美國信安金融集團 (PFG) 2005 Q4 法說會逐字稿

Good morning, and welcome to the Principal Financial Group fourth quarter (technical difficulty) call. There will be a question-and-answer period after the speakers have completed their remarks. (OPERATOR INSTRUCTIONS). I would now like to turn the conference over to Tom Graf, Senior Vice President of Investor Relations.

Thank you. Good morning, and welcome to the Principal Financial Group's quarterly conference call. If you don't already have a copy, our earnings release and financial supplement can be found on our Website at www.Principal.com/investor.

Following a reading of the Safe Harbor provision, CEO Barry Griswell and CFO Mike Gersie will deliver some prepared remarks; then we'll open up for questions. Others available for the Q&A are our three division presidents, John Aschenbrenner, responsible for the Life and Health Insurance segment, Jim McCaughan, responsible for Global Asset Management, and Larry Zimpleman, responsible for our U.S. and International Asset Accumulation. Julia Lawler, Chief Investment Officer, will also be available for questions.

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 most recent annual report on Form 10-K and quarterly report on Form 10-Q, filed by the Company with the Securities and Exchange Commission. Barry?

Thanks, Tom, and welcome to everyone on the call. The fourth quarter was an excellent finish to an outstanding year. For the three months we delivered strong earnings growth and record earnings per share. We continue to drive solid growth in assets under management and account values, with both reaching record levels at year end. As always, Mike will provide a detailed overview of our quarterly financials. I'll offer some performance highlights for the full-year and for our four-year track record since going public. Then I will focus the remainder of my remarks on the health of certain key businesses and our ongoing efforts to accelerate growth in each.

2005 was again a very good year for The Principal, even after adjusting for items impacting comparability, which Mike will discuss in detail. We delivered record assets under management of 195 billion, up 17%, including 33% organic growth for Principal International and 25% organic growth in Principal Global Investors' third-party assets under management; record account values of 120 [billion] for U.S. Asset Accumulation, up 11%; record operating earnings of 862 million, up 13%, including record results for all three operating segments. This growth was even stronger given nearly $18 million of preferred stock dividends paid in 2005, with no corresponding activity in 2004. We also delivered record operating earnings per diluted share of $2.97, a 22% improvement, and record sales for each of our three key retirement and investment products totaling $11.5 billion, a 13% improvement.

We achieved very good progress in the life and health segment as well, with continuing strong individual life sales, including some real momentum with non-qualified sales in the fourth quarter, which offset some of the decline in universal life secondary guarantee sales, very good growth of insured medical covered members in our target states, as well as overall, and strong improvement for the year in insured medical lapse rate -- and record sales, premiums and earnings for the specialty benefits division, with sales up 23%, premiums up 13%, and earnings up 26%.

2005 also contributed to very strong long-term results, particularly so in light of continued equity market volatility and weakness. In the four years since our IPO, our performance includes compound annual growth of 17% for earnings per share, driven by a 10.5% growth rate for operating earnings, 14% for account values in our U.S. Asset Accumulation businesses, and 18% for total company assets under management, excluding BT, the Australian asset manager we sold in 2002. We've also had a 490 basis point improvement in return on equity since 2001, and our strong financial performance has driven outstanding appreciation, with our share price increasing 131% since the opening of our IPO through year end 2005.

During 2005, we remained highly focused on several critical areas, including accelerating growth in our U.S. and international retirement businesses, creating a successful Global Asset Management organization, and profitably growing our life and health businesses. Our outstanding results in each of these reflect a year of continued strong execution. I've already mentioned some of the progress in the life and health segment. I will spend the next couple of minutes on the performance and progress of three key asset accumulation and asset management businesses, starting with full-service accumulation.

In addition to a record fourth quarter, full-service accumulation delivered record earnings for the year, up 10%, or 22 million, driven by continued strong account value growth. Account values increased $8.4 billion, or 12% for the year, to a record 77 billion. Net cash flow contributed a very solid 3.3 billion, reflecting increasing deposits from retirement plan investors, good contract level retention, and very strong sales growth.

At 6.1 billion for the year, we grew full-service accumulation sales by 17%, reflecting strong progress on several key fronts. Total Retirement Suite sales exceeded $2 billion, making up 34% of our sales in 2005, compared to 24% in 2004. We also had nearly 800 million of full-service accumulation sales to existing clients. These demonstrate a meaningful shift in demand toward Total Retirement solutions and the responsiveness of our broad, integrated offering to plan sponsor needs.

Alliance sales also grew substantially, up 29% in 2005 to a record 2.3 billion, reflecting growing success with both existing and new relationships. Our increased focus on the small case market continued to pay off as well. Our sales force dedicated to the small case market sold more than 1800 plans, including 18% growth in security builder cases. Further, over 1000 independent advisers wrote their first plan with The Principal during the year, with nearly 700 of these plans in the emerging market space.

Let me wrap up the sales discussion with a couple of additional thoughts. In 2005, we continued to strengthen our portfolio of best-in-class retirement solutions, as well as our powerful sales infrastructure and exceptional distribution reach. We also continued to expand relationships with existing clients and to increase sales rep productivity overall. We've built a lot of momentum going into 2006, and we are therefore highly optimistic about achieving our 10 to 12% organic growth rate for the year.

