美國信安金融集團 (PFG) 2009 Q4 法說會逐字稿

Good morning and welcome to the Principal Financial Group fourth quarter 2009 financial results call. There will be a question and answer period after the speakers have completed their remarks. (Operator Instructions).

I would like to turn the call 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.

As always if you don't already have a copy, our earnings release, financial supplement, and additional investment portfolio detail can be found on our website at www.principal.com/investor. Following a reading of the Safe Harbor provision, CEO, Larry Zimpleman, and CFO, Terry Lillis will deliver some prepared remarks, then we will open up for questions. Others available for the Q&A are Dan Houston, US Asset Accumulation and Life and Health Insurance, Jim McCaughan, Global Asset Management, Norman Sorensen, International Asset Management and Accumulation, 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 or 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.

Larry?

Thanks, Tom. Welcome to everyone on the call. The fourth quarter was a period of modest economic recovery with continuing improvement in credit markets and a more positive tone for the equity markets, though challenges remain. I will focus my comments on fourth quarter and 2009 results with Terry providing additional detail and close with some thoughts about 2010 and where we stand in implementing our strategy for growing our fee-based Global Asset Management and accumulation businesses.

Given overall market conditions we view fourth quarter results as solid in a year that demonstrated the benefits of business and investment portfolio diversification and the resilience of our businesses. Strong improvement from US Asset Accumulation and Principal International drove total Company operating earnings up 12% from the year ago quarter. These two segments added $44 million in operating earnings, reflecting higher average assets under management, strong expense management, and the benefit of having vibrant businesses in emerging international markets, which have not been impacted as significantly by the economic recession. Principal International delivered $870 million of positive net cash flow for the quarter. Other highlights include total Company return on equity of 10.6%, a 40 basis point sequential improvement due to growth in our fee-based high return businesses. (Inaudible) continued strong performance from the investment portfolio with net realized capital losses of $59 million, a level comparable to the second and third quarters and continued improvement in net unrealized losses, about $350 million for US invested assets in the fourth quarter with credit spreads narrowing by about $1.2 billion partially off set by an increase due to higher interest rates.

Because of our strong asset liability management this increase in interest rates is not an economic issue. We view 2009 as a very solid year for the principal. During some of the most challenging capital market and economic conditions in 75 years, we delivered $804 million of operating earnings, a decrease of only 15%, and $590 million of net income, an increase of 39%. GAAP book value, including other comprehensive income, more than tripled from a year ago to $23.05 per share as of December 31st, 2009, reflecting the significant turmoil and illiquidity in the market at that time.

During the year our assets performed in line with our expectations as did our liabilities. We saw a $6.3 billion decline in net unrealized losses in 2009 with $8.2 billion of improvement from credit spreads narrowing partially offset by a $1.9 billion increase due to higher interest rates. Assets under management improved $38 billion in 2009 to $285 billion, creating the opportunity for earnings growth in 2010. Our GAAP balance sheet was strengthened by more than $2 billion in 2009 as a result of the equity and debt raises along with strong net income. In total, we entered 2010 in a stronger and more competitive position than at any time in our history as a public company.

Now, I would like to spend a few minutes discussing where we are in the process of economic recovery and how that may impact our businesses in the short-term. As we have said many times before, we have always been very disciplined about the liabilities we put on the books as well as where we invest our capital in order to produce the best long-term return for shareholders. During 2009 we scaled back the investment only business as part of our overall capital management efforts. In line with our goals for the year, the investment only business is now just over 25% of general account liabilities, with our reduction in a block freeing up $165 million of capital. Our current plan is to continue to scale back this business as much tighter spreads in the market today are resulting in a return on capital that we do not believe is attractive.

Now let me turn to full service accumulation and the impact of the economic recession. For the year, we had net cash flow of 2.5% of beginning of year account value, below our long-term target. Because of the recession, we saw recurring deposits, that is new deposits from existing clients, decline about $700 million from 2008 due to participants being laid off, matches being suspended, and a slight scaling back of participant deferrals. Given that recurring deposits have increased on average by about $1.4 billion per year over the past four years, we estimate the impact of the recession on recurring deposits in 2009 to be in excess of 2.5% of beginning of year account values. The good news is that we are seeing recovery in these areas and expect that to continue as we move into 2010.

Finally, the lower volume of sales activity in the marketplace and the general decline in equity values in 2008 further depressed transfer deposits that come from plans that are moved to the Principal. Transfer deposits were down in 2009 by $2.7 billion or 3.4% of beginning of year account value. Again, there is good news. We are seeing pipelines build. October and November were our two most active months of the year for quote activity and on a sequential basis fourth quarter sales more than doubled to $1 billion. We remain confident in our ability to have full service accumulation, net cash flow, get back to the 4% to 6% of beginning of year value as more normal job market and economic conditions return.

