美國信安金融集團 (PFG) 2006 Q3 法說會逐字稿

Good morning and welcome to the Principal Financial Group third quarter 2006 conference call. There will be a question and answer period after the speakers have completed their remarks. If you would like to ask a question at this time, simply press star and then the number one on your telephone keypad.

I would now like to turn the conference over to Tom Graf, Senior Vice President of Investor Relations.

Good morning, and welcome to the Principal Financial Group's quarterly conference call. If you don't already have a copy, our earrings release and financial supplement can be found on our web site at www.principle.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 Larry Zimpleman, President and Chief Operating Officer, Division Presidents, John Aschenbrenner, responsible for the Life and Health Insurance segment and Jim McCaughan, responsible for Global Asset Management, and Julia Lawler, Chief Investment Officer.

Some of the comments made during this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. The Company does not revise or update them to reflect new information, subsequent events or changes in strategy. Risks and uncertainties that could cause actual results to differ materially from those expressed or implied 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. Good morning and welcome to everyone on the call. With all time highs for total company operating earnings, earnings per share and assets under management, results for the third quarter 2006 were outstanding for The Principal. As always, during the call, Mike will provide a detailed overview of our quarterly financials as well as an update on capital. I'll focus my comments on some key performance highlights for the three and nine months, and on our continued progress in three key areas, accelerating growth in our U.S. and International Asset Accumulation business, creating a successful global asset manager and achieving profitable growth in our Life and Health Insurance businesses.

The third quarter was again an excellent quarter, even after adjusting for items impacting comparability, which Mike will discuss in detail. We delivered a 19% growth in total company earnings, driving 25% improvement in earnings per share. Other third quarter highlights include record total company assets under management of $215 billion up 27 billion, or 14% over the prior year quarter. Record account values for our U.S. Asset Accumulation businesses up $15 billion or 13% to 132 billion and record or near record earnings in each of our three operating segments driven by double digit earnings growth in eight of our businesses.

Highlights for the nine months, ending September 30, 2006, include, 12% improvement in total company operating earnings compared to the same period a year ago, 19% improvement in operating earnings per diluted share, 15% improvement in U.S. Asset Accumulation deposits, and a 47% improvement in U.S. Asset Accumulation net cash flows, and very strong sales of our three key retirement and investment products with full service accumulation up 20%, mutual funds up 16% and individual annuities up 24%. As I mentioned, we remain highly focused on several critical areas, including accelerating growth in our U.S. and international retirement businesses.

I'll start with full service accumulation, which had record earnings in the quarter and 16% growth through nine months. Though third quarter 2005 was a tough comparison quarter from a sales and net cash flow perspective, we continue to perform well relative to our longer term targets. Net cash flows are 3.7% of beginning year account values through nine months, sales are up 28% year-to-date based on cases and 20% year-to-date based on assets with a third quarter coming in at a very solid $1.4 billion.

Importantly, account values are up 10 billion or 13% from a year ago to $85 billion. These strong results reflect a tremendous job we do with planned participants, which, when coupled with our leading asset retention capabilities, is helping retain assets within the plan at benefit event, and fueling outstanding growth in our retail businesses when rollover occurs.

We believe it will be increasingly important for our investors to look at full service accumulation, mutual funds, individual annuities and the bank as a set of inter-connected businesses designed to meet the entire spectrum of investor needs from accumulation through retirement income management. Through nine months on a combined basis, earnings for these businesses are up 22%, account values are up 14% and net cash flow is up 19% compared to the same period a year ago.

Reflecting our ongoing commitment to transparency, we've made some recent enhancements to the financial supplement. These changes make it easier for investors to analyze these key accumulation businesses on a combined basis, and provide additional information on key measures such as a more detailed breakdown of full service accumulation deposits.