I'd also emphasize that retention continues to be a major focus. At 93.8%, excluding ABN AMRO, employer-level retention was down from a record high in 2004, but nonetheless outstanding and among the best in the industry. Large case retention was even better at over 96% for the year. We continue to retain assets when a plan participant changes jobs or retires, with 52% asset retention for the year, also well above industry averages. To add some perspective, in 2005 we retained more than $4 billion of at-risk assets, which was up $450 million from 2004 and included 1.6 billion of retention into our retail products -- an increase of nearly $200 million.

As part of our ongoing efforts to strengthen the earnings power of our businesses, we continuously refine and enhance our product and service platform. In 2005, for example, we expanded Total Retirement Suite, introduced a number of innovative new investment and retirement income management offerings, and enhanced our Retire Secure program. These and other efforts enable us to expand our role as trusted adviser, transform products into solutions, and help small and medium-size businesses and their employees achieve financial security and success.

Moving to Principal Global Investors, 2005 was another remarkable year -- a record 74 million in operating earnings, a 33% improvement; record 145 billion in assets managed, including a record 42 billion of third-party assets, and a record 111 new third-party institutional mandates, representing a record 6.9 billion in assets. Third-party assets under management is up 38% from a year ago, and 25% on an organic basis, excluding assets acquired as part of the Columbus Circle transaction.

Investment performance for the year continued to improve and was outstanding across asset classes. Of the retirement plan assets managed by Principal Global Investors, 92% ranked in the top two Morningstar quartiles for the one-year period, 89% for the three-year period, and 82% for the five-year period; very high-performance, which bodes extremely well for asset retention. Strong performance, including an exceptional one and three-year equity performance track record, has made us increasingly search-competitive across asset classes. Principal Global Investors now manages assets for nine of the 25 largest U.S. pension funds and won nearly $1 billion in third-party equity mandates in 2005, which compares to only 51 million in 2004.

In terms of accelerating international growth and profitability, Principal International continues to make excellent progress with another outstanding year. In 2005, Principal International's earnings improved 76% to a record 71 million. Even excluding items benefiting results, which Mike will discuss, earnings improved 42%, operating revenues increased 17% from 2004, to a record $605 million, and assets under management increased strongly as well to a record [15.4] billion at year end.

As you know, during the year we exited our pension business in Japan, due to the slow emergence of the defined contribution market in that country. We also entered a mutual fund joint venture with China Construction Bank. We experienced strong initial success with our first mutual fund IPO, coming in at $771 million, a record for China. While we will continue to seek strategic acquisitions for Principal International, our primary focus will be on organic growth, leveraging and expanding our distribution and sales networks, launching new product solutions, and preparing to capitalize on pension reform as it unfolds in Chile, India, Brazil and China.

Before I close, let me briefly cover a couple of other things. In terms of effective use of capital, organic growth and strategic acquisitions remain our top two priorities. As you know, we have also returned capital to shareholders through repurchases and cash dividends. In 2005, we bought back 22.1 million shares for $867 million, or an average price per share of $39.17. As of year end, we had yet to begin the Board's $250 million November 2005 authorization, but we did repurchase $50 million of shares through February 1st of this year. We also paid a cash dividend on our common stock of $0.65 a share in the fourth quarter, an 18% increase from 2004, and a 160% increase since our initial cash dividend in 2002.

As mentioned throughout the year, we continued to receive important third-party recognition for excellence in serving retirement plan sponsors and participants, for technology innovation, and as a premier employer. To the list I would add two more. In December, Principal Global Investors was selected as one of three nominees for Money Management Letters' Bond Manager of the Year. And in January 2006, we again made the Fortune 100 Best Places to Work, our fourth consecutive year. These awards are particularly gratifying and communicate the strength of our commitment to our customers and our employees.

In 2005, we accomplished a great deal. Driven by strong performance, ROE improved strongly to 13.8% at year end. Excluding items which benefited 2005 operating earnings on the net, and without further adjustments to equity, our ROE would have been around 13.3% for the trailing 12 months. So clearly, there's much for us to accomplish to reach our longer-term target of 15%. Looking ahead, we will continue working hard to extend our leadership with small and medium businesses and their employees, to be a great place to work and to create value for our shareholders. We are confident that with further economic recovery and modest equity market growth, we will continue to deliver superior long-term results for our shareholders. Mike?

Thanks, Barry. This morning I will spend a few minutes providing financial detail for each of our operating segments and additional highlights for the quarter and the year. I'll close with some brief comments on our growth expectations for 2006.

As Barry indicated, we are very pleased with our results, particularly in light of some weaknesses in the equity markets for the year. We delivered strong earnings per share growth in the fourth quarter, an improvement of 17% compared to the prior year quarter. We also delivered 22% improvement in earnings per share for the year compared to 2004. In both periods, certain items impacted operating earnings, netting to a benefit of approximately $0.04 a share in fourth quarter 2005, between Principal International and the corporate segment, and approximately $0.11 a share for the full year. I'll cover these in more detail shortly.

Moving to the segments, I'll start with highlights for U.S. Asset Management and Accumulation. Segment assets under management increased $22 billion, or 16% from a year ago, driving total company assets under management to a record $195 billion at year end.

Compared to a year ago, segment earnings increased 1% in fourth quarter 2005 to $136 million, including a record $66 million for full-service accumulation. As you may recall, in fourth quarter 2004, full-service accumulation earnings included a $6.2 million tax benefit from a special dividend received. Excluding that benefit, full-service accumulation earnings improved 13%, consistent with our growth in average account values over the period.