Let me close this section by citing some third party sources that put full service accumulation, net sales flow, and sales into context. According to Cerulli Associates, the economic recession caused the 401k universe to be a net outflow during 2008 and 2009. They estimate $30 billion of outflows in 2008 and $43 billion of outflows in 2009, with outflows expected to improve in 2010 as the economy continues to recover. Compared to that, full service accumulation had net inflows of $5.5 billion in 2008 and $2 billion in 2009. The Life Insurance, Marketing, and Research Association or LIMRA regularly reports key 401k metrics. Let me mention a few key findings from their most recent survey through nine months. We were one of only three firms adding more than 100,000 participants. We were one of only four firms adding more than $2 billion in 401k assets; and we were one of only five firms adding more than 1,000 plans.

In summary, while the economic recovery will continue to cause some challenges, we remain confident in the competitiveness of our 401k and defined contribution products, and we believe more normal growth will resume for full service accumulation over the next few quarters assuming employment recovers. I would like to conclude my comments with some thoughts about our progress in implementing our small-medium business asset accumulation, asset management strategy, and how that positions us for success over the longer term. While we want to maintain a well-diversified and small-medium focused business strategy, our priority is growing our US Retirement business, including full service accumulation, mutual funds and separately managed accounts, along with our international asset businesses and our global asset management business. Beyond offering a stronger growth profile, these businesses are fee-based high return businesses that require minimal capital for growth. As a result of this strategy, we have seen strong assets under management growth since 2001 despite essentially flat markets. Total assets under management are up $186 billion for a compounded annual growth rate of 14%. During this period, we grew full service accumulation account values by $53 billion, an increase of nearly 125%.

What may have escaped as much attention is growth in other areas, Principal global investors with $66 billion of higher third party assets under management, an eight fold increase; Principal international with $31 billion of higher assets under management, also an eight fold increase; and Principal funds with $25 billion of higher account values, a four fold increase. Going forward, our ability to continue to grow the US retirement businesses will depend upon our success with independent distribution, particularly our key alliance partners such as Morgan Stanley Smith Barney, UBS, Merrill Lynch, and Wells Fargo. We have been working diligently to build deep and lasting relationships with these partners. Despite the market turmoil in 2009, we generated $8.5 billion of sales from independent distribution for full service accumulation, mutual funds, and separately managed accounts. This translates into a three-year compounded annual growth rate in excess of 15%. So it is clear, we are making very good progress in our efforts to build lasting relationships across the full range of asset accumulation products in our most significant channel.

Future success for Principal International will result from successfully exporting our US retirement expertise to selected key emerging markets in Latin America and Asia. In Latin America, we have achieved a compounded annual growth rate of more than 20% over the last five years for both operating earnings and assets under management. The memorandum of understanding with Banco Brazil provides for extension for our exclusive relationship for another 23 years. While the change in ownership percentage from 46% to 25% will have an impact on near term results, the increased size and reach of Banco Brazil enhances the long-term growth potential in this key market.

We are implementing the same model in high growth markets in Asia, that is to combine our retirement and asset management expertise with strong local distribution partners. In China, for example, we increased assets under management by $1.4 billion or 30% in 2009. In Malaysia, our asset management expertise was recognized by Asia Asset Management with CIMB Principal Asset Management named Best Institutional House of the Year and CIMB Principal Islamic named Islamic Fund House of the Year. Finally for Principal global investors, our key will be a disciplined focused effort to manage assets appropriate for retirement and other long-term investments while employing our multi-boutique strategy to drive assets under management growth. Reflecting the success of our multi-boutique strategy, each of the three boutiques we have had for more than three years, Columbus Circle, Post, and Spectrum, has a compounded annual growth rate for assets under management in excess of 25%.

In closing, we enter 2010 with a well crafted strategy focused on high growth, high return businesses with diversification to see us through challenging times. We believe that served us well in 2009, and it will allow us to achieve our longer term goal of 11% to 13% growth in earnings per share as markets continue to recover along with the economy.

Terry?

Thanks, Larry.

This morning I am going to focus on four areas. I will cover operating earnings and how the results are emerging as the economic recovery builds. I will cover net income, including performance on the investment portfolio. I will provide an update on expense management, and I will wrap up with some comments on the strength of our position as we enter 2010.

