- I mean, the guidance is a pretty modest growth. And I just wanted to sort of get a sense of what your feeling is here.

Well in terms of 2001, , you know we -- we're in a repurchase program that took some shares out of the picture. So you're aware of that. So that would have adjusted down the number of shares. Now are you asking what share repurchase assumptions are made in the EPS? I'm not sure ...

No. I guess what I'm asking is, with the -- with what you reported for the full year, and your guidance being I guess on the low end, certainly, not at your expected growth target, I'm just curious if -- what is the one thing that you're most concerned about as potentially out there, you know, that could, you know, keep earnings growth from being really strong? Is it the market, is it credit, is it sales? I'm just curious. That's what I'm really asking.

Yeah, sure. I'm sorry, we probably didn't understand your question properly. Clearly, I think the big unknown for us is the equity markets. I mean, you know, when we came out, you know, January was pretty strong and now it's getting clumped around again.

So as I said in my -- in my guidance comments, we were really expecting a 1.5 percent increase in each of the first two quarters; a three percent growth in each of the last two quarters. And that's really what gets you to the guidance we gave. If markets were more robust, then we would certainly expect to have, you know, much better earnings than that.

So we tried to take a reasonable view of what markets might do over the course of the year. And I would say, in our case, that's probably the biggest variable that we have by far.

Great, thank you.

Thank you, .

The next question comes from Al . You may ask your question and please state your company name.

Thank you, Putnam Lovell Securities.

I was hoping you could address a question I had in the U.S. asset management accumulation business relating to the level of net inflows. They seem to be tailing off on a quarter basis throughout '01, as do the gross sales. Can you just elaborate on why that is?

Yeah, , how are you doing today?

Very good, think.

Good. Let me turn that over to Mike, and then Larry may chime in. I think is something in the numbers you're looking at.

Yeah. I think one of the -- one of the effects I think that you're seeing is we were very strong in the funding agreement market early in the year, which generated some very, very strong cash flows early in the year. As we went through the year, we pretty much topped up where we wanted to be in that market, and so did not sell much of that kind of business later in the year. So I think it's really -- really coming off of that one product that you saw -- strong sales early and very modest sales late in the year.

OK.

If you look behind the trends, you would also see new sales. And fourth quarter sales were very large, very strong in the fourth quarter. But some of that cash flow obviously doesn't show up until -- won't show up until the first quarter of this year.

OK, that's helpful. I had one other question related to the investment portfolio. It looks like year over year there's a higher concentration in double rated bonds. And I was just wondering if that was a conscious decisions or of, you know, a higher rate of stocks falling down a notch? And somewhat related, it looks like your investment income in the life insurance and disability unit investment income was up at a growth rate in excess of what your reserves grew or what your premiums grew. And I was wondering if there was any relationship between the two.

Yeah, I think we're pretty opportunistic in terms of where we make investments. So it depends on the relative value and where the spreads are in the different investment classes. I think we probably did make a little bit of a move in the double class to pick up a little spread. In terms of the individual life in , we did manage the assets in that. Those investment segments, the segments backing that product a little more aggressively this year. And so we did pick up some additional investment income.

And you view that as sustainable in terms of sort of the run rate you're at in terms of net investment income in the quarter?

Yes, we do.

Yeah, OK.

Thanks, .

Thank you.

Ed , you may ask your question. Please state your company name.

Merrill Lynch, (Company: Merrill Lynch & Co. Inc.; Ticker: MER; URL: http://www.ml.com/) good morning everyone.

Hi, .

Good morning.

I had a question about the sales in 401(k). I think you -- the -- the numbers that you talked about for the full year -- the 63 percent growth in full service -- I think for the nine months it was 60 percent. So there was no slowdown in -- in the fourth quarter, which is a little different than -- than what we heard from another company in 401(k).

And I'm just wondering if you could talk a little bit about what you're seeing in terms of new plan formation versus takeover business. What kind of impact we've had on both of those from the economy and the decline in the stock market. Thank you.

