美國信安金融集團 (PFG) 2007 Q1 法說會逐字稿

Good morning and welcome to the Principal Financial Group's first-quarter 2007 conference 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 do not 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, Chief Executive Officer, Barry Griswell, Chief Operating Officer, Larry Zimpleman, and Chief Financial Officer, Mike Gersie, will deliver some prepared remarks. Then we will open up for questions. Others available for the Q&A are 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 filed by the Company with the Securities and Exchange Commission. Barry?

Thanks, Tom, and welcome to everyone on the call. This morning, I'll provide some brief comments on our results for the quarter and our outlook for the year. Mike Gersie will then provide a detailed overview of our financial results. Reflecting his new role as Chief Operating Officer, Larry Zimpleman will follow Mike with an operational overview.

With continued strength in our core businesses but disappointing results for our risk businesses, first-quarter 2007 was mixed for the Principal. Starting with our core Asset Management and Accumulation businesses, we were very pleased with our performance including $65 billion of growth in assets under management from a year ago; 13% growth in operating earnings for our U.S. and International Asset Management and Accumulation segments on a combined basis; and $5.2 billion of total sales for our three key retirement and investment products, full-service accumulation, mutual funds, and individual annuities.

We were also very pleased with Principal Global Investors continued strong investment performance, net cash flows and growth in third party institutional assets, our integration of WM Advisors, and Principal International's continued strong performance.

First quarter was a difficult one for the life and health insurance segment with earnings down $25 million from a year ago. Much of the decline came from the health division due to claims run out from 2006 primarily related to high deductible health plans in the insured medical business. We do not expect a quick fix, but we're confident we have isolated the issues and identified the actions needed to bring the division back to more solid profitability.

The rest of the decline primarily reflects normal but unfavorable claims fluctuations in the individual life and specialty benefits divisions. We expect results in these divisions to improve as experience returns to more normal levels. As always, we're highly focused on execution, on running our businesses effectively and profitably. As Larry will discuss, we remain committed to our insurance businesses and we continue to make progress in a number of important areas to improve our competitive position. I would emphasize that each contributes to the strength of our small and medium business franchise, each provides earnings diversification for the Company, and each we believe can contribute to the organization's long-term profitable growth.

Total Company outlook for the year remains very positive. As communicated in our earnings release, total Company earnings per share guidance for 2007 is now $3.80 to $3.92 per share, which compares to the $3.80 to $3.95 range communicated in December 2006. The change reflects lower expectations for the health division for the year but more importantly, growing momentum in our core Asset Management and Accumulation businesses.

As we also communicated in our release, we remain committed to and confident in our ability to achieve longer-term performance goals, 11% to the 13% average annual growth in EPS, and roughly 50 basis points average annual improvement in return on equity.

I'll now hand over to Mike.

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

As indicated, we were very pleased with our core Asset Management and Accumulation businesses. Operating earnings were up 13% for our U.S. and International Asset Management and Accumulation segments combined. The risk businesses clearly dampened total Company results. Compared to a year ago, earnings per share increased 2%.

Moving to the segments, I'll start with U.S. Asset Management and Accumulation. Segment assets under management increased $59 billion from a year ago, grabbing total Company assets under management of 32% to a record $270 billion at quarter and. Segment earnings increased 13% from a year ago to $178 million. Full-service accumulation and mutual funds were the biggest contributors to segment growth, with both delivering record earnings.

At $82 million, full-service accumulation earnings improved 15% on 17% growth in average account values. On a pretax basis, earnings improved 19% over the prior year quarter. At $12 million, mutual fund earnings more than doubled, reflecting good postmerger performance and continued strong organic growth.

As an update, amortization expense for the value of business acquired related to WM Advisors will be approximately $18 million per year over the next three years. This compares to our preliminary expense estimate of $12 million per year. There is also an additional $5 million per quarter of amortization expense in the mutual funds business that is fully offset in the fees and other revenues line, so it has no net impact on earnings.

At $24 million, Principal Global Investor's earnings improved 5% from a year ago. At year-end, we communicated that earnings from commercial mortgage securitization activities would be about $10 million less in 2007 than in 2006. The expected decline reflects our transition to the commercial mortgage-backed securitization joint venture with U.S. Bank, which freed up $500 million of capital for general corporate purposes.

In the first quarter, earnings from the commercial mortgage securitization activities were $4 million less than the year-ago quarter. Excluding the impact of this business in transition, Principal Global Investor's earnings would have been up more than 30%, consistent with their growth in assets under management.

Investment-only and full-service payout earnings were up 10% and 9% respectively on 8% and 2.5% growth in account values. Earnings in both businesses benefited from slightly higher prepayment fee income than the prior year quarter, about $1 million for investment-only and $0.5 million for full-service payout.