Before moving on, I'd like to comment briefly on the Pension Protection act of 2006. We see this law as a critically important step toward helping millions of Americans achieve a more secure retirement. It encourages automatic savings options, makes investment advice more accessible for employees, clarifies and simplifies rules bringing more certainty to define benefit plan funding and makes permanent a number of tax incentives that were to sunset in 2010. At a high level, we expect the pension provisions to add to our full service accumulation deposit run rate in a pretty significant way, but over the longer term, as we also expect it will be a multi-year process for plan sponsors to make changes to their plans such as adding automatic enrollment and step-up features.

Moving to International Asset Management and Accumulation, we continue to make significant progress driving growth. At quarter end, Principal International's assets under management reached a record $18 billion, an increase of 21% from a year ago. The increase does not include AUM from CCB Principal, our joint venture in China, where during the quarter we launched our third mutual fund IPO raising $772 million of funds. Strong AUM growth continues to drive growth in revenues and in turn operating earnings, which are up 18% through nine months.

Last night we announced that CIMB Principal, our Malaysian joint venture, had entered an agreement to acquire the Asset Management business of Southern Bank Berhad, including a proprietary sales force of some 4500 strong. This acquisition will make CIMB Principal Malaysia's leading asset manager, with combined assets under management of 3.8 billion, providing a strong platform for growth in Malaysia and throughout southeast Asia and strengthening the Company's leadership in Shariah-Compliant Investments.

We also continued to make very good progress creating a successful global asset manager. Investment performance continues to be strong across all asset classes, of the retirement plans separate accounts, managed by Principal Global Investors at September 30th, 2006, 81% ranked in the top two Morningstar [fortiles] for the one year period, and 89% for the three-year period, 88% for the five-year period, performance that is driving good sales and asset retention. From a year ago, Principal Global Investors third party assets under management are up $9 billion or 23%. For the nine months, their total net cash flow is $9.5 billion, up 3 billion or 46% compared to the same period a year ago.

Before discussing progress in the Life and Health segment, I'll provide a brief update related to our agreement to acquire WM Advisors from Washington Mutual, which we announced in late July. We now have approval of both mutual fund boards and clearance from the Federal Trade Commission. We are seeking the necessary shareholder approvals with the intent to close the transaction by year end.

I'd also like to communicate again how excited we are about this acquisition and the outlook for our mutual fund businesses going forward. As discussed the transaction will expand our suite of retail mutual funds, give us significant third party distribution to capture the increasing flow of individual retirement and investment assets, enhance our asset management capabilities, add important scale to the business and solidify our leadership in life cycle funds.

In the Life and Health segment the third quarter was our eighth consecutive quarter of record operating revenues driven by record revenues in the Health and Specialty Benefits Divisions. Earnings were up significantly in the third quarter, reflecting good underlying growth in the Health and Specialty Benefits Divisions and some items benefiting results in each division which Mike will discuss. Importantly, we continued to achieve good growth in our key in-force measures with double digit increases from a year ago in Group Dental, Group Life, Group Disability premiums and in target state insured medical covered members.

Moving to our total company outlook, I would remind investors that we no longer update annual guidance as the year progresses. 2006 guidance provided in December 2005 spoke only as of the date on which it was made. In terms of guidance for 2007, the Company intends to communicate our outlook in early December in a separate public release as we did a year ago.

That said, we're very pleased to be so strongly positioned through nine months with respect to our longer term EPS growth target of 11 to 13% and we remain confident in our ability to achieve that target over the longer term. We're also very pleased with the progress we've made improving our return on equity. At 15.1% for the trailing 12 months, we've increased ROE more than 600 basis points in the five years since our IPO. Importantly, we believe we can continue to achieve our targeted improvement of roughly 50 basis points per year over the next several years as we continue to grow earnings and effectively manage our capital.

In closing, we remain sharply focused on executing our growth strategy. As always, we'll continue working hard to extend our leadership in the industry to meet the needs of growing businesses and their employees and to deliver superior long-term results for our shareholders. Mike?

Thanks Barry. This morning I'll spend a few minutes providing additional highlights for the quarter and year-to-date and financial detail for each of our operating segments.

As Barry indicated, third quarter performance was exceptional. Earnings per share increased 25% from the year ago quarter on an actual to actual basis and more than 16% on an adjusted comparable basis excluding items I'll discuss shortly.