We view 2005 full-service accumulation net cash flow as very solid, though slightly below our target at 4.8%. This minor miss reflects late sales effective dates in fourth quarter 2005 for some larger cases, which will come true in first quarter 2006 deposits.

As expected, we also experienced some higher contract-level withdrawals in the fourth quarter in the ABN AMRO block, as we have accelerated our efforts to integrate the business into our platform. We are on track to complete the integration of the block by the end of first quarter, nine months ahead of our original timeline. Despite the increase in withdrawals in fourth quarter, performance and retention of the block have been simply outstanding, and significantly better than what we had assumed in pricing the acquisition. While we expect some higher contract-level withdrawals again in the first quarter, the important thing to remember is that by accelerating integration, we are making the block accretive sooner. Further, after first quarter, we would expect net cash flow to return to more normal levels.

We remain confident that over the next several years we can achieve our 5% net cash flow target, and more importantly, assuming markets perform as expected, our 14% targeted growth in full-service accumulation account values. Our confidence reflects a firm belief that we will continue generating deposit growth sufficient to cover higher withdrawals, which naturally increase with account value growth.

A couple of important things to keep in mind. In just three years we've increased account values by $34 billion, or 80%. In 2005, deposits were a record $15.4 billion, an increase of 15%, or nearly $2.1 billion from 2004. As you know, there are a number of levers that drive deposit growth, including annual pay increases for participants, higher deferrals, and increased participation in existing plans. As Barry mentioned, we remain highly confident in our ability to drive sales growth as well, which not only generates higher transfer deposits, but also new contributing participants.

For the full year, earnings for U.S. Asset Management and Accumulation improved 8%, to a record $538 million. In addition to full-service accumulation, three other businesses in the segment achieved double-digit earnings growth for the year. Principal Global Investors' earnings were up 33% in 2005, including 8% in the fourth quarter. While fourth quarter earnings tend to be higher than normal, due to timing of annual incentive fees, [tightening] of commercial mortgage-backed security spreads dampened Principal Global Investors' fourth quarter 2005 earnings by approximately $3 million. The sharper improvement in full-year earnings reflects very strong commercial mortgage securitization results overall and significant asset growth.

Mutual fund earnings improved 10% in fourth quarter and 17% for the year. At a record $3.4 billion, mutual fund sales remained outstanding, with double-digit growth again in 2005. Individual annuities earnings dropped slightly in fourth quarter, but improved 10% for the year to a record $56 million. Individual annuities sales were a record $2 billion in 2005. Though up less than 1% from a year ago, we view this as an outstanding result in light of the negative impact that the flattening yield curve is having on fixed deferred annuity sales.

U.S. Asset Management and Accumulation segment results were dampened in 2005 by a decline in full-service payout business, where earnings dropped by $12.5 million, or 21%. The decline was a result of lower mortality gains, as well as lower asset yields and lower prepayment fee income than in 2004. We were certainly encouraged by an improvement in fourth quarter 2005 single premium group annuity sales, and expect the full-service payout business to return to moderate growth in 2006. While we also faced a difficult environment for investment-only business due to interest rates, our disciplined efforts to protect spread helped keep our drop in earnings for the year to less than $1 million.

Moving to International Asset Management and Accumulation, earnings for the year were very strong, as Barry mentioned. There were several items impacting fourth-quarter and full-year comparisons, which I will cover briefly.

Principal International's fourth-quarter earnings improved to $23 million from $12 million in the year ago quarter. Earnings for the quarter were aided by tax benefits of $13 million, with the largest a $9 million benefit from the liquidation of our defined contribution pension business in Japan. In anticipation of the Japan tax benefit, we made some discretionary investments in marketing, advertising and sales training during the fourth quarter 2005, which lowered earnings by $3 million. We also had $1 million of costs associated with the Japan liquidation.

In total, these fourth quarter 2005 items netted to a benefit of approximately $9 million. Adjusting for these items, operating earnings were about $14 million for fourth quarter 2005, a very good result.

Principal International's full-year earnings were also aided by an additional $2 million of tax benefits, including the American Jobs Creation Act, and by $3 million due to a refinement in accrued revenues in Mexico, which we communicated in the third quarter. Adjusting for all of these items, which net to a $14 million benefit for the year, segment earnings were $57 million, an increase of about 42% over 2004. This would equate to a return on equity of approximately 6.5% over the trailing 12 months.

To close this discussion, of this adjusted base of $57 million of earnings in 2005, we expect Principal International to deliver 15 to 20% earnings growth in 2006, but would remind you that the first quarter is a seasonally-low quarter for the segment.

Moving to our life and health insurance business, 2005 was a record year for the segment as well, with operating earnings of $274 million. Earnings for the quarter were $63 million compared to $53 million in the fourth quarter 2004. Specialty benefits continued to achieve strong earnings growth, improving 20% in the fourth quarter to a record $22 million, and 26% for the year to a record $75 million. For the quarter and the year, each of the specialty benefits lines achieved strong sales growth and very good retention, driving premium and fees up 13% from 2004. Specialty benefits generated more than $1 billion of premium and fees in 2005, and at year end the division return on equity was 14.9%, reflecting very strong performance for all lines of business.