Individual annuity earnings were down about $1 million from the prior year quarter in spite of strong growth in account values. This earnings decrease is a result of a $5 million increase in deferred policy acquisition cost amortization expense due to lower market performance than a year ago and somewhat higher lapse experience than assumed in pricing. Over the long-term, we'd expect individual annuities earnings to grow in line with account value growth.

Moving to International Asset Management and Accumulation, first-quarter earnings were up 10% from a year ago primarily due to continued strong growth in Brazil and Hong Kong. Adjusting for items impacting comparability, earnings were up 15%. As you may recall, first-quarter 2006 earnings included a $3 million benefit. First-quarter 2007 earnings benefited by $2.5 million due to deferred policy acquisition cost refinements in Brazil and Mexico.

Principal International did experience some minor outflows in the first quarter. This reflects the liquid nature of many mutual funds in India and the tendency of corporate customers there to redeem money market fund shares in advance of the March 31 fiscal year end. As we experienced a year ago, we expect much of the redeemed funds will be reinvested with us during the second quarter.

Moving to the life and health segment, at $46 million, first-quarter earnings were down $25 million from a year ago. Specialty Benefits division earnings of $18 million in first quarter were dampened by $3 million due to unfavorable claims experience primarily in the group life line. Individual Life division earnings of $15 million were dampened by $9 million split fairly evenly between higher than normal death claims and higher than normal deferred policy acquisition cost amortization expense due to the lapse of a few large employer-based cases.

As we communicated at year-end, division earnings were also down due to lower investment income associated with our transfer of excess statutory capital to corporate in 2006. This reduced division earnings in the first quarter by about $4 million.

At $12 million, health division earnings were impacted by unfavorable reserve development related to claims incurred in 2006 but not reported until 2007, which lowered earnings by $15 million. Much of this adverse experience is coming from high deductible health plans with higher-than-expected claims from these plans overall and more claims incurred late in the year. As you may have seen, benefit usage in high deductible health plans caused other health insurers to experience unfavorable reserve development from fourth quarter 2006 as well.

Let me quickly provide some additional perspective. If we put claims into the year they were incurred, normalized earnings for the health division would have been about $66 million in 2006. While not the level we target or expect, this still translates into a 13.5% return on equity for the division and a 16.6% return on equity for insured medical.

Based on current performance of our high deductible health plan block, we believe health division earnings as a run rate of approximately $65 million for 2007. We expect to report somewhere around $50 million of earnings for the full year, reflecting the $15 million impact on first-quarter earnings from the unfavorable runout of 2006 claims. Because high deductible health plans shift claims to late in the year, we also expect most of these earnings will be spread over the first three quarters with fourth-quarter earnings very negligible. Larry will cover some of the things we are doing to improve division results overall.

To wrap up my comments, let me quickly cover capital. At quarter end, we continue to be in a very strong capital position with about $0.5 billion of excess capital between the holding company and the Life Company and about $300 million of debt capacity. Organic growth and strategic acquisitions remain our top two priorities for use of capital.

We also continue to return capital to shareholders through strategic repurchases. In the first quarter, we bought back 1.6 million shares for $100 million from the Board's $250 million November 2006 authorization. As always, we continue to look for ways to optimize our capital structure and to effectively use capital to build value for our shareholders. Larry?

Thanks Mike. As indicated, I will provide a brief operational overview covering our ongoing focus on three areas, continuing growth in our U.S. and International Asset Accumulation businesses; leveraging our Global Asset Management expertise; and profitably growing our life and health insurance businesses.

In light of first-quarter performance for the life and health segment, let me start bare. As Mike commented, we view the underlying operations of the Individual Life and Specialty Benefits divisions as stable. They are both on track to deliver solid earnings and revenue growth for the year in spite of first-quarter results as claims experience returns to normal levels.

In the Specialty Benefits division, we continue to achieve a 15% plus return on equity. Premium and fees were up 14% for the division with double-digit growth in all lines. And we continue to make progress in improving expenses as a percent of premium.

In the Individual Life division, we continued to build momentum with our retail products and our nonqualified offering with first-year premiums up 9% from a year ago. We've also improved expenses as a percent of pricing allowables. In light of its earnings performance and membership declines over the past two quarters, I will provide more detail around the health division.

First, I will comment on the insured medical business. Price strengthening initiated midyear 2006 will continue to work its way through results over the next several quarters, positively impacting earnings. We also have a number of initiatives focused on controlling claims costs including network contract management, claims processing, wellness programs, and disease management. And because of our expense management efforts, we have improved medical expenses as a percent of premium by 110 basis points from a year ago.

Over the course of 2007, we plan to further reduce expenses by $12 million to better align our expense structure with lower membership in both the insured medical and fee-for-service businesses. Through a first-quarter position illumination and attrition, we've already made significant progress toward that target. As an additional positive development for our fee-for-service business, we expect to announce a national network discount arrangement in the next week or so. This will allow us to provide our fee-for-service customers competitive discounts which along with our focus on expenses will help us return the fee-for-service business to growth and profitability.