Sure, . I'll ask Mike Daley to jump in real .

Hi, .

In terms of fourth quarter for us, it actually was the second largest quarter of the year in terms of production on the full service side. So we had a very strong quarter. And, , I attribute that to the fact that 9-11 didn't really pan out to the full extent we were thinking it might when I last talked with some of you folks. And so while October was a little soft compared to historical standards for us, November and December were quite strong.

And really the driver behind all that, , is it just gives our folks out in the field a little more seasoning with the changes that we introduced in January of 2001. And so those themes of focus on accountability are really starting to gain traction out there. And our people are understanding how to play the game the way we're playing it now. And so I'm very optimistic about what we can do with our back office reputation, our full service model, out there in the market.

And we are, -- to get to another part of your question -- we are seeing a fair amount of takeover business. And we think that reflects, as I said in my comments, very much on the -- the value that we offer in the market and the acceptance of a full service integrated kind of a platform.

I think -- I think, , last time we spoke we were talking about 2000. We were just a little bit under a 50-50 mix between startup cases and transfer cases. For 2001 in general, we were closer to a 70 percent transfer, 30 percent startup mix. And that obviously helps with the asset growth.

Thank you very much.

You're welcome.

You're welcome.

Jason you may ask your question. And please state your company name.

Good morning. Jason , at Bank of America Securities. (Company: Bank of America Corporation; Ticker: BAC ; URL: http://www.bankamerica.com/)

A couple of questions for you as well. I was hoping you could talk about Australia, perhaps in -- in just a little bit more detail than you gave. In the release, you mention a couple of factors, hiring some new managers. I'd be interested in perhaps what the overall turnover rate for the organization has been between, say, this year and last year. And then perhaps just some more detail in terms of what's being done on the -- on the superannuation side.

And then in correlation to that, is the $300 million impairment all for Australia? And are the assumptions that you've given us going forward for 2002 implicit in the $300 million write-down that's going to occur in the first quarter? Thank you.

Hello, , how are you doing?

Good thanks.

Well, a lot of questions there. Let me see if I can ...

Well, we'll keep it on Australia, though.

Yeah, that's good. I appreciate that. I would say, you know, turnover -- employee turnover has been, you know, reasonably high. But I would say most of that has been at our -- you know, our taking action, quite frankly. I don't think we've had a lot of turnover that people that we -- you know, we didn't want to lose. So we've not had any mass . We've actually been in a mode of bringing in new people to replace those who, you know, were part of the organization during some of the times we were having difficulties.

But certainly no mass on the organization. The turnover has been relatively modest, certainly in terms of those who we wanted to keep. In terms of the write-down, let me jump to that one. Of the $300 million that we announced, roughly $260 million -- in that range, maybe a little under that -- was associated with BT, and the balance of that was associated with the other acquired entities we have in the complex.

So certainly not all of it was BT. And so we're -- we're on the -- we're in the low end of the range of what me might have thought would have been occurring at BT lower end.

In terms of some of the things we're doing to enhance performance, certainly -- as you point out -- the corporate superannuation continues to be one that's getting a lot of our attention. We have formed an oversight group made up of people from our business unit here, working with the business unit there. We continue to send resources down in the are of technology administration, sales and service. So some of the sales activities that we talked about here in Mike Daley's area, Mike is certainly sharing with them and making sure that those competencies get transferred.

It was mentioned in the comments, is a business that's growing extraordinarily well. It's an interesting , where we're the administrator of other organization's assets, and it gives us access to new distributors. We doubled assets there to $2.7 billion under management, and I think it's expected to double again this coming year. So that's quite robust.

And I would say that some of the changes we talked about with you are starting to take hold. And I know there's some controversy in some of the numbers, but, you know, you really have to look perhaps beyond the survey that really speaks more to the institutional side, which we are not making quite as much progress there but we are bringing in some new folks and are focused on it.

But you really have to look at the retail funds, where about 65 percent of our assets under management in Australia are actually in the retail fund. And there, you do see better pickup in performance, particularly if you look at the three month numbers, you would see, for example, that our largest funds are in the first or second quartile for the last one and three month period.