Moving to the segments, I'll start with highlights for U.S. Assets Management and Accumulation. Assets under management for the segment increased $23 billion or 15% from a year ago driving total company assets under management to a record $215 billion at quarter end. Operating earnings for the segment increased $24 million or 18% in the third quarter to $157 million. Full service accumulation was the biggest contributor to segment earnings growth, increasing $12 million or 19% to $74 million on a 15% or $10 billion increase in average account values. Full service accumulation net cash flows were $770 million in the third quarter or 1% of beginning of the year account values.

Because there can be significant fluctuations in net cash flow between quarters, due to plan effective dates and timing of receipt of transfer assets, we focus on longer term results. As Barry mentioned, net cash flow through nine months is 3.7% at beginning of year account values.

From that base we'd expect to be very close to our long term 5% target at year end. We also focus on [levers] of net cash flow. In addition to strong sales, which are up 20% for the nine-month period, we continue to drive strong growth in deposits from existing customers. Through nine months, these deposits are up $1.1 billion or 15%, reflecting improved contact level retention and higher participation and deferral rates driven by our local education and enrolment efforts, along with Retire Secure, our new work site program.

Returning to the segment earnings discussion, Principal Global Investors delivered new record earnings of $24 million. The 32% improvement over the prior year quarter reflects strong growth in management fees in all lines, real estate, fixed income and equities.

Through nine months, Principal Global Investors earnings are up $15 million or 27% reflecting continued strong growth and third party assets under management and excellent execution of commercial mortgage securitizations. The Individual Annuity and Mutual Funds businesses also contributed to segment growth, with earnings improving 11% and 63% respectively, reflecting strong sales and good retention of at risk assets, both businesses continued to deliver excellent growth in account values with individual annuities up 19% and mutual funds up 21% compared to third quarter 2005.

Through nine months, we've retained more than 54% of at risk assets in the Full Service Accumulation business, including more than $1 billion directly in to IRA rollovers using our mutual fund, individual annuity and bank products. The strong result reflects our continued success building relationships with retirement plan investors in retaining at risk assets into our retail rollover solutions.

Moving to Principal International, third quarter operating earnings were $23 million. The result included a net benefit of $5 million due to tax refinements in Mexico, with tax benefits of $8 million being partially offset by higher amortization expense which reduced earnings $3 million. As you may recall, third quarter 2005 results also included benefits which were about $4 million in total. Excluding these item, earnings were about $18 million in the third quarter of 2006 and $16 million in third quarter 2005. Good growth in Brazil and Hong Kong is more than offsetting some slowdown in growth in Mexico as the [Aforae] market begins to mature.

Principal International's return on equity for the trailing 12 months is 8.8%, adjusting for items impacting earnings during that period, segment return on equity is about 6.8% up roughly 110 basis points from the year ago quarter. The segment remains on track to achieve sustainable return on equity of 7% by 2007 and 10% by 2010.

Third quarter earnings were $82 million for the Life and Health segment compared to $65 million in the year ago quarter. The quarter included $12 million of benefits from reserve refinements and deferred policy acquisition cost unlocking, but importantly reflects good underlying earnings growth in the Health and Specialty Benefits divisions. Earnings for specialty benefits improved 25% from a year ago to $23 million, reflecting continued strong sales and solid retention, and $3 million in benefits related to the previously communicated change in reserving on group long-term disability claims. Through nine months, excluding the impact of reserve refinements, division earnings are up 15%. Both division earnings were $28 million up $13 million from the year ago quarter reflecting good underlying growth, a return to more normal loss ratios and $4 million reserve refinement benefit.

Compared to a year ago, insured medical covered members are up 14% in target states and 7% in total, reflecting strong sales in retention over the trailing 12 months. We achieved our ninth straight quarter of target state member growth. Our growth has slowed somewhat in light of [indiscernible] strengthening we communicated last quarter, reflecting our discipline and on going focus on effectively balancing growth and profitability in this business and throughout the organization. Going forward, as we continue to focus on our key health business drivers, network discounts, expense management, integration of the wellness business, stabilizing the fee for service business and pricing discipline, we expect to drive both higher revenue and higher earnings in the health division.