A couple of final comments on the health division. While we recognize there is more work to be done, this business has a strong strategic fit. Health insurance is usually the first benefit a small employer offers and employees continue to rate it as their most valued. Consumer-directed healthcare and health savings accounts play to our key strengths, administration, benefits management, and investments. As we have done over time, we expect to achieve good long-term returns for the division.

Let me now discuss our focus on and progress achieving continued growth in our U.S. and international retirement businesses. I will start with full-service accumulation which achieved record earnings in the first quarter as significant growth in account values continues to drive strong growth in earnings.

At quarter end, account values reached a record $95 billion, an increase of $12 billion or 15% from a year ago reflecting good growth in deposits from existing retirement plan investors, strong plan and participant level retention, and outstanding sales. Full-service accumulation deposits were very strong, more than $5 billion in the first quarter, as were net cash flows of $1.3 billion or 1.4% of beginning of year account values. Organic full-service accumulation sales were an outstanding $2.2 billion in the first quarter, second only to our record $2.9 billion of sales in the year-ago quarter.

Total retirement suite remains a key driver, making up 35% of sales for the quarter based on assets and improving 85% from a year ago based on plan count. Alliance sales were also very strong, up more than 40% from a year ago to $881 million. Looking forward, with gross pipeline up 40%, we remain highly optimistic about our outlook for full-year sales.

Retention also remains a major focus for full-service accumulation. In addition to being an industry leader in plan level retentions, which came at 94.5% for the quarter, our participant level retention continues to significantly outpace the industry. In the first quarter, we retained 52% of assets that became at risk when participants change jobs or retired, more than $1 billion in total including $369 million directly into our retail roll-over products.

We are also very pleased with our successful integration of WM Advisors. As you know, we integrated WM Advisors into two distinct operations, our mutual funds and asset management businesses. This makes precision around measuring results more difficult but at a high level, performance of these businesses for the quarter was very consistent with our acquisition plan. Importantly, we made meaningful progress in two key areas, building momentum with our new third-party distribution, which contributed about half of our $1.5 billion increase in mutual fund sales, and minimizing withdrawals inherent in a fund merger, resulting in stable net cash flows.

The first quarter was also a period of continued strong investment performance. 70%, 90%, and 89% of the retirement plans separate accounts managed by Principal Global Investors ranked in the top two Morningstar quartiles for the one-, three- and five-year periods respectively at quarter end.

Principal Global Investors and Principal Funds, our mutual fund complex, received five Lipper Performance Achievement certificates during the quarter. For the five-year period ending 12-31, 2006, five funds ranked first in their category for cumulative total return, including four of our lifetime funds.

Strong performance across asset classes has made us increasingly search competitive. Principal Global Investors was awarded $2.2 billion of institutional investment mandates during the quarter, including a $1 billion international growth stock mandate from Thrivent.

First-quarter net cash flows were a record $4.4 billion, contributing to $14 billion of net cash flows over the trailing 12 months. From a year ago, Principal Global Investors' assets under management is up $52 billion or 34% to a record $204 billion. This includes a record $64 billion of third-party assets, an increase of 44%.

We are also very excited about a new opportunity beginning later this quarter where Principal Global Investors will be the asset manager for a newly formed credit derivatives product company, another great example of the depth and breadth of Principal Global Investors investment capabilities.

In terms of accelerating international growth and profitability, Principal International continues to make good progress. Segment assets under management are up 36% from a year ago to a record $22 billion. This includes $2 billion from operations acquired in the first quarter by CIMB-Principal, our Malaysian joint venture.

Principal International's improvement in earnings reflects continued strong earnings growth in Brazil and Hong Kong, some stabilization of results in Mexico, and a return to normal levels of inflation in Chile. Based on normalized earnings, Principal International's return on equity is approximately 6.7%. The segment remains on track to achieve sustainable return on equity of 7% by year-end 2007 and 10% by 2010.

Before I close, let me also comment briefly on total Company return on equity. Though down on a sequential basis, we remain confident that continued momentum in our core asset management and accumulation businesses will enable us to expand return on equity over the next several years at an average rate of roughly 50 basis points per year.

In closing, we remain sharply focused on executing our growth strategy. As always, we will 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.

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

(OPERATOR INSTRUCTIONS) James Ellman, Seacliff.

You mentioned on the problems you're having in the insurance space have been identified in fixed -- should we see the improvement in that space as early as the second quarter?

I think the way I would characterize it is the Specialty Benefits and the Individual Life businesses you should indeed see some improvement. Now we are talking about claims so for the most part but our indication is that those claims would come back and you would see improvement.

The medical I think is a little bit more problematic. I think if you look at the $50 million that we're projecting for the full year that is where we think that it will be. We think that, as we noted, the earnings will be a little more -- will be stronger in the first three quarters, so I guess improvement is relative. It will not be an improvement over the prior year for the medical business, but it will be heading back toward reasonable profitability.