So if you go down and look where the assets are and look at what we're doing in terms of improved performance, you do get a view of improved performance. Now I would be the first to admit -- and I said it in my comments -- this is going to be a slower turnaround, it's not going to be an overnight. We envisioned that we will continue to make modest progress the first half of the year and that that progress would pick up the last half.

We still have some one-year, three-year and five-year numbers in the system that are going to take a while to work their way out. So we're confident in the people that we've brought in, the processes we've put in, that we're going to show continued improvement in the marketplace. And we're quite confident.

I think your last question had to do perhaps with whether some of these changes were implicit in our -- in our guidance ...

Right.

... and I would , yes, that we took all of that into consideration when we gave the guidance. So that should be implicit in it.

And also implicit in the $260 million impairment? Would that be correct? Is that a forward-looking estimate?

I'm ...

What do you mean by forward-looking, ?

Well, do you take the January 1, 2002, that point in time, and look backwards versus where you thought you might be to take that impairment? Or, when you take that impairment, do you actually look forward a year or two and say, "Here's where we think we're going to get, and that's how we come up with the $260 million?"

Yeah, the way we -- the way we calculated the impairment, , was to really project out the future income flows -- future cash flows -- for the organization over a 10 to 15-year period. And so it really was a forward-looking, what do we think the business will really do under conservative assumptions.

So remember, we're doing this for accounting purposes. We in a little bit of conservatism, and so it really was looking at the various lines of business that they have, the kind of growth in the lines, and the profitability of the lines, and that's the way we determine the value of the business. And then due to the impairment, based on what's that versus the carrying value of BT.

OK, great.

, let me say this.

Yeah?

That nothing in this write-down would impair, in our view, our ability to hit the numbers that we have been projecting for 2003. So we -- we do not see this as being -- deteriorating our earnings capability over that, which we've talked about. Now it will reduce equity, obviously.

Right. And, I'm sorry, one last question related to that. How often do you go back and then review the -- the goodwill?

I believe the new rules require you to do it annually.

OK, great. Thank you very much.

Thank you, .

Colin , you may ask your question. And please state your company name.

Salomon Smith Barney, good morning, gentlemen.

Hi , how are you?

Good. A couple of questions. With respect -- I guess I'll first start with the mortgage business. What happened with the mortgage servicing asset this quarter in terms of the level of impairment you took?

Second, with respect to the realized losses, I guess focusing in on Enron, our calculations had you right in about 80 percent of those off. Is that true, or what's the remaining balance there?

Could you also talk a little bit about what happened with the partnerships on the corporate line, that was the third?

The fourth one is probably easy -- was that the $100 million in premiums on the pension line, which was down significantly, and if you could just clarify what caused that to drop so much.

OK. Well let's start with Paul on the write-down. Paul Bognanno, as you know, is the head of our -- of our mortgage banking business, and we have him here to discuss that. So, Paul, do you want to jump in on that one?

Sure, good morning, .

Good morning.

Now you asked about the fourth quarter. The net write-down on the fourth quarter, taking impairment in -- in gains, was $47 million.

Thank you.

Mike, I think you probably have the middle two here.

Well at Enron -- I've got very quickly here, . We've got a book value of Enron investments held of $117 million. We're carrying that at about $45.5 million. You asked a question about partnerships, and I'm trying corporate line. Partnerships in the corporate line ...

Yeah, you referenced in the press release that income was down there.

Oh, the investment. OK, you're talking about the change in income. All right. That was really due to -- we had some corporate investments that we withdrew some funds out of in the fourth quarter of last year. And we had some gains on that that we booked in the fourth quarter of last year. We did not have a -- obviously, that was a one-time event, so we did not have it occur in the fourth quarter of this year. Does that make sense?

Yeah.

OK.

And then the last one had to do with the 100 million for the pension . So, Larry, you want to take that?

Sure. Hi, . Good morning. The $100 million in the fourth quarter for the pension line reflects the single premium group annuity business that we wrote during that quarter ...