Starting with fourth quarter 2009 results, total Company operating earnings improved $22 million or 12% compared to the year ago quarter. This reflects 6% higher average assets under management and strong expense management. Two segments drove the improvement. US asset accumulation earnings improved $23 million or 22% on $7 billion or 4% higher average account values. Growth for the segment was even more impressive, up $47 million or 70% excluding results for the investment only business, which as you know we are scaling back. The accumulation businesses added about 2% net cash flow and the guaranteed businesses generated negative cash flow reflecting our scale back of investment only.

Principal international's earnings improved $21 million, more than doubling from a year ago quarter. Roughly half of the improvement reflects strong performance on a local basis with the increase also reflecting recovery in macroeconomic conditions as well as a $3 million after tax from realized capital gains in Brazil. Principal international added $11.5 billion of assets under management during the year to reach a record $34.6 billion at year end. The gain was driven not only by market performance and favorable currency movements, but importantly by record net cash flows, $3.2 billion or 14% of beginning of year assets under management. Global asset management earnings were down on a reported basis, but up 35% excluding earnings and certain post advisory contracts which were sold in first quarter of 2009 and performance fees in the prior year quarter of about $16 million after tax on a contract where performance fees are determined every five years.

On a sequential basis, total Company earnings were down $38 million or 16%. The variance reflects a number of items, the largest being seasonality of health claims and benefits in third quarter 2009 from early redemption of MTNs and lower DAC amortization expense. Excluding items impacting comparability between periods, earnings improved 9% sequentially on 5% higher average AUM, demonstrating we are continuing to see positive operating leverage as our assets under management build.

Fourth quarter was also another solid quarter for net income at $142 million. Net realized capital losses in fourth quarter 2009 were $59 million, compared to $189 million of losses in fourth quarter 2008. Compared to a year ago quarter, fixed maturity credit-related impairment and sales were down $43 million, an improvement of 42%. Losses on commercial mortgage whole loans were up only $1 million or 7% and have been fairly stable over the past five quarters. We expect total credit-related realized capital losses to decline in 2010 with improvement in corporate credit losses more than offsetting higher losses than commercial mortgages and CMBS. I would also reiterate our expectation that over the course of the cycle, losses on our commercial mortgage whole loan portfolio will come in at around 2% pretax.

These results demonstrate the organization's discipline and expertise. Our strong asset liability management process discipline around the liabilities we take on and the assets we match against them enable us to avoid selling in an illiquid market. Our expertise in corporate credit and real estate coupled with adherence to internal credit exposure guidelines have helped us keep losses to a manageable level. We are very confident in our investment portfolio and the strength of our capital and liquidity. We are now positioned to take advantage of opportunities to improve return on invested assets, but as always will do so with discipline, particularly given the ongoing uncertainty in the environment. Moving to expense management, we reduced the fixed component of compensation and other by approximately $290 million or 16% compared to 2008. This translates into a reduction from our original 2009 budget of more than $400 million.

Let me me close with a few thoughts on the strength of our position as we enter 2010. Principal global investors starts the year with $205 billion in assets under management, an increase of 8%. Combined, account values for full service accumulation and mutual funds, total $127 billion, both businesses up 20% from a year ago. Finally, Principal international starts the year with a record of $35 billion of assets under management, 50% higher than when we started 2009. As a quick reminder several items will impact comparability between 2009 and 2010, continued scale back of investment only; the change in our economic interest in Brazil Prev; our investment in the health division; and an increase in weighted average shares outstanding. That said, the increase in assets under management and account values from a year ago positions our fee-based businesses, businesses that are not capital intensive and do not rely on general account guarantees for strong revenue growth in 2010.

Let me also comment on our risk based capital ratio and capital position going into 2010. As of year end, we estimate our risk based capital ratio to be in the range of 415% to 425%. We also have substantial cash at the holding company providing additional flexibility. Relative to a 350% RBC ratio, we had $1.5 billion of total excess capital at year end, about half at the life company and half at the holding company. Clearly, we have continued to effectively balance a focus on operating earnings growth with discipline in managing our capital. This concludes our prepared remarks.

Operator, please open the call to questions.

(Operator Instructions). Your first question from the line of Jimmy Bhullar with JPMorgan.

Hi, good morning, thank you. I have a question on your FSA business. On the sales, just what the pipeline looks like, you've been positive on the pipeline for awhile, but the absolute level of sales have been somewhat weak. Last quarter you mentioned you expected a billion in the fourth quarter and that's what you saw. Any sort of outlook for what you expect in the first quarter would be helpful, if you're willing to share that? Related to that, the withdrawal rate seems to be picking up even if you look at it as a percentage of average account values, and I wanted to see what the drivers were behind that?