All right and could you comment on are there any areas that are in the insurance space that really are not strategic in terms of bringing in asset management business? You mentioned obviously in your comment, the comments earlier, that the health plans certainly are strategic for working with U.S. AMA. Are some of the other areas not strategic and potentially could be sold at a gain that would not negatively impact your ability to grow on the asset management side?

You know, I think, James, that virtually all the businesses that we are in right now have a very strong strategic fit. We have really transformed almost all of our businesses, certainly our specialty benefit businesses are selling into the small to medium business market. If you looked at the individual life, while there are some parts of that that are dealing with just the general retail, increasingly they too are focused on the small to medium business and also employees of small to medium businesses.

So they all have a very, very strong strategic fit. But I would also quickly hasten that they have got to perform, so they are not so strategic that if they are not performing that we would just continue to stay in them. But we remain very confident that we can manage these businesses, that they are important to our strategy, and therefore we are optimistic about them over time.

And I guess I would just remind everybody that one of the key parts of our story is that we're focused on the small to medium business market and that is a different market than just strictly being in the 401(k) and the large case market. It is very important that we have different services and products to serve the needs of small to medium businesses.

Very good. Thank you very much for the time.

Ed Spehar, Merrill Lynch.

Could I follow up on the health side? If you add back the $15 million for the adverse development, it looks like you would have had a pretty good quarter. So I am wondering, could you be a little bit more specific about what is it that's going on in the next three quarters because it seems like there is something else other than just sort of the high deductible medical plans, sort of the timing of claims?

Sure, Ed. I will just ask John to go ahead and jump in and address that.

I guess the -- I would say there are two things going on. The first is around the high deductible health plans and there is a much more concentration of claims in the end of the year on those high deductible health plans. And so while the first quarter looks strong -- if you took the $15 million out from 2006 -- it probably could have been even stronger because the high deductibles would have much lower claims in the first quarter and much higher claims in the fourth quarter.

The other thing that we really have to work on is the fee-for-service business. With the shrinkage in the business the last two years, that has gone from a very profitable business where it is not really contributing to earnings of the health division. We have now changed our expense structure in the fee-for-service business so we have got the expenses right sized with the smaller size of the business.

As we mentioned, we have got a national network discount agreement that we hope to sign very soon. We think between those two aspects, we ought to be able to really be much more competitive, start seeing growth in the fee-for-service business and start driving more earnings on the fee-for-service side.

So the two things that are holding earnings down on the health business in 2007, one is the high deductibles and the claims that we expect to see really in the fourth quarter this year, and then the fee-for-service earnings that really won't start rebounding until we get into 2008 and get the new sales for 1/1 2008 there.

And just one quick follow-up. Did you say that because of the timing of earnings now that it is expected that the health segment in total should be negligible earnings in the fourth quarter?

Yes, we said basically that the run rate for the entire earnings for the year will be around $50 million and that most of that will come in the first three quarters and very little -- of course this is all our projection, but likely very little in the fourth quarter.

Okay, thank you.

Colin Devine, Citigroup.

Just wondering if I could focus on the 401(k) business and if you could just give us an update on a couple of things? One, where you stand on implementing some of the features of the Pension Protection Acts such as auto enrollment, trends you're seeing there? Where you are at with getting annuities into your 401(k) system and perhaps where you are on the longer-term care combo plans?

And then also, if we could touch on the regulatory environment, there is clearly a lot of scrutiny out there in terms of fee disclosure. I gather you are the subject of some legal action as well and if you could just fill us in there? Thanks.

I will Larry jump in on the first part and maybe I'll take the latter part.

Just a few comments around the items you mentioned. First on Pension Protection Act, we are seeing a very strong interest in the elements that were kind of blessed under PPA. That includes things like auto enrollment and step-up contributions and the use of lifetime funds. At the end of the year, we had about 20% of our institutional block that was already utilizing auto enrollment. And we'd probably expect that to come close to probably doubling over the next twelve months or so.

In terms of annuities, I would tell you that at least as it relates to the use of income annuities, just pure vanilla income annuities, those remain fairly low. The interest remains fairly low. There is still a lot of interest in discussing income management solutions broadly, but there does not seem to be a clear winner as to what that solution is going to be. And we think that is really how that is going to emerge over time. So that is not concern for us.

We have a wide range of income management solutions there including guaranteed minimum withdrawal benefits, direct payouts, income annuities. So we are well positioned there.

I think you asked about long-term care. I don't have a lot of comments there. That is not an activity that we are in today, as you know.

Just the combo products permitted by the Act.

Yes, we are not active in necessarily in -- we don't have any combo products out in the marketplace today so it is not, again, it's not something that is an area of focus for us at the moment, Colin.