OK.

... which was -- less than last quarter, as I think Mike said in his comments earlier in the quarter, actually our full-year production in that single premium area was up 35 percent for the year to $740 million. So there's just this little seasonality building to that . That's what that $100 million reflects.

And one -- one other follow-up. Barry, with respect to BT, I guess at this point Principal is looking to drop the name, and you've confirmed that in the Australian media. If you did, would that impact the size of the goodwill right now -- that you're looking at right now?

I'm glad you asked that question, , because there's a -- there's a misunderstanding. We're not in any way looking to drop the name. And I think the confirmation in the Australian press was certainly inappropriate. All we're really looking to do in Australia is to better tie in the Principal name to the BT name. And that's been a strategy from the very beginning, so that people understand that the BT organization in Australia is part of a much larger, you know, quality organization, global organization.

So -- and we've always had it in our advertising. You know, member of the Principal Financial Group. So all we were signaling is that we're going to start using the Principal name more prominently. We have a lot of capabilities around commercial real estate and lots of other things. So we want to be more prominent in the Australian market, but in now way do we intend to change the name of BT. That's not -- that's not -- that's not something that's even under consideration at this point.

If we were to change it, I suppose you would have to go back and look at, you know, the value of the name on your books and that would cause you to rethink some things. But that's not a direction that we're going. I think the confirmation that came out of this was really confirmation that we're looking to better introduce the Principal name into the market.

Thank you.

You're welcome.

Joanne , you may ask your question. And please state your company name.

UBS Warburg (Company: UBS AG; Ticker: UBS; URL: http://www.ubs.com/), good morning.

Good morning.

I have -- I've got a couple of questions. One is, can you just comment on this -- on the -- on the decline in number of plans that's reported on page 25 of the supplement. It looks like there was a decline in -- in full-service pension plans, not only sequentially, but year over year as well. Can you talk about that?

The second question is related to the -- the BT. I was wondering if you could talk -- if you could talk about any changes that have taken place down there in terms of the investment style or the investment philosophy? And, also, can you comment on your relationships with independent financial planners -- or financial advisers in Australia?

And then, lastly, on the write-down of the Enron holdings, it seems to me that you -- there must be something that you're thinking about in terms of -- or that there are some assets that are -- or there are some bonds that are secured by assets, to suggest that you are keeping that asset on the book at 40 cents on the dollar. Can you comment on that?

Sure. Yeah, good question. We'll be glad to try to cover them here. Let me -- let me first ask Larry Zimpleman to cover the decrease in plans. That's a good observation. It's actually something that we've been purposely doing. But let me let Larry give you a little more information on that.

Yes, thanks. There are really -- there are really two trends going on there that I think are worth noting. The first one is the continuing -- it's slow, but the continuing downward trend in defined benefit plans. And that really just reflects the -- the overall trend in the marketplace of a declining -- a declining nature of defined benefit plans.

Now in our case, because of our full-service capability broadly and across both defined benefit and defined contribution, we are able to converge about 70 percent of those defined benefit plans into new defined contribution plans. But nevertheless, they'll fall out of the -- the defined benefit category.

The more important element that's going on here is a program that really started in really 1999 and continued in 2000. And has more or less finished now in 2001, which was to take the very low end of our 401(k) defined contribution block, which would typically be plans of may five to 35 , and to really move them to a more appropriate solution in many cases.

We either had to implement electronic means of communicating with them and/or move them to some other solution, like a simple or a plan. So it's that transition of those very, very small defined contribution plans that reflects that outflow in the .

And that was just related to the high cost that it took to service those plans? Is that it, Larry?

That's correct, .

OK.

Now, , I think you had two more. Let me -- and then -- well, actually, three more. Let me cover the middle two. BT -- the investment philosophy itself, I guess that's stayed investment. Style has not changed, maybe investment philosophy has. We're still basically a growth-oriented manager in most of our funds there. Even though, as you probably know, in Australia you have balanced funds and you have lots of different funds that you don't typically find here in the states.