At $25 million of operating earnings in fourth quarter 2005, results for the individual life division were very solid, but down slightly from a year ago due to worse claims experience. For the year, individual life earnings were up $8 million to $118 million. As previously communicated, in 2005 the division benefited from reinsurance methodology refinements and deferred acquisition cost adjustments totaling approximately $11 million. Excluding these items from 2005, and similar items for 2004, division earnings would be up about 4%.

The increase in segment earnings in the fourth quarter 2005 also reflects significant improvement in the health division. Operating earnings increased $7 million to $16 million, reflecting a return to more normal, though slightly unfavorable, claims experience. Keep in mind that health division earnings are normally lower in fourth quarter due to seasonality of claims. For the year, health division earnings were down about $5 million, but still generated a strong return on equity in excess of 18%. 2005 earnings were dampened by investments in wellness growth, as well as some expenses that we would not expect to repeat in 2006.

2005 earnings were also dampened by a lag between expense reductions and the decline in fee-for-service members that occurred in the first quarter. We're continuing into 2006 our efforts to turn around fee-for-service member growth, as well as to better align expenses to the smaller block.

Importantly for the health division, we continue to see meaningful growth in insured medical covered members. Fourth quarter 2005 was our sixth consecutive quarter of target state member growth and fourth consecutive quarter of growth in total. Compared to 2004, covered members in our target states are up 16%, and total members are up 8%, reflecting both strong sales and improved retention. We also delivered very strong growth in our wellness business, which increased 44% in 2005 to 96,000 lives, and continued progress in improving network discounts in our target states.

Overall, 2005 was a solid year for the life and health insurance segment and for each of the divisions. In 2006 we will continue working to improve our competitiveness, focusing on target markets and opportunities to generate sustainable, profitable growth.

Before taking questions, I'd like to revisit some important items to keep in mind in terms of growth expectations. As always, growth targets should be applied to normalized results. Our long-term earnings per share growth target of 11 to 13% incorporates equity market improvement of roughly 2% per quarter. As previously communicated, we expect Principal Global Investors operating earnings to be relatively flat in 2006 compared to 2005, primarily reflecting our transition to the commercial mortgage securitization joint venture with U.S. Bank.

As we also communicated, we expect a benefit of approximately $10 million for the specialty benefits division, due to reserve refinements to be implemented for the long-term disability line.

I'd also like to summarize the items that aided 2005 operating earnings by $33 million in total. In addition to the $14 million for Principal International identified in this call, we also had $11 million of benefits for the individual life division, due to reinsurance methodology refinements and DAC adjustments. We also had $8 million in benefits for the corporate sector, approximately $5 million of positive impacts from joint venture real estate in the third and fourth quarters, and $3 million from reduced interest on federal tax matters in the fourth quarter. I'd also remind you that in 2006, corporate segment earnings will reflect an additional $15 million of impact from paying four quarters of preferred dividends compared to two payments in 2005.

This concludes our prepared remarks. I would now ask the conference call operator to open the call to questions.

(OPERATOR INSTRUCTIONS). Dan Johnson, Citadel Investment Group.

Two questions, please. On tax matters, can we talk a little bit about the normalized level of taxation, either in USAMA as a whole, or maybe it's easier to talk about the full-service business? Whichever one you'd like.

Okay, Dan. You want to go ahead and mention the other, and then we'll answer both?

There's another part of the tax question, and that's on -- if you could give us an update on the -- I think its section 29, fuel benefits, and what's going on with the oil rates.

Let me have Mike start with the tax matters and what is our normalized tax rate, and either Mike or Julia will come in on the section around the fuel benefits.

Let me talk a little bit about normalized tax rates. Rather than dealing at the segment level, let me talk at the corporate level, because I think it's really more important to think about tax rates at the corporate level.

A longer-term normalized rate would be somewhere in the 27 to 28% range. During 2005, obviously, you can see that our rate was significantly lower than that. A piece of that was due to synfuel, that section 29 credit that we received in 2005. That accounted for a reduction in tax rate of maybe 2 to 2.5%. That synfuel credit, I believe, runs through the end of 2006, but then our deal expires at the end of 2006, so we get more back -- 2007 -- Julia corrected me. 2007, so it's two years to run.

What we're planning on with oil levels, oil price levels this year, I think baked into our formula has been a slight cutback in the amount of credit that we would expect to receive from that deal. The credit kind of phases out on a sliding scale, and so we've been a little bit conservative in our forecast for 2005. And at least in the numbers that we've worked, we've backed off a little bit from that full 2.5% reduction in rate.

That actually takes care of both of those tax questions. The other question was on the investment-only business, in terms of the -- what sort of growth outlook we have there, whether you want to talk about it in earnings or return on assets would be helpful.

Larry?

As we've commented before, we would expect that our growth rate in operating earnings from the investment-only business would parallel the growth rate in our general accounts. So we're sort of estimating that over the longer-term to be sort of the high single-digit kind of rate. In terms of your ROA question there, as we've commented before, we see just a little bit of spread compression there, reflecting what's going on in the market. If you look back over the last 12 months, we've seen about four basis points of spread compression in that investment-only segment. But it still remains for us a very attractive, very attractive business. The ROAs and the ROEs on that are still well in excess of our cost of capital. So we're going to continue to try to keep that business right up at the rating agency cap.

So the mix between the growth in the assets and some spread compression still gives us some element of positive op income growth?

Absolutely.

Jimmy Bhullar, JP Morgan.