Third quarter 2006 earnings for the Individual Life division were $31 million, down about $1 million dollars from a year ago. We viewed third quarter performance as solid for the division, relative to very strong results in the year ago quarter, which included favorable death claims. Third quarter 2006 also included a $4.5 million benefit from deferred policy acquisition cost unlocking.

As you may recall, in May of this year we launched our new Universal Life Second Guarantee product. The pipeline is building and we expect it to be a competitive, solidly profitable product for the individual life division. With this product and others we continue to focus on reserve relief mechanisms to reduce redundant statutory reserves and ore effectively deploy our capital.

I'll close with some additional comments on Capital Management. As always, our first priority for use of excess capital is funding organic growth. Our second priority is strategic acquisitions to enhance capabilities or accelerate growth in our U.S. and International Asset Management and Accumulation businesses. Our announcement in Malaysia is clearly consistent with our acquisition strategy and our growth strategy.

Our third priority is to return capital to shareholders through share repurchases and dividends. Through nine months, under board authorized share repurchase programs. the Company has bought back $750 million of shares including the accelerated program announced in May. Under the terms of that program, the Company paid $500 million and received the initial delivery of approximately 7.7 million common shares. We expect to receive additional shares in the fourth quarter based on the volume weighted market trading price over the execution period. As we did a year ago, the Company expects to announce declaration by the board of our annual common stock dividend in early November.

As you may recall, in October, we issued $500 million of 30-year senior notes with a 6.05% coupon to be used to fund our acquisition of WM Advisors and for general corporate purposes. Following the completion of the WM Advisor transaction and after we pay our annual dividend to stockholders in December, we'd expect to be in strong capital position with around $200 million of excess capital at year end, several hundred million dollars of cushion at the life company and several hundred million dollars of debt capacity.

As you know, we try to maintain some flexibility in our capital structure to respond to changing conditions and to capitalize on opportunities. I'd also remind you that we produce additional excess capital as we generate net income.

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

[OPERATOR INSTRUCTIONS] Your first question comes from Suneet Kamath with Sanford Bernstein.

Just one question on the pension reform. Barry, your comments about the impact on asset growth sort of taking some time. I'm also wondering if the change is going to have an impact on your ability to consolidate the market? Obviously, this is something that you've talked about being a benefit to you. I would assume that some of the competitors in the industry will also see a benefit. Do you think it's going to have an impact on their decision as to whether or not to exit and then subsequently reduce some of the acquisition opportunities that you perhaps had in the past? Thanks.

Thanks, Suneet, I appreciate the question. I don't think it's going to have a significant impact. I mean, one of the points I was trying to make in my remarks is this is going to phase in over a longer period. I think DBK, for example, doesn't even come in until 2009.

It may give some folks a more optimistic view of the market, and I guess, on the margin that might make some decisions get changed. But, by and large, I don't think it really impacts how people will view the market over the long haul. Larry, do you have a different view?

No. I concur with that, Suneet. I think at the end of the day, the bigger drivers are more just the equity markets themselves. and the challenge that I think, frankly, Pension Protection Act will require, which is to further invest in the business in order to do some of the things like investment advice and managed accounts and a lot of the new opportunities that come up are going to require investments. It's really kind of a balance and I think it's a scale business and we'll continue to benefit from consolidation.

And if I can just follow-up. Barry, you mentioned that your ROE expectations are ongoing improvement at 50 basis points per year, but, if we take sort of a little bit of a longer term view, as the population shifts from accumulation products to more wealth distribution, wouldn't that increase the capital requirements of your silent business and maybe slow some of that ROE improvement?

Well, it's a reasonable observation, Suneet, and perhaps it'll have an impact. I would argue that the Asset Management business is going to grow extraordinarily fast during this period of time, and you'll have Asset Management business that is not connected to guarantees, it'll be managing retirement funds of different sorts.