I will turn it over to Dan for more color. As we have said in our comments over the last couple of quarters, Jimmy, we are generally seeing an increase in pipeline quarter-over-quarter, and you are seeing that now start to translate into sales. One of the things needs to be factored into this is the time it takes from when things enter pipeline into when it turns into sold cases can often be somewhere between two and three quarters. As I said in my comments, we are seeing that build.

In terms of withdrawals, again one of the things I would say here as a general comment before I ask Dan to comment further, is that we have always described withdrawals, Jimmy, as being somewhere in the range of 16% to 18% on an annualized basis and that usually comes from about 12% to 20% member withdrawal and 6% to 7% employer based withdrawal. That's generally the area within which the withdrawals are staying. The comparison to 2008, as we have said before, is always difficult because 2008 was far and away our best year for retention, both at the member level and the contract level.

Thanks, Larry. Couple comments as it relates to withdrawals in 2009. In the first half of the year reflecting layoffs, we saw about $700 million of higher than normal member level withdrawals and in the second half, member level withdrawals actually returned to what we have called a normal level. Third quarter of ' 09 member level withdrawals were 2.5 percentage points beginning of quarter balances and fourth quarter it was 2.4, so about a push during that period of time.

If we shift our attention to contract level withdrawals, they were better than normal in 2008. We talked about that in the past. In the latter half of 2009 they actually picked up. There are a number of reasons for that. We are addressing them in a number of ways. The first way in which we're addressing them is adjusting our service model which enables us to be more competitive while maintaining pricing discipline on that block of business. The second is to aggressively push for enhancements to our Principal CPA Hedge Program, offering third party administrators more choice and flexibility in servicing these clients.

If we try to just normalize the fourth quarter results as we have discussed earlier, the difference in large part between our historical loss in withdrawals for employers versus the fourth quarter is the difference of about 0.6%, which equates to about $500 million during that period of time. We did lose one large client, nearly $300 million, and we lost a stable value contract that would have been about $70 million. Again, when you start normalizing these results you can see again we focus our attention back to our business and get recurring deposits going back in the right direction.

Any comments on whether the $1 billion in sales should get better from here for the next few quarters or not?

Right now we are anticipating a relatively strong first quarter. That number right now is estimated between $1.5 billion and $1.7 billion from what we know today. Perhaps a better way to start looking at pipeline -- if we look at pipeline created in the month of January of 2009, that was $2.7 billion. If we looked at that same time frame for 2010, that number is now at 3.6 billion. Nice improvement in created pipeline for just the month of January. It does feel like there are a few things loosening up, that the advisors are getting the attention of plan sponsors to start having discussions around these plans.

Your next question comes from the line of Andrew Kligerman with UBS.

Good morning. A few quick technical questions. First, how much did MBS re-rating help the RBC ratio? With regard to RBC improving to 415 to 425, excess capital remained flat at $1.5 billion, why was that the case? Lastly on DAC, FSA and annuities, the DAC figure looked a little light, and I wanted to make sure there weren't any unusual items going forward.

I guess I'll just have Terry take all three of those, Andrew.

This is Terry. The RBC improvement due to the -- there were two adjustments that were made this quarter, real point as well as the Pimco solution for RMBS and the real point was for CMBS and that had an impact of about 20 points on our RBC factor. We also, as you mentioned earlier, that the excess capital didn't change from last quarter to this quarter, but we did move $300 million are down from the holding company down to the life company which helped improve the capital ratio.

As far as DAC for the fourth quarter, what you saw was an increase in the DAC amortization this quarter over last, predominantly due to the lack of favorable DAC unlocking in the fourth quarter compared to the third quarter. As far as unusual items, I don't think there is anything unusual in that. The DAC also will increase as the earnings increases. That's the way the DAC calculation works, a factor applied to your gross profits. You expect to see DAC someplace in the $25 million range. It was around $21 million this quarter. It is creeping up into that more normalized range.

Thanks.

Thanks, Andrew.

Your next question comes from the line of Randy Benner of FBR Capital Markets.

Oh, hi. Thanks. Couple of policy related questions. The first is on DRD, the administration put out its budget proposal that the DRD benefit may be narrowed. I want to get the sense if you can quantify the potential impact of that in 2011, based on what you understand on that proposal.