And then in terms of fee disclosure, there have been as I think many people know, there has been one hearing already from Congressman Miller. It is rumored there will be another hearing sometime in the next couple of months. I think, however, the kind of good news here is that it seems to be, everyone seems to be moving down a path including the Department of Labor where it is going to be more of a disclosure item than some attempt to perhaps regulate fees or to do something more draconian.

So all in all I think it is actually a healthy discussion, Colin, and I think given that maintaining retirement plans is a fiduciary obligation, I think it really does work to our long-term benefit because we fully support transparency and complete disclosure. And I'll turn it back to Barry to talk about your last question.

Yes, just to comment on looking at fees and regulation, there is inquiries. People are looking. There's a lot of noise about it. We're watching it. We're discussing. We feel like we are in a very strong position. We have always focused on having fair fees and good disclosure.

You know it is interesting. I think the more this debate goes on, the more people will understand that for most part fees are fair and are a good value. The Investment Company Institute did a white paper not too terribly long ago and they really tried to analyze what's going on with fees. And I think they made a very strong case that when you consider all of the transactions that get done, when you figure all the things that plan sponsors or administrators typically do, that fees are very, very reasonable.

So we're certainly taking part in that debate. We want there to be a good debate. We think ultimately disclosure is a key part of it and we have really been out front trying to make sure that we do disclose fees in an appropriate way.

Hey Barry, one follow-up. I guess the Department of Labor now is considering target or lifecycle funds as an acceptable default option within 401(k) plans. What would that mean to the Principal and what is your position on it? Would it impact your margins?

I think our view is it would be -- it is a very good trend. They are very, very appropriate defaults I think and not only defaults. I think there has been a lot of press lately that they are just great funds for people who don't really want to get into the complexities of trying to look at asset allocations and doing all that work. And the key thing as we all know, is the rebalancing and have good intentions to go in and make changes over time, but you don't.

SO one of the strongest growth parts of our business in the mutual fund and the 401(k) really are the lifecycle or life stage funds, and we think they are very, very appropriate and really would not have any material impact on our margins.

Okay, great. Thank you.

Steve Schwartz, Raymond James.

Steve, are you there?

Steve has withdrawn his question. Jeff Schuman, KBW.

A couple questions about the health insurance business. First of all, I was intrigued by Larry's contention that you still see the health insurance business as a strategic fit with retirement. In your K, you identify your key retirement competitors as Fidelity, Nationwide, AXA, Mass Mutual, Manulife and then in addition, we see companies like the Hartford [hit] with small but growing platforms. So I am wondering I guess why you still feel some strategic connection in that business when others are able to grow pretty nicely without it?

And then secondly, I was wondering if you could give us a little more perspective on your ability to negotiate with providers and to build or rent networks? A couple of companies you know well that you've transacted with in the past, Mutual of Omaha and Coventry did a transaction last week. Mutual got out of the group health business. They were able to sell a couple of their markets for some value that others will have to run off. I think one of the issues they cited was really the difficulty in negotiating appropriate network discounts.

What has happened that has enabled you maybe to get a better contract at this point? And how are you positioned going forward to maybe negotiate a little bit better with providers than somebody like Mutual was?

Okay, Jeff. This is Barry. I will give you an answer to the first one and have John talk a little bit about the second one. In terms of a strategic fit, I would remind you that's today of all of the SMB relationships that we have, we have about 100,000 SMB relationships; covers about 6 million members over all across the complex today. And about half of those come out of our life and health segment and a majority of those come out of the health insurance division within the life and health segment. So it really does remain a true opportunity for us to get introduced and to extend the Principal brand to small and medium business, which of course remains our target market.

As I said in my opening comments, it remains very much the case that health insurance is really the first benefit that any small business owner is going to put in. So I think we are advantaged, Jeff, by the opportunity to introduce small business owners to the Principal much earlier than our competitors. And while we have also talked about the opportunities around cross selling and some of the practical challenges to that, I can also assure you that working with brokers who in fact place that business and those brokers also place retirement business again does position us in a more advantageous position than the competitors that you were mentioning.

And when you look at those competitors, frankly, Jeff, many of those are not adviser driven and our model is a very adviser driven model. If we were not perhaps in that model, it would be a different story, but we believe very strongly there is a strategic fit and it certainly enhances our retirement business.

I will John comment on the other question.

I will split the network discussion between the two pieces, the fee-for-service business and the insured business. Because on the fee-for-service business, as we mentioned, we hope to have a national arrangement that we will announce within the next week or so that will allow us to be much more competitive and this would be with a national network.

On the insured side, I would say it is just continual hard work down in the trenches. We have attempted to select the locations to target where we have good discounts, where there is maybe less discount discrepancies between carriers. But primarily what we used is leased networks that over the last couple of years we've gotten much more active in going in and negotiating Principal's specific discounts in a number of locations. And as I said, we continue to look for those locations where the network discrepancies are not as large and where we can be competitive.