But really what's happened is -- and I've talked about this before -- we were actually taking much too much risk in our investment style process and we really have moved away with that -- away from that. The new people that we've brought in are much more looking at long-term sustainable investment to performance. And to do so without the high ups and downs that we've had in the past. So that's caused us to look at portfolio construction, to have better parameters around the risk we're taking in our portfolios.

So I think we've done all of the right things to have an investment style that's very consistent with the retirement services-oriented organization, and I think the improvements are starting to come through.

And is that reflected on the because you did have to take some big losses? Have you repositioned the portfolios and got out of some of the less liquid and ...

Yeah. Yeah, that certainly -- I mean, we certainly had to do some repositioning, particularly in the equities. And anytime you do that, you know, you can never -- you're always going to have some -- generally, you're going to have some losses to do that. But, yeah, there were some embedded investment performance with re-balancing a lot of those -- the portfolios, no doubt.

OK.

Let me also talk about the relationship with independent financial planners. I would -- I would describe it as being strained. Obviously, when you have investment performance problems, it's going to strain the relationship with your producers. But I would say we've been through this with them in the past, and we have good evidence that when we improve performance, they come back around.

We've had a number of road shows, where we've traveled around and talked with them and explained improvements. I think they're giving -- continue to give us the benefit of the doubt that we will improve performance. I think they'll be there on our side when we do. I think they are basically loyal; they like the BT, and they want to do business with us. And I think they're very much on our side that we get our investment performance turned back around and they're going to give us the time to do that, I believe.

Lastly, let me ask Mike to talk about the carrying of the Enron and what our expectations are there.

Yeah, , good question and very insightful to know that we're carrying it a little higher than perhaps market. Our deal -- our investments are in , which is a subsidiary of Enron. We've been in this deal for a long time. We think we understand the structure. We think we understand the value of the underlying assets.

We believe that the part of Enron will come out of bankruptcy sooner. And so that gives us some belief and a pretty strong relief that we're going to recover a decent amount on the notes. So the write-down would not be as severe as what is being shown in the marketplace.

So we think we've got a pretty reasonable carrying value in what the ultimate result of will be at the end of the day.

OK, great. Thank you very much.

Thank you, .

Thomas , you may ask you question. And please state your company name.

Good morning, Dresdner Klinewort .

Hi, .

Hi. Last -- during the last call, you had mentioned that the sales pipeline for the U.S. 401(k) business was as strong as it's ever been. Now that November-December really bounced back quicker than expected, can you just give us an idea -- you now, I would have to guess that pipeline is probably even stronger than you had indicated back then.

Is there any way you can quantify it or just give us a general sense for how that's looking? And, in particular, is the reason the pipeline is so strong -- are you expecting any particularly large cases or maybe just give a little lay of the land there as well.

Well let me ask Mike Daley to chime in on that one. Good question.

All right. Just to give a little backdrop here, what we had talked about was -- because of 9-11, we had lost some pipeline that got pushed out into 2002. And that stuck. What happened was we were able to generate some additional pipeline that -- that helped us close out November and December in quite a strong way, as well as we improved our close ratios on existing cases in November and December.

As we look forward for 2002, I would say that what we're seeing in terms of pipeline and what we're seeing in terms of results are very consistent with the guidance that Barry had shared with you earlier in this conference call. So -- so we remain quite optimistic that the changes we introduced in early 2001 will continue to drive the business in a manner in which we can support our -- our long-term earnings growth.

And is the reason for the guidance in the first place about the pipeline, is that skewed towards large cases in particular, or is that pretty broadly distributed? Is there any way you can give us a description on that?

Absolutely. There are a couple of factors driving pipeline. Number one, without it we are successfully garnering more transfer type of business than startup cases. And so that drives up the volume of asset dollars in the pipeline. Number two, we're also moving up slightly in the average sized case being sold. We had about a 63 percent increase in the average sized case based on assets in 2001 over 2002. And so that helps drive the pipeline. Both of those things are widespread events, though, that well for the overall organization here.