I would argue that we have been working very hard on finding solutions like the Principal Income IRA, which has a lot of flexibility in it but is not caught up in some of the capital using guarantees. But, you're right, it will move in that direction, perhaps, but I think it would be adequately offset by the growth in some of our very high ROE businesses.

Thanks very much.

Your next question comes from Eric Berg with Lehman Brothers.

Thanks very much. I have a sort of a broad, strategy question and a question related to your Group Insurance business. First a [narrow] question related to the Group Insurance business. The specialty lines, it's really quite striking how quickly they've grown, in rough terms 30% growth in the number of disability customers, very, very rapid growth in improved life and in the dental business.

We just got off the MetLife call where the management there described those markets as just very competitive. What should we be looking to? Why should we be comfortable that this very, very rapid, well above industry growth rates rate of growth for The Principal is not going to have an unhappy ending here?

Okay. You want to lay out your strategy question and then we'll come back around?

The other question relates to sort of a general question about where the 401(k) business is headed. And specifically my question is, in the annuity business, as everyone knows, we've moved from this model of sort of helping people save on taxes to a heads I win, tails I don't lose, I get all the up side of the stock market but none of the down side, in short to a guarantee oriented business.

Everyone knows that. My question is, do you see the same thing happening in the 401(k) business, where very soon Principal will be in the business of effectively guaranteeing the stock markets returns much like the annuity companies are today?

Good questions, Eric, and we appreciate them. I'll ask John to answer the first. I think we've got good answers. We've talked about this a little bit in the past. But, John, you want to talk about our rapid growth in special benefits?

I think I would start out by pointing at our market, and just reminding everyone that we really are in the small to medium business market which, while competitive, is much less competitive than the large case market that I think many people are talking about on their calls. The other thing I'd remind us all of is that we started about four years ago with essentially no distribution force for specialty benefits.

We had moved from a generalist distribution force that wholesaled pension, group and group medical products, to a specialist force and had to build a specialist force for specialty benefits from scratch. So a lot of what you're seeing is really Principal starting from a fairly small base so the percentage numbers, while large, are off a small base, and building a distribution course where we're both building the numbers and building the maturity of that distribution force.

So I think the growth is easily explainable. I think we will start to see somewhat of a slowdown. I think we can maintain strong growth, but not at the high 20s or mid to high 20s that we've been seeing in the past. I think the other aspect that's critically important is just the discipline, the financial discipline we've built around the business, and from a pricing, reserving, underwriting standpoint, we pay very, very close attention to that.

I think the results you've seen bear out that that financial discipline is paying well for itself in terms of very good financial results. We'll maintain that financial discipline going forward.

Larry, you want to jump in on the first question asked second, I guess, or visa versa, I'm not sure? The strategic question.

The strategic question, Eric, this is Larry. A few comments on that, I guess you were sort of asking whether we believe that the trend that maybe we've seen in some of the other other asset accumulation markets, particularly variable annuities, where you've seen more and more guarantees get imbedded into those products, whether that same trend could perhaps come over to the 401(k) market.

I guess my view would be that -- I'll address it this way, Eric. I think on the pre-retirement side I don't really see that happening. In fact, I think the trends that we see sort of go the other direction, in that participants seem to have less and less interest and appetite for guarantees on the pre-requirement side.

I think it's potentially possible on the post-retirement side on the drawdown side, I think it's potentially possible that some of the new features like withdraw benefits could find their way into some of the post-retirement areas. And, but again, I think that's going to take place over many, many years, perhaps over a decade or more. It will adjust slowly to that. And I don't see it as any big factor certainly in the near or medium term.

Thank you.

Your next question comes from James Ellman with Seacliff.

Yes. Thanks for taking my question. First of all, on the Pension Reform Act, could you comment on what sort of growth change would you expect in 401(k) inflows from the change in the law? And could you comment on what sort of ramp-up would you expect from the Advisory business that you could launch now under the indemnification of the Act.