I just have a couple of questions. First, if you could talk about some competition in the pension market; a few insurance companies have been talking about entering, and specifically the small case market. If we look at your growth in assets and number of plans, you've actually done much better in case sizes higher than 500 employees than for case sizes [veering] to 99 or 100 to 499. And the second question is just on buybacks. I think in your guidance you implied 100 million for 2006. You've already done 50 through January. What's a more realistic number to expect for buybacks in '06?

I'll have Larry comment on the first two, and then Mike can take the third.

In terms of pension competition, what I would say to you is just that we're very happy and very comfortable with where we're at, in terms of our overall retirement sales situation. As Barry and Mike commented on, we're in very good shape relative to our Total Retirement Suite. It's working. It's 34% of our sales. It's $2 billion. It's a very unique positioning that really very few if any of our competitors can match.

Our alliance sales are working. Again, we saw alliance sales up 29% last year. 1000 advisers wrote their first plan with us. That's just -- that's a great start. We have much further we can go with that, so we feel very good about that.

In terms of the place where the sales are coming from, again, by the nature of having our retirement sales expressed as assets you're going to see that it looks like a lot of those sales are coming at the middle and upper-end, just because those are plans with transfer money. So that's where it's going to look like the growth is, but don't be too misled by that. As Barry commented in his remarks, our security builder sales, which is security builder the product, for our low-end and new start-up plans -- those sales were up 18% last year; that's a very strong story. And the emerging market reps who focus on that part of the market are really beginning to mature now. So again, we have a lot of optimism we're going to continue to see double-digit growth down there. So we feel very good about our competitive position in small, medium and large.

Are you seeing other companies enter the small case market, or any impact on margins that's having for the industry?

I wouldn't say there's anything there that is of a big concern. All the markets are competitive. That just goes without saying. Again, I think our results say that we have a great value proposition, we generally -- not exclusively, but we generally use a fully bundled approach, which, again, we believe is a superior model for the small and medium marketplace. So, we feel very good about where we are, and we feel that we can compete against anybody.

Mike, you want to talk little bit about share repurchase and capital?

I'm going to give you an omnibus answer to our capital question, because in order to really understand share repurchase, you'd probably have to take a look at all the sources of available capital. So anticipating many questions -- Barry is looking at his watch. I've got to be careful not to run out the clock here.

We constantly review our capital position, and so things we look at are available capital. We define available capital as cash at the holding company. At the end of the year we had roughly 150 -- or 100 to $150 million of available capital sitting at the holding company. We look at our debt capacity, and primarily looking at debt to cap ratios, although you also have to consider coverage ratios and other things. We'd like to run at a debt to cap ratio of 20 to 25%. We finished the year slightly under that 20% level, on a Moody's basis. And that's one of the measures that we look at. So you could argue we've got some room to maneuver, some capacity to issue debt, looking at debt capacity.

Another aspect we look at is capital adequacy at the life company. We are in the process of going through risk-based capital calculations at the life company. We may have some excess capital at the life company. However, each rating agency has its own view on capital adequacy. Some agencies have their own proprietary rating methodologies, and so we are really taking a very hard look at life company capital. But the bottom line is we may have some room to maneuver, and we may have some ability to redeploy capital from the life company.

Now, turning to share repurchase, baked into the guidance that we gave back in November, I think we had mentioned $100 million of share repurchase used in our 2006 estimate. That $100 million really sprang from excess capital that would be generated from 2006 earnings. We also had some earnings and capital generated from 2006 that would be earmarked for acquisitions. And depending on how that plays out and whether we do a lot of acquisitions or few acquisitions, we could have some capacity.

So getting to the final question is, could we do more share repurchase in 2006 -- my answer to you would be, well, we believe we have some room to maneuver, but we're still looking at all the components.

And we do have (multiple speakers) -- and we are working on a $250 million share repurchase authorization from the Board.

Tom Gallagher, Credit Suisse.

First question is just going back to something Mike said on retention. Is it fair to say that, if I'm reading you correctly, that 1Q net flows in full-service are probably not going to improve a lot from 4Q levels due to the ABN integration? Is that -- am I reading you correctly with what you said?

I think that's one way to interpret it. It's a little early to know exactly what's going to happen, but I do you think in the script we tried to say that the ABN AMRO will probably be accelerated in terms of getting onto our system, and that may cause more net flows. But it will be well within pricing, and it's just really accelerating the net flows that we would anticipate having anyway. And, as I think Mike said, we would anticipate this would make the block accretive quicker, because they get onto our system where we then start picking up the margins.

Also, we had some sales that we made at the end of the quarter which presumably, hopefully, will flow through in first quarter.

So then (multiple speakers)

You're going to see a reasonably strong quarter, but it's going to be some strong flows coming from the last quarter and it's going to be some runoff of the ABN AMRO. Net net, it'll probably be a pretty normal -- we would anticipate perhaps a pretty normal quarter.

And then, Barry, I guess your commentary that you still feel good about the 5% of the AUM trend in net flows, that would imply you're approaching kind of 1 billion a quarter thereafter. So that's still a pretty reasonable expectation in your mind, despite a little bit of a pickup in redemptions?

I think that's right, but let me ask Larry to just clarify to make sure.