The third thing driving the pipeline is simply, again, the techniques and the proactive management tools we put into place that is focusing our entire sales infrastructure more on generating pipeline. And so when we have the entire body of sales reps and sales management thinking about generating pipeline for future sales, it has a huge impact there.

And so we've got folks on our system right now worrying about third quarter in terms of pipeline, and by doing that, that assures that as we get to the third quarter from a sales standpoint, that we're going to be in pretty good stead.

So it's part of the process we've put in place, it's part of the fact that we are slightly -- we are seeing slightly largely cases, and it's a function of, I just think, the talent and reputation we have in the marketplace.

That's helpful. Thanks. And then just a question on the commercial mortgage and real estate portfolio. Can you just comment -- I saw in the release it had mentioned it took some real estate losses that were embedded in those -- in the total number. Can you comment on what that number was?

And then, also, can you just comment on how you feel about the quality of that portfolio? During the last call, you had mentioned it's actually been improving in quality. Is that still the case? And in terms of exposure to K-mart in that portfolio, can you comment on that as well?

Sure. We'll ask Mike -- can you remember all that, Mike?

I'm not sure I can remember all of that. Real estate losses -- and I don't have the number right in front of me -- but I think we went from -- we've been in a process of selling real estate, winding that exposure down over the last few years. And in the fourth quarter last year, I believe we had in the neighborhood of $50 million of gain as we sold properties. I think this year it flipped to a small amount of loss.

So we're not talking about big dollars of gain in the fourth quarter of 2000 and big dollars of loss in the fourth quarter of 2001. It was more of a flip from a modest amount of gain in the fourth quarter to a very small amount of loss in the fourth quarter of 2001.

In terms of -- I think you asked about the quality of the real estate portfolio?

Overall portfolio.

Overall portfolio?

Just the quality more specifically of the commercial mortgage and real estate portfolio.

Yeah, and I think the quality is roughly -- you know, we still believe we have a very high quality portfolio. We have not seen any major stresses put on the portfolio. Obviously, some markets are a little bit weaker. But the portfolio is pretty well seasoned, pretty well margined. We don't see any major negative impacts.

And then just exposure to K-Mart in the commercial mortgage portfolio.

Exposure to K-Mart -- hang on a second, I've got to look that number up. It's one of those things that I don't have on the tip of my tongue, but we do have written down here. K-Mart exposure is -- well we've sold out of all the bonds that we had of K-Mart early in January. I think our exposure is still down -- is in the real estate portfolio in terms of credit tenant loans and K-Mart exposure in neighborhood shopping centers.

If I'm remembering right, there's about $46 million of exposure in both of those areas. Looking at the potential loss out of those areas, I believe the real estate folks were saying -- depending how bankruptcy goes -- somewhere between perhaps $3 million to $10 million of loss.

OK. That's helpful, thanks.

Depending on how they come out of -- what they do in bankruptcy.

Thank you.

Caitlin , you may ask your question. And please state your company name.

Good morning from Credit Suisse First Boston. (Company: Credit Suisse Group; Ticker: CSGKY; URL: http://www.credit-suisse.com/)

Just a clarification on the share repurchase program. It looks to me like you actually bought back the entire green , or pretty close to it in the fourth quarter. So, therefore, the authorization is basically used up. Is there any plan to put a new one in place?

Good question, . How are you doing today?

Good, thank you.

Yeah, you're right. We basically have -- have bought back or have executed one to get back the green . And we have a board meeting coming up in a few weeks and that's always the topic of discussion. And -- so there's no outstanding authorization right now, but it's certainly something we'll continue to look at as we manage our -- our equity and our capital.

OK. And then a follow up, can you just review for us the mortgage assumptions that you've put into the 2002 guidance. And maybe since we're a month into the quarter already, let us know how that mortgage banking business is doing in light of the backup in mortgage rates.

Yeah. We of course don't give guidance on a segment-by-segment basis, but we can certainly talk more broadly about how we view the mortgage -- the mortgage business, so ...