Hi, James, this is Larry, I'll try to respond to both of those. In terms of the inflows, we have done a fair amount of modeling on that. And we think that at a case level, at a plan level, the impact of an automatic enrollment and potentially then implementing step-up contributions, James, could be an increase at that particular plan of about a 10 to 12% increase in inflows. However the -- that's at a case level. The sort of the unknown, which makes modeling the entire block a little bit more challenging, is to know that if today we have 20 to 25% of the plans that use automatic enrollment, is that number going to go to 40% in the next year or two, is it going to go to 60%?

So, I think to ultimately model it you have to make some critical assumptions about how rapidly auto enrollment is going to ripple through the 401(k) world. And I think, as Barry commented in the opening part, is, our belief is that that will be a meaningful but a measured implementation of auto enrollment and step-up contributions and so forth. That would be our view. But it's about 10 to 12% at a plan level.

In terms of the advisory capabilities, we have, of course, been offering an investment advice capability for about two years now. We use a third-party engine, [Ibbitson] in our case, as the vehicle for that investment advice, and frankly will continue to do that. We have been very happy with that. We think there are some advantages to that in the near term. We will evaluate given PPA, we will evaluate whether at some point in the next couple of years we want to develop that advice engine capability, but for now we will stay with the Ibbitson engine.

Very good. With the closing of the WM Advisors deal and the Malaysia transaction, could you give us an idea as to for 2007 what percentage of your earnings do you expect to be coming from the asset management side of the business rather than the insurance side of the business?

Mike, do you have-- or Larry -- I would think we're inching up to 65, 68%, somewhere right in there. We're going to be heading to 70% over the next few years. Inching up a little bit toward that number, would be my guess, James.

When we announced the WM Advisors deal, we did speak to the fact that, at least in 2007 only slightly incremental to earnings.

[inaudible] With that change over the next year and your relationships with some of the companies that follow you on the sale side, do you expect that you're going to be seeing, or are you pushing to have some of the analysts that follow your company move from being the insurance analysts to the asset management company analysts?

We would think over time, as our mix of earnings shifts even more that would be appropriate. There's this ongoing debate as to whether you should look at us on a PE basis or a book-to-price basis. I think over the long haul, there is no doubt that these asset accumulation and asset management businesses are going to grow faster.

I would expect at some point the market would say, you're more -- first I think people see us as a hybrid now. And I would think at some point you're going to see us as a more pure asset accumulation, asset manager. But, I suspect that will take some time.

You won't have analysts covering you that get a nose bleed when your price-to-book goes over 1.1 time? [LAUGHTER] Thank you very much for taking a call from a real investor, I appreciate it.

Thank you.

[OPERATOR INSTRUCTIONS] Your next question comes from Tom Gallagher with Credit Suisse.

Morning, guys. I guess, first question, is just on the, I guess, Larry just going through the math you were kind of laying out. I just want to make sure I understand the numbers correctly.

So if you assume at a planned level you could have a 10 to 12% increase in deposits, am I thinking about this the right way, assuming your old guidance, which I think was about 5% of AUM at the high end, in terms of kind of net flows to AUM, so if you start out about assuming you get about 4 billion of net flows for full service business, and then you apply 10% to that, so that would be about 400 million of kind of incremental deposits, but then you assume that doesn't all happen at once it kind of gets graded in, so just for ballpark purposes I took half of that, so about 200 million of kind of incremental flows, do those numbers sound in the ballpark of kind of the way you guys are thinking about the implementation of this and the potential impact?

I'll just make a few comments on that, Tom. Obviously, I don't know if, in the context of a call like this we can probably get into all the math we need to get into. What you need to do, Tom, would be take the total deposits that come into the full-service accumulation business. In rough terms today that might annualize to something like $15 billion, just to talk about total deposits, it would be off of that base, it would be off of that base that you would be working the 10 to 12% increase.

But, again, I would caution you that the big assumption you have to make here is the rate of implementation of the new auto enrollment and step-up contributions. Though today, about 20% of plans utilize that automatic enrollment, and so building off of that base and how quickly you assume you build off that base will determine how quickly that sort of $15 billion number goes up. But, if every plan adopted it tomorrow, that would mean about 10 to 12% of 15 billion, which would be about 1.5 to 1.8 billion would be the increase in annualized flow if it went to 100% of plans tomorrow. Does that help?