Just to give you a little bit more color around that, again, I think what you really have to understand is the extent to which the integration of the ABN AMRO block masks some of the underlying trends that are going on, because remember that that 4 billion in account value that we took on with ABN AMRO never came through deposits. So if you just track historically net cash flow, you're going to get a distorted figure, because the 4 billion which goes on the outside never came through deposits to begin with. So if you just identified in 2005, for example, and if you try to take as apples and apples a look as you can to try to judge our net cash flow of the Principal block, we would have been in excess of 5.5% in 2005. So we feel very good if we can accelerate this integration of ABN AMRO, get it on our platform as Barry described a minute ago, we should see the normal net cash flow trend resume.

So really no change in organics; this is more the acquisition-related impact of big asset in, you're going to get some redemption level from that, but you're not getting the corresponding deposit?

That's correct. And as Barry said, actually the redemptions we're seeing are far less than what our acquisition plan would have been. So overall, this has been a very positive transaction for us, albeit it has introduced some noise around the net cash flow.

I just had a couple of earnings-related questions. I guess this is the case in both full-service accumulation and in mutual funds. We just saw a nice increase in fee income in 4Q, but then you actually saw some compression on margins, I guess particularly still on the mutual fund side. But I noticed that in both cases. Is there anything unusual in the quarter that kind of suppressed margins?

Nothing particularly unusual there, but just let me give you a little bit of color around that. First of all, if you go back and look at the period a year ago, you have to be a little careful, because we had mortgage prepays and we had the dividend received deduction tax benefit in the fourth quarter. And those two items would account for a couple of basis points of ROA that would say that 2004, frankly, was a little bit overstated relative to what it should have been. So actually, the trend lines around ROA are really much more in line than what that initial comparison would lead you to believe.

I guess I noticed there was a pretty sizable pickup in DAC amortization, as well as other expenses. So I didn't know if there was something related to that.

There's nothing unusual in the DAC amortization, other than it reflects the growing increase of the business. And I would argue to you, as we've seen that annual DAC amortization go from about -- on the full-service accum from about 85 million a year to about 105 million a year, that, I think, speaks very well to the quality of earnings that's coming out of that full-service accumulation segment, where our earnings are up 10%, even though we are seeing -- and we think appropriately -- a pretty large increase in our DAC amortization. So it's a good quality story.

One last question. I noticed the net flows in IAMA were a little bit weaker this quarter. Was that due to the Japan liquidation, or anything else going on there?

The issue there was primarily our mutual fund company in India, where there are some large employer-based amounts that moved somewhat in and out as they do their seasonal kind of cash flow activity in India. I would say, however, that we are seeing more long-term sticky money in India, but it continues to have a little higher level of this employer money, where they're doing their cash flow activity for the year. So that's the primary reason; it was not the Japan liquidation.

And just as a heads up, as you get into countries like China, you're going to see a little bit more volatility in their mutual fund business as they have IPOs and large sums of money come in, and then over time, some of it runs off. So I think you're going to see a little more volatility in countries like India and China around cash flow.

Ed Spehar, Merrill Lynch.

Mike, I wanted to go back to the expenses in international. If you look at the first three quarters for both the commission line and the other expense line, and then you look at what those numbers were in the fourth quarter, and they were pretty consistent in the first three quarters, it would suggest that the level of expenses was well above, I guess, a normal level. I think you identified $4 million after-tax. I think if you look at the numbers I'm talking about, you might be able to come up with something double that or even more. I'm curious if you could talk a little bit more about the expense line.

Good question, but I'm not as close to it. I don't know if Larry -- because the international reports to Larry.

I don't have any -- I don't have any significant comment, I guess, to make there. I think as was noticed, there was an increase in the level of capitalizations in the international business. And there was, I think, and also causing some noise in there, a reclassification of compensation expense during the year. We implemented some new commission schedules in our Mexican business in the second quarter, and also we've had a lot of success down there with taking over some [larger] net transfers in the Afore business. And I think that reclassification and the new commission schedules is what's causing the change between the DAC amortizations and what runs through as expenses in the IAMA segment.

Joan Zief, Goldman Sachs.

I have two questions. You talk about integrating ABN AMRO and getting the accretion. What sort of pickup do you think you can actually get in the margins, in the return on assets, once that is integrated and operating at the margins that you are anticipating? That's my first question. My second question has to do with the growth in book value. When you think about hitting your return targets, your return on equity targets, what sort of growth in book value do you think you have to contend with in order to sort of offset and get earnings even a little bit bigger to get to your 15% target?

I'll ask Larry to take the first, Mike the second. I think the first of the short answers is going to be we want to get that block of business to the same margins as all the rest of our business, and obviously it wouldn't be that way until it gets on our systems. But Larry, maybe you can amplify a little bit.

I will cover it very quickly. Barry has really covered it. We said at the time we did the acquisition a year ago, we were very clear at that time in saying we didn't expect any increase or accretion. There was -- essentially that business would operate on a breakeven basis until we could get it on our platform. So you want to think about during '05 essentially that being at a margin of basically zero, or an ROA of zero. Now, once it comes onto our platform, which again we expect to complete in the first quarter, that would bring it back to something very close to, if not right in line with our normal profitability, which again is going to run in that sort of 30 basis point to low 30 basis point range. So it will basically increase up to the normal level, as Barry just said.

You may have stumped us on the second one. As I understand, you're asking what kind of growth and book value would we anticipate in order to hit our 15% ROE (multiple speakers)

Joan, are you asking -- I think maybe I could turn the question around. What level of share repurchase would we need to embed in order to get to a 15% ROE?