Just one follow-up. With your insured member sales down pretty sharply at least this quarter, does that impact your negotiating leverage in some of these markets going forward?

You know, because we are part of a larger lease network, we're not really typically negotiating just with the Principal. So I would say no, the sales being off has not been significant. In those locations where we are negotiating Principal specific deals, we still have some very strong potential to grow there. So I don't think in the short run that that is going to have a significant impact on us.

Okay. Thank you very much.

Saul Martinez, Bear Stearns.

I apologize if you already readdressed this, but I did get on the call late. In the medical business, not only did we see higher claims, but lapse rates spiked in the group medical business; new sales in the target market were down pretty substantially. Can you talk a little bit and give us a little bit more color as to what drove that?

Sure. We have instituted some price strengthening in 2006 that is directly impacting both sales and the lapses, so that is really what you're seeing in the lower sales and the higher lapse rates. The emphasis -- I guess what I would like to do is just remind ourselves that even with the poorer performance from the medical business in the first quarter, we had a 14.1% trailing 12 months return on equity. Or as we said in the script, if you go back and apply the claims in the appropriate quarters, 2006 would have been about a 13.5% return on equity for the medical business in total and about a 16.8% just on the insured business itself.

So the insured business is performing and we expect will continue to perform at better than a 15% return on equity, so all of the efforts that Larry talked about in terms of expense improvement, claims processing, disease management are aimed at making our products more competitive to try and turn around the sales and lapse rates going forward.

Okay and just a quick follow-up on the individual life. Are there any common characteristics of the book that caused the mortality blip? Was it concentrated in a certain type of policy? Was it closed block, open block? Was it the number of policies or was it a question of the average size of claims?

It tended to be older policies, older age policies, and larger policies. The other thing I think that is important is most of the higher claims occurred in January and February. March claims were back to normal or maybe even slightly better than normal. April claims are significantly better than normal, so they've actually bounced back the other direction.

As I recall, John, some of those older claims did not have quite the reassurance that we have today so they had less reinsurance.

Yes.

Were these policies that were written recently or in the last couple of years? When you say older age -- you mean older vintage years or older age businesses?

They are both older policies so they have been in force for quite awhile and they are older age policies.

Okay got it. Great. Thanks.

Jeff Hopson, A.G. Edwards.

It looks like the planned growth was particularly strong pretty much across the board. Anything that Larry can add there. And I think he mentioned that the pipeline was up 40%. How does that compare to the fourth and third quarters?

Thanks, Jeff. I appreciate you noticing that the planned growth was up all across the board. We've had a lot of discussion about that in the past and now we've got them all growing and we are pretty proud of that. And I think it does bode well for the future.

Larry, do you want to answer the rest of the year looks like particularly the 40% increase in the pipe?

Jeff, this is Larry. I would say that the pipeline has been quite strong. It was strong going back to third quarter and fourth quarter and that's why we had what we would consider to be an outstanding quarter for full-service accumulation sales in first quarter '07. That really represents the pipeline that we would've been looking at in third quarter and fourth quarter.

So I think that again we have the -- we continue to deepen the alliance relationships that we discussed. Our alliance business was up 42% in the first quarter. As I have commented to many people over the last couple of years, if you really want to get some sense of what the growth opportunity is, in other words, can we continue to have that 10%, 12% growth? You just really need to sort of follow how we're doing with our alliance partners each and every quarter.

So again we are very happy with that, with alliance sales up 40%. We still see a lot of opportunity there, Jeff. Because with these alliance partners, again, we are generally three or four years into that relationship; and it does often take five, six, seven years before it really fully matures and we really establish a deep relationship with those advisers and those large distribution networks. So the 40% I think is very consistent and it bodes well for the rest of the year.

Okay. The planned growth just reflects the sales in the third in the fourth quarter, I guess. So you would expect that planned growth to continue to be fairly vibrant, I guess.

The planned growth, Jeff, in large measure reflects the maturing of an activity that we started about three years ago, where we targeted sales reps specifically at the zero to $2 million range of plan assets. We've got today about 40 to 45 sales reps who work exclusively in that zero to $2 million range.

So for example if you look at first quarter, those 40 reps produces about 815 sales in the first quarter, as compared to 740 sales in the first quarter a year ago. So their activity continues to get better and better and better. That is why as their maturity and their expertise has built over the last couple of years, that is why you're seeing the turnaround in total for our full-service accumulation plan counts. So that is really what is going on there.

We do expect that to continue. We should continue to see growth in all size ranges, but also certainly in that zero to $2 million range.

Okay, great. Thanks.

Joan Zief, Goldman Sachs.

I just have a couple questions. My first question relates to the life mortality. When you looked at this, did you check to see if the unusual swing related to new policies you had written? Was it a particular type of product structure, or was it pretty random?