This is Paul Bognanno. Hi, .

Hi there.

The mortgage production business has continued to be strong through January and into February. And we have a good, strong pipeline. I can't give details, but we feel very positive about our earnings capacity. Now we don't expect to the kind of money that we did in 2001. We think there will a cyclical downturn, of course, in the business, but frankly, we are not seeing it yet.

So can you give us some color as to what kind of assumptions you've built in? I'm not asking for anything specific, I'm just looking for some color.

Well we would -- I guess I would put it in terms of -- we had a percent return on equity last year. We're probably looking at something -- something south of 20 percent this year.

Let me say this, . Maybe one way to answer this is that I think we would view interest rates to -- our inner model, we're kind of viewing interest rates as being reasonably stable. Perhaps moderately going up. And that would basically say that your refinance is probably going to be modest, but as Paul said, we already have a very strong pipeline right now.

But I think we would envision that we would gradually get back to more normal circumstances in the mortgage banking business. But as we have said before, we have a $25 billion larger portfolio servicing than we did when we started last year. So we grew the -- you know, the servicing, by $25 billion. So that tells you that our earnings would go up fairly significantly on that part of the business, and that' very much a positive.

OK, that's helpful. Thank you.

Eric , you may ask your question. And please state your company name.

Yes, good morning from Lehman Brothers. (Company: Lehman Brothers Holdings Inc.; Ticker: LEH ; URL: http://www.lehman.com/)

I actually have a couple of questions regarding pension, but even before I get to them, just to make sure I understand, if you go below -- I mean maybe I'm not doing the algebra correctly, and tell me if this is the case -- but if you drop to a, say, an 18 or 19 percent return on equity from whatever the figure was -- 33, 34 percent -- does that imply that earnings are going to -- does that effectively say that earnings could be down by as much as 30 or 40 percent to the mortgage banking area?

Is that effectively what you're saying at this point? And then I'd like to ask a follow up, please, regarding pension.

I don't think that' what we were saying. We're -- I think -- I think the right answer is what I said, is that we might see the environment in the mortgage business returning to more normal conditions and get out of this huge refinancing of America's mortgages and to have something where there's more modest refinance and probably more modest, you know, new mortgages.

But in this business, if that happens, the value of servicing goes up. Because as interest rates go up, the value of the servicing goes up. So we are not looking at a precipitous drop in earnings, but we would expect that they would get back to more normal.

And what we've said constantly is we think this is a 15 to 20 percent business on a continuous basis over a long haul. We're not trying to signal that we're going to get back to a 15 to 17 percent , you know, in a short period of time. But that's the direction it will have to head because that's the -- you know, that's the nature of the business for refinancing to not last an indefinite period.

Great. My questions regarding pension were these: First, I think as mentioned or referenced earlier, Nationwide has a pretty sobering view -- at least right now -- of the small 401(k) market, saying the new plan formation is slowing, employers are less willing to transfer. Plans when they are transferred are smaller than would otherwise be the case.

Are you -- what are you saying and seeing about this core 401(k) business? Are you more -- is the environment brighter in your view or better in your view? Is this business growing rapidly? How do you see the market right now relative to their fairly, again, sobering view? Thank you.

Good question, . Let me -- I don't know if I should answer it or Mike. We both want to answer it because we think we've got a -- we've got a good answer. Let me ask Mike. He's the person running the operation.

Thank you.

, I would just say that we do not share that point of view that Nationwide has. We have had a tremendous fourth quarter. We are feeling very sanguine about what's happening from a pipeline standpoint and a ratio standpoint on our business and an average sized case on our business, and we're happy about the degree of transfer cases that we are winning.

So, again, I point to our business model, our market reputation, our expansion of distribution channels and our ability to gain exclusive, if not preferred, relationships and alliances as all very positive signs that this core business has some great positive flows for us in the months ahead.

And, , I'd just like to say I think the business model really needs to be emphasized here. I mean, a lot of the takeover cases we get, you know, they are with companies that have outsourced the administration or have outsourced, you know, various parts.