What I was looking at is you have a nice pickup in book value at the end of the year, and given your -- what you see for profitability, I guess you should have some sort of book value growth. So I guess my question is, what type of book value growth are you looking at? Do you feel that the way to get your ROE up from 14% to 15% is keeping your book value growth flat? Or are you anticipating that your profitability can improve enough that even with book value growth, you can achieve your target in a reasonable time?

Let me go through a mental model with you, and I will throw this out for your consideration. Others around the table may give me strange looks when I say this. But if you think about our model of -- we've talked about -- out of operating earnings, roughly half of operating earnings goes to support organic growth, about a quarter of the operating earnings goes to support dividends, and then the other quarter is available for share repurchase or acquisitions. I think we've talked about that before. So if you think about a growth in book value, you could contemplate, ex any sort of acquisitions, that roughly half of our operating earnings would go to support growth in book value. And if you believe we're going to generate operating earnings growth, let's say in the 10 to 12% range, roughly, I'd say that we would be growing at about half of that. Does that make sense?

Yes, I think that's right.

So to get to your ROE up 50 basis points a year, where is the extra improvement in margins? It's still in the international business, and --

It goes really back to the -- think about the fastest-growing businesses are in the highest-returning businesses. So therefore, that gives us a lift in return on equity, so natural growth just pushes us toward that 0.5% a year, plus obviously we have to do some clever capital management. We can't let capital lay fallow.

So USAMA growing faster than the other businesses, and IAMA coming online, as it has been, 15 to 20% growth, and then capital -- repurchase of shares through capital management.

And specialty benefits, a rapidly growing business that's earning 15% a year.

Al Capra, Oppenheimer & Co.

Good morning. Just a couple of follow-ups on the FSA sales. I was curious to know if you could tell us what percentage of your sales this year came from larger cases, and then perhaps give us some color on the mix of takeover business versus new plans.

Larry, you want to --

We've tended to draw a line in terms of large sales, your first question. We've tended to draw a line at plans that had 100 million and over of plan assets. That's just where we've drawn the line. It's somewhat arbitrary. But if you use that measure, this year we had 10 sales in that 100 million and over level, and those 10 sales aggregated about $2 billion. Last year we had about five sales that were 100 million an over, and they aggregated about $1 billion. So you can see the average has stayed very similar, or we've just written a few more large cases there.

Takeover versus new (multiple speakers)

Takeover versus new -- that ratio still has tended to stay very steady, around 35% of the plans being brand-new start-up plans and about 65% of the plans being transfer or takeover plans. And that ratio has been fairly constant for a number of years.

Just a follow-up to the large case plans. How sustainable is that $2 billion figure? I think historically you've been running large cases representing about 10 to 15% of total sales.

Keep in mind, when we're talking about large here, we're talking about the large end of medium. We're not talking about getting into mega-cases, Fortune 100 cases or even Fortune 500 cases.

The big key there is really, as Barry said in his remarks at the start of the call -- the big issue there is the competitiveness of our Total Retirement Suite approach, where we bring together, again, defined benefit, defined contribution non-qualified and [ESA]. And we're finding again that there is just a tremendous demand out there in the marketplace for the single integrated approach that cuts across these multiple retirement plan classes of [EBDC] non-qualified and ESA. So we're really just going where the demand is. And as Barry said in his comments, we remain optimistic that we should hit our 10 to 12% growth targets into 2006.

One quick numbers question. On page 42 in your supplement, there are two essentially new lines. You've got some trading gains that led to higher net investment income and fixed maturities and equity securities. The total is about 12.5 million. Is that something that is sustainable, or was there something onetime in nature there?

Julia?

Can you repeat where you're referring to?

On page 42 in your supplement, it's the net investment income reconciliation. You've got 7.6 million in fixed maturity securities trading gains and equity securities trading gains of 4.9 million. I don't remember seeing that line in the past, nor do I see any benefits in the past. Is that sort of a onetime issue, or is that something -- a new initiative that we should model going forward?

Where that comes -- we have very seldom put things in the trading category, first of all. And we have put a little bit more of our liquid assets in trading. So you might see more of our gains or losses come from that trading category, but we tend to look at all of these sort of together, because for the most part most of what we're seeing, all of our activity would be in the available-for-sale category. So I would call that not -- the fact that it's showing up in trading not unique.

Just a geography issue this quarter, that's all.

Correct.

Suneet Kamath, Sanford Bernstein.

I guess just a strategic question. Last December one of your competitors talked about having a leading market share position in both 401(k)s and variable annuities as a strong competitive advantage, particularly as baby boomers retire. You guys are obviously there on the 401(k) side, but you're share in variable annuities is pretty low. So my question is, do you have the scale to really leverage the annuity platform in terms of wealth distribution? Or is this an area where you think you might need to grow via acquisition in the future?

That's a good question. I think the way we view this is that our primary interest in the annuity market right now is for the serving of our 401(k) plan participants and others as they enter retirement. We have never been, nor are we now very bullish on variable annuity as a stand-alone product for accumulation. We much prefer the qualified employer-sponsored kind of accumulation products. But as you get toward retirement and you need to supplement your retirement, or particularly when you're in retirement and you need guaranteed income, we think annuities make a great deal of sense. So we have those capabilities, we're pretty darn good at it, and I think the scale issue around the annuity market is quite different when it's coupled with a leading 401(k) provider. So our intention is not to have that be a huge stand-alone business selling through warehouses and banks, but rather to be a very good supplement to our main core business of retirement through employers.