My second question is, with the level of excess capital that you have, would you consider increasing the buyback later in the year?

My third question is on the corporate side. Is there any change to your full-year guidance of that being somewhere around $50 million to $60 million?

Let me take a stab at the first two. I didn't quite understand the last one, but I will turn it over to Mike, maybe he could answer it. As John said on the life mortality, we really have done a great deal of analysis. It is older policies that have been in force -- by older, I mean have been in force for quite some time. Older ages. And they tend to be with less reinsurance than we currently have today. So we think it's fairly random, fairly isolated, and not anything necessarily systemic.

As for the share repurchase, we are under a $250 million authorization. We will fulfill that I am sure over time. Then we will go back to the Board and talk to them once that authorization has been completed. That is really all we can say about that, in deference to the Board. That is a Board decision.

The last comment, Mike, I didn't --

That last question was regarding our expectations for the corporate segment, what the level of income or loss. Because (inaudible) loss because it includes the interest on corporate debt. We had indicated $50 million to $60 million I think back in the November/December time frame. That holds today. We don't change that estimate (inaudible).

Thank you.

Eric Berg, Lehman Brothers.

I actually just had one question, also regarding this medical business. My question is as follows. Because the business that you have been referencing that caused the problem in the quarter is high deductible business -- call it catastrophic coverage -- it certainly should not have come as too much of a surprise, if a surprise at all, that there would be a heavy slug of claims at the end of the year.

Isn't that sort of how the plan works? That people have very big deductibles that they have to meet first? So my question is, what it is --? Maybe you could take us beneath the surface a little bit here and help us understand.

Is there a certain type of claim? What has gone wrong here? Is the type of individual who purchased the coverage different? The question is almost actuarial in nature. What is it about what is happening with these claims that is so profoundly different from what you expected that it could not reasonably have been anticipated given the structure of the product? Do you sort of understand my question?

Yes, I think we do. This is John again. First of all I would say, it is not really catastrophic coverage. Because the bulk of these plans are not the qualified high deductible plans with HSAs. They are more the plans that have $1,000 to something less than $2,500 deductible.

We did expect that there would be a heavy back-ending of claims. But it was much more dramatic than we expected. So I think it is really behavioral changes that are going on.

It was not really just claims in the fourth quarter. It was claims in December itself and in the latter part of December. So what is not clear is whether it was just a tiny differential, as people are getting to the end of the year and they are going to kick into a brand-new deductible on January 1, whether they have moved up their -- some of the procedures they will be getting. And whether it is just a movement from one year to the next, or whether it is a significant change in actual behavior around the amount of medical treatments they will get.

But I think the surprise to us was not that it was back-ended, but it was back-ended as much as it was in December and late December.

Second and final question, I actually have another one; relates to the Specialty Benefits, which also you -- I think Barry said in his comments that there was some issue there with respect to -- was it -- did you say group life? What was that issue and why are you as hopeful as you are that it will not occur? Thank you. I am done.

There was probably a $2 million to $3 million hi to earnings from extra mortality on group life. It really looked to us in our analysis, a pretty deep analysis, that it was just a random fluctuation. In April it has returned to normal. So we do not really expect that it is anything systemic at all.

Thank you, John.

Thomas Gallagher, Credit Suisse.

I have a specific question on the earnings guidance. Just bear with me as I kind of run through a few things and I will get to the question in a minute. But -- and I am just running some of these numbers now but if I look at the health insurance business guidance of $50 million of earnings for the year, it implies the average earnings amount per quarter will be close to 1Q levels, actually about $1 million above that, even though I understand it is not going to be evenly distributed; stronger next two quarters, negligible in 4Q.

Anyway, when I then look at the low end of your EPS guidance, it basically gives you an $0.11 quarterly pickup from what you delivered in 1Q. So even if I assume individual life and specialty benefits does normalize and pick back up, this implies I think a fairly substantial pick up in U.S. AMA earnings from 1Q levels. A, I just wanted to see if my math is correct here. And b, was there anything in the U.S. AMA segment that would have kind of depressed earnings that would then make a fairly sizable lift in the next couple of quarters pretty doable?

Mike, do you want to--?

I'll take a shot at it. First, think about the run-up in the equity markets. So when we have done our forecast for the year and we are basing our forecast and where equity markets are today given the very strong run that they've had in April with a 2% growth per quarter from there. And so that is kind of the first thing that I would say well U.S. AMA is going to do a little better than it did in the first quarter because equity markets were pretty flat in the first quarter.

Second thing to think about is there is a little bit of seasonality in the U.S. AMA business. Principal Global Investors for example, and you've seen it the last few years has performance fees that it gets in the fourth quarter so you get a bit of pickup in income in the fourth quarter. And I think those are the two primary drivers, a little bit of health and spread business. You've already mentioned that a bit of rebounds in the life and health business, so I think you can get there without stretching too hard.