And having this integrated platform, where we control the quality and we can guarantee, you know, the kind of performance you're going to get in terms of administration and -- I mean, I just think that's huge in the marketplace right now. We're seeing a lot of people coming to the quality players, you know, like Principal.

Sure, that's helpful. And my final question, turning to page 25 of the supplement -- and this is harking back to an earlier discussion regarding new flows in the pension business -- I understand that the business investment only tailed off towards the end of the -- towards the end of the year.

But if there is this bigger pipeline, if the sales effort is gathering momentum, should we be seeing this in the line item entitled, "Gross new deposits under management full service?" I would think that those numbers would be, you know, moving upward. Or is that something rather that is down the road.

Yeah, we're all trying to find the ...

, this is Larry, how are you?

Good morning, Larry.

Generally speaking, your belief about what you should see is basically right. The process of taking over an existing plan does typically take perhaps a 30-60 -- maybe on the outside, sort of 90-day -- process to -- basically to execute. And the cash often comes at the end of that process.

So you very definitely will see that -- that full-service gross deposit number continue to move up over a period of time.

That was it. Thank you very much.

Thank you.

We have time for one more question today. The last question comes from Len . You may ask your question and please state your company name.

Good morning, Foxpick . First question just on excess capital. Given that you spent $300 or $350 on share buyback, where you put your excess capital today and how would you sort of prioritize your use of that excess capital.

And then the second question, the group earnings were lower than I expected. It looked like expenses were up and the group dental loss ratio ticked up. Can you just give us some more color there please?

Sure. How are you doing?

Very good, thanks.

It's good to talk to you, . Let me -- let me cover the excess capital very quickly. The strategy really hasn't changed from that which we described to you before. We would expect not to make any major acquisitions in the next couple of years. We will continue to think about acquisitions in markets where we don't have critical mass or what we think we need to add to that. So that might mean in the international arena.

So, you know, I think basically nothing has changed. As we said, the repurchase program that we had in place to get to green , you know, will continue to that's complete. And then we will look at whether a repurchase program is appropriate. That is a very, very important tool and we'll certainly look at it.

So really nothing has changed. We will effectively manage our capital. It will include a repurchase as a tool. It will not include any large acquisitions. It will probably include some acquisitions in areas where we think that's -- that's needed.

And with that, let me ask John to comment on the -- on the group ...

Can we just stay on that, though, can we just sort of get a -- can Mike give us a dollar amount of where he put his excess capital today? Again, I just want to affirm that you've bought back the green already. That's what it looks like from the end of period to your account.

We have executed a plan that has effectively bought back the green , that is correct.

OK.

And your other part of your question?

Just where would Mike put the excess capital at today?

Oh, the amount. I'm sorry.

Well I think what we said when -- you know, in the past, has been we've got about -- we had about $470 million of capital sitting up at the holding company and we had dividend capacity move another half a billion dollars or so -- maybe a little more than that -- during 2002 from the company to the holding company.

We think about that as sort of excess capital capacity that's sitting at the holding company. I think that gives you kind of an indication of the magnitude of what we're dealing with for 2002.

We probably have some additional capital we can deploy out of the company, but we tend to think more in terms of capital that resides at the holding company as being more generally used in either shared buybacks or acquisitions.

OK.

?

Yeah, on the group side, earnings were down a little bit from the third quarter, but that was primarily because the third quarter was really an exceptional quarter. But we think the group business is in very, very good shape both in the fourth quarter and moving into 2002.

OK the group loss ratio ticked up a little bit. Is there any concerning trends there?

Not major.

OK, thanks.

I think we would also say the third quarter was pretty strong for , is that right, ?

Yes. About a 75 loss ratio is -- is pretty appropriate on the group .

OK, thanks.

Thank you.

That concludes the question and answer portions of today's conference. I'll turn it back over to the speakers for closing statements.

Well we just want to thank you all for joining the conference today. We appreciate your questions very much and I hope you have a great day.

Thank you. That does conclude today's conference.