One quick follow-up. Larry mentioned the margins on the ABN AMRO block should be consistent with your overall mix. What is the asset base that we should be using in terms of the ABN AMRO block, just to kind of apply those margins to?

Basically, the experience of that over the last year, as we said, has been -- we think actually has been quite good. If you remember, we started with about 4 billion of account value there. We ended the year right at about that same level or just slightly below that. If you net out the deposits to that block, you add the investment performance for that block, and then you take out all the withdrawals, you're still at approximately somewhere between 3.75 and 4 billion of the total account value that's in full-service accum that represents former ABN AMRO business. So it's stayed fairly flat through that entire year, which again we view as a very, very positive result.

Tamara Kravec, Banc of America Securities.

Most of my questions have been answered, but I would like to ask about the mutual fund joint venture with China Construction Bank in terms of that opportunity. Can you quantify it at all -- I know it may be early and perhaps difficult -- in terms of net flows you expect there, or other opportunities like this that may exist that can push your international business a little bit more?

Larry, you are closest to this.

I'll just make a few comments around the CCB. Again, we did our first launch in the fourth quarter, 771 million. As Barry commented, it is to be expected that there could be some outflows around those funds once the redemption period begins. The redemption period begins on February 9th, so we're just now beginning that redemption period. Obviously, we have a whole series of actions in place to be aggressive in retaining as much of that money as is possible.

We plan to do approximately two more IPOs during 2006, and so whether they'll be at the same level, I think, will depend really on what products are involved in an IPO, and that decision has not been made. So it would be premature to suggest that they'll be of that same size; it will really depend on what the product is. Over the longer-term, our plans around that joint venture are to be profitable in approximately three years. And we think we could forecast AUM maybe in the 3 to $5 billion range at about that period of time. I hope that gives you some idea of where we're going there.

That's great. Turning to the U.S. Asset Accumulation business, the small case effort that you have, what is the current size of your sales force there? I know you have dedicated force, and I was wondering how many people you have now in that effort.

We have -- right now, we have about 40 people dedicated to the emerging market. And probably the thing that's of more significance as well is that we're getting some very good seasoning there. If you look at the number of those reps who have been with us a year or more, we're now up to where almost 30 -- between 25 and 30 of those reps are now on board for over a year, fully trained and, we think, basically fully up to speed at this point. So again, we're optimistic about their potential going forward.

And do you see the need to expand that further, or do you think it's just more the seasoning of that sales force that will get you there?

It's probably going to be a little bit of both, but I would tell you that we pay a lot of attention to the productivity, and we're very pleased with how the productivity has grown. So we're going to continue to push for higher and higher levels of productivity.

Lastly, in terms of the U.S. Asset Management business as well, what is your view on the acquisition potential there? You've had ABN AMRO, you have had Columbus Circle. Is there perhaps more in the pipeline? Do you feel comfortable that there would be enough there in the next year or two to do?

You actually gave examples of two different acquisitions, so I'm not sure which you meant. Certainly, the ABN AMRO is staying with the KeyCorp. And that's really the consolidation play, and that's requiring blocks of business. And we continue to think that that is going to be an area that we'll participate in. It's hard to know when organizations are going to come to a realization that they need to make that move, but we think it's going to happen. We don't think the marginal players are going to be able to survive the tough competition and consolidation, so we believe there will be more of that. We are definitely going to participate in that consolidation.

On the asset management side, we've been extraordinarily successful with (indiscernible), with Columbus Circle, and we've basically been filling out asset class niches that we've had for both our -- on 401(k), but also institutional asset management. And we would think there might be a few more of those. It might be geography or it might be asset class, and we're very interested in pursuing those if they come along. So that's kind of the overview answer to that.

I think we're getting short of time here, so we have one more, I think.

Jeff Schuman, KBW.

Mike, I was wondering if you could talk a little more about the corporate segment. A fair amount of noise there. But I think if you kind of adjust things out, it looks like corporate is probably trending better than the assumptions embedded in your '06 guidance of a 50 to $55 million loss. I wonder if that's the case, and if maybe we need to be a little less conservative in the outlook there.

I think our official position would still be, since there's a lot of variability, somewhere between 40 and 60 for the year. But based on the most recent work that we've done, I think I would shade the number closer to 40 than to 60.

One clarification. You're anticipating some reserve refinements in specialty in '06. Are those going to come through above or below the line? And if they're above the line, will they be transparent so we can pull them out?

They will be above the line and they will be transparent. In fact, I think we've already given you some indication as to what they will be -- haven't we, John?

Yes, we've indicated that we would expect they'll be about 10 million for the year, but we will communicate those as they come.

They will come in gradually over the year probably, is that the case?

Yes.

We have reached the end of our Q&A. Mr. Griswell, your closing comments please.

Again, I just want to thank everyone for your being on the call, for your good questions, for your continued interest in the Company. We're committed to long-term improvement of shareholder value, and we're excited about the future, we're excited about 2006, and look forward to seeing you all out as I make my travels. And again, thank you very much for your support.

Thank you for participating in today's conference call. This call will be available for replay beginning at approximately 1 PM Eastern Time until end of day February 14, 2006. 337-0203 is the access code for the replay. The number to dial for the replay is 800-642-1687, or 706-645-9291.