I will be happy to make comments on that. This again, as you know, Randy -- DRD has been mentioned in administration budgets for a number of years. It is certainly something that has been under discussion. I will also say you have seen no real efforts at this point on the part of Congress to do anything. The impact of DRD as a practical matter on Principal continues to come down year by year and a lot of that is as a result of more and more of assets going into international equity which doesn't get the benefit of DRD and more and more assets going into the mutual fund chassis which also doesn't get DRD.

The impact of DRD continues to come down. It is in the range of $70 million on an annualized basis, which again is somewhere in the range of $0.20 or so. We continually are told if there were to be any change, it would be very much of a graded in prospective change, phased in over a reasonably long period of time like five or seven years. In terms of impact on the organization, we would have plenty of opportunity to decide what would be the appropriate actions to take to mitigate any actions that Congress might take in that area.

That's excellent. Just another one. Again, not necessarily something that will happen. This antitrust exemption, there is talk of that trying to be lifted in Congress. Curious how that would hypothetically affect the health business?

In theory, it would affect all or our insurance businesses. As I talk to our people and I read the commentary from legal counsel and others, Randy, again what I find consistently and what I hear consistently is it would have a very, very minor impact.

Really, I think at the end of the day, this is something that is more about, if you will, political sort of maybe feel good situation in regard to insurance reform, but as a practical matter, I don't know that it would really do anything to necessarily introduce competition. If you think about for example the health insurance business, you will go across state lines to buy health insurance from someone else who quite likely doesn't have a network that is of any value to you because they operate in different states. It sounds good and feels good, but as a practical matter isn't competition today in terms of competition in the health insurance business.

Thank you.

Your next question Suneet Kamath of Sanford Bernstein.

Thank you and good morning. Two questions on the FSA business, if I could. The first is a follow-up to Jimmy's question on the pipeline. I think last quarter you quantified that pipeline at $42 billion, and I think you said it is higher now. Just wondering what the nominal level of that is? And then, a more detailed question for Larry or Dan. You had mentioned some struggles that the 401(k) industry has had generating net flows and growth. I think we all understand the reasons why. What that also might suggest to me that at some point the opportunity for plan sponsors to put the screws on the industry and squeeze out pricing, especially as they are struggling with the impact of the weak economy, wondering if you can give any thoughts on that and whether or not you are seeing any of that in some of the quote activity that you have talked about recently? Thanks.

I will have Dan provide more detailed comments. Again, in general pipeline is up 30% from where it was a year ago, and we are continuing to see that lift month by month. I would say in terms of pricing, as I have said many, many times, this has always been a price competitive industry. I think that to the extent, frankly, that there is price competition, it works to the benefit of the leaders in the industry of which I consider us to be among in the top.

Things like operational efficiency really matter. Things like straight through processing really matter; and I think again we have demonstrated and Terry commented on the positive operational leverage that has been going on, and I think it's going to continue to go on as hopefully markets recover and assets rebuild. I feel very confident about our ability to operate successfully, even recognizing it will be a price competitive market.

Dan, will you comment further?

Maybe a couple more items, total retirement suite still for us represents about 65% of our sales, still value being derived from our clients. They are looking for a coordinated approach for ESOP, non-qualified deferred comp and defined contribution. Most of the questions coming around defined benefit have to do with helping them either freeze those plans or terminate those plans, if and when interest rates move in the direction that will allow them to do that.

The other one I would tell you is it has high lighted the importance of this retire secure, the ability to go out, provide guidance and education to plan participants helping these plans become more productive for plan participants.

And a closing comment that relates to price. There is price sensitivity, as you point out, which is why we have made a decision to start bifurcating our business model that would allow for a lower price in the instances where customer is asking for fewer services than what we have provided in the past. Before it was a one size fits all bundled between our emerging dynamic and institutional, we now have some flexibility that will allow them to dial in that price instead of services more into their interest. Hopefully that helps.

That does. Maybe just one quick follow-up. In the quotes activity that you are seeing, are you seeing any aggressive pricing from some of your competitors? You are saying it has always been competitive, perhaps more so than in the past?

I think so. You saw a couple of players in the insurance sector take down some very jumbo cases, in excess of $1 billion, and we have every reason to believe based upon the information we were able to ascertain through the consultant community that that was in large part driving more net cash flow and less profitability, covering some fixed overhead expenses.

But, I would say, yes, there is a modest uptick in overall relative competitiveness and we are certainly making all the changes we have to in our expense run rates to ensure that we stay in pattern and still at the same time provide our customers with what they are looking for and many of them are still looking for a full service bundled solution.

Those were insurance companies, not asset management companies.

Yes, I cited specifically one particular competitor in the insurance sector that comes to my mind that has been very aggressive.

The realty, Suneet, is there