That helps a lot. And so then to the billion five or so then we would make some assumption on implementation, auto enrollment and,-- Okay. That's exactly what I needed. The next few questions--

Before you move on, Tom, just one-- another way to think about it would be, I think, that it's going to be a lot easier to get new clients, I think you're going to see the biggest impact on new sales. So when you've got a new case coming on, and the enrollment is likely to be auto enrollment, it's likely to be step-up.

I think going back to your enforce and making those changes is a lot more work and it takes a lot more time, so, I think that would be another way to think about it. It's more impact on new flows than it is total deposits. But over the long haul, total deposit number will happen. The other things is that you've got to-- we all got to remember that boomers are going to start retiring. You've got the positive of the Pension Protection Act but then you've also got the demographic shift where you're going to have more people going out of the plan.

Got it. And, Barry, on a related note to that, we just got off the MetLife call. They were talking fairly bullishly about opportunities in the pension plan closeout business, as I guess, potentially being a real opportunity for capital deployment. Can you comment on the way you guys are viewing that?

Sure, Larry, go ahead, jump in.

As you know, Tom, we also play very significantly in that space. Again, our view would be that there will be some increased opportunities that come out of defined benefit plans that terminate, and either are replaced with nothing or maybe are replaced with deferred contribution plans. But I would caution that again there's nothing necessarily magic in the Pension Protection Act that's going to all of a sudden take a underfunded defined benefit plan and make it fully funded. So, again it's going to take a couple of years, absent some spectacular rise in equity markets or some substantial change in interest rates.

It's going to take a couple of years to get those existing underfunded defined benefit plans funded up to a level that they can then afford to terminate. But, again, over the three to five-year period, I do think you're going to see that single premium termination annuity business show more growth and opportunity than it has certainly in the last couple of years where it's been very negatively impacted by very low interest rates. So, I'd agree with the assessment but I would be a little bit more measured as to how quickly it's going to emerge.

Got it. Last question is just on, can you just comment on your outlook for investment spreads given the flat yield curve from where interest rates stand today?

We'll let Julia chime in on that one.

The investment spreads have obviously been very low on almost every aspect class. Going into '07 we don't see any thing that would give us any indication that it's going to change significantly for the asset classes that we are involved in. We are constantly looking for new asset classes, however, and have been able to maintain a certain level of those spreads.

Actually, let me just clarify the question. What I meant to say was, investment spreads in your [GIK] business, full service payout and full service accumulation from a profit margin standpoint? Or are those-- can you comment on how those have been trending and whether you see a change ahead in those?

This is Larry. What I'd say, Tom, there is that, if you look back, in other words, if we compare what we're achieving today in those businesses for spreads as compared to what they were let's say 12 months ago, I think that we've seen a very modest amount of spread compression, approximately five basis points in that. As Julia said, looking forward now from where we are today, we don't necessarily think that there will be a substantial change in that.

So the returns are slightly lower, but at five basis points, they still provide a very, very adequate return. We are still very, very happy with how that business has performed. Because, again, as Julia said, we really have the opportunity through PGI, Principal Global Investors, to look across a much wider array of asset classes today than we ever have in the past in an attempt to continue to maintain the spread, and we've actually been quite successful at that.

Thanks a lot.

Thanks, Tom.

There are no further questions at this time. Mr. Griswell, your closing remarks, please?

Well, again, we just want to thank you all for joining us on the call. We appreciate your interest. As I said earlier, we're very pleased with the quarter. We're very pleased with the outlook for our performance in the coming months and years ahead. We hope you have a great day and we'll see you soon.

Thank you for participating in today's conference call. This call will be available for replay beginning at approximately 1:00 p.m. eastern time until end of day November 7th, 2006. 5040488 is the access code for the replay. The number to dial for the replay is 1-800-642-1687, or 706-645-9291.