Okay, thanks.

And then clearly that is the guidance that we believe in when we do all of our analysis, so we believe that is the right range.

Thank you.

Suneet Kamath, Sanford Bernstein.

Okay, it's Sanford Bernstein. Just a question on the auto enrollment, Larry, in terms of what you're seeing I guess the move from I think you said 20% to 40% or something like that. At what percentage enrollment are these sort of average plans bringing in assets? Obviously the maximum is something like 15,000 per year, but what is the actual amount of money that they are contributing on an annual basis in these auto enrollment cases?

Maybe I will try this and then see if this is responsive to your question. In the modeling that we have done, if you took a plan as it has existed prior to Pension Protection, so there was the normal sort of elective decision on do I contribute and then the elective decision in terms of how much do I contribute, and if you look at that model as compared to what can be done after Pension Protection Act, where we can now or the plan sponsor can go with an auto enrollment so you have to decline to not participate and can have higher levels of default contributions plus the opportunity for increased contributions over time.

If you model those two different situations, in our modeling we believe that the introduction of automatic enrollment and the step up contributions and the higher default contributions, the increase in deposits for that case is about 10% to 12% over what it otherwise would have been. So that again, that is not the pickup just from the automatic enrollment, but that is a total increase in cash flow from that particular plan that would implement all of the PPA provisions. Does that help?

Yes, I guess that does help. Then just as a quick follow-up, can you give a sense on what percentage of your plans have auto enrollment today?

As I said earlier, it was of our very large plans where we have I would say we have the most intimate relationship with those plans so in looking at those what we call institutional plans, a little over 20% of those had auto enrollment as of the end of the year. I don't know if I have that number exactly with me as it relates to today as of the end of the first quarter. But I can say that we are seeing very strong interest and that was my comment that I would expect that that 20% would fairly quickly go to at least a doubling, a 40% over certainly the next three or four quarters. But I don't actually have it as of the end of first quarter, but it would be somewhere between 20% and 25% of the institutional (inaudible).

That's fine. Thanks very much. I appreciate it.

Ken Zuckerberg, Fontana Capital.

It was actually a follow-up question to Suneet's. When we think about the penetration in the smaller plans, I wasn't sure if you could speak to that. I heard the answer on the large institutional, but is there any penetration data that you could provide on the smaller plans?

Ken, this is Larry. In terms of smaller plans, I would say that I don't know that there will necessarily be dramatic differences in terms of the ultimate utilization of tools like auto enrollment and step up contributions but where I think there would be a difference and there's a difference today and I think it will persist, is that the implementation of these tools will not be as rapid in the smaller end of the marketplace.

So for example, if 20% of our larger clients use auto enrollment today, there would not be a 20% utilization of that auto enrollment feature in the smaller plans. It takes longer. There is more effort involved in that. As I said earlier, the relationship with that client -- with those clients is not as intimate as it is with the larger clients. Again, I think ultimately, ultimately, they will be as interested in using auto enrollment but it is going to take a few more years before that impact is seen in those smaller plans. So it is more of a delayed timing than a difference in the ultimate utilization.

Understood, thanks for the answer. Maybe one unrelated question, forgive me, since the high deductible health insurance plan is not an area I focus that much on, but when you talked about the strategy from here, part of what I was wondering is beyond claims management, expense initiatives, is there any issues with respect to product whether product design needs to be addressed or your plan is a bit more generous than others? Certainly any guidance you could provide to us in terms of timeline of the turnaround would be helpful.

Sure, we don't see at this stage any huge plan designed issues. We continue to look at plan design and how that might affect behavior and whether we can make some changes that would be beneficial. At this stage, I do not see any huge issues that we're going to be addressing.

In terms of timeline, if you're talking from an earnings standpoint, we would expect the earnings on the fee-for-service business to start growing in 2008. We would expect that the earnings on the insured business are about the level they are going to be going forward for a little bit of time. They are in the 15% to 16% return on equity, so we're not looking for a huge rebound on the insured earnings, but rather put the improvement into pricing to get more competitive so we can get growth out of the line. And that is where the earnings on the insured side will come from.

Great. Thanks very much.

James Ellman, Seacliff.

My question has been answered.

I think we have come to the end of the time. Let me again thank you all for your attention, your participation. As I started out, the results were mixed and clearly disappointing for us, a difficult quarter but our story remains the same. We have a very high-quality franchise. We're focused on executing. We are very, very focused on creating shareholder value over the long haul and you can count on us to continue to pursue the strategies that will do just that.

So thank you all very, very much and have a great day.

Thank you for participating in today's conference call. This call will be available for replay beginning at approximately 1:00 PM Eastern time until end of day May 8, 2007. 351-0915 is the access code for the replay. The number to dial for the replay is 800-642-1687 for U.S. and Canadian callers or 706-645-9291 for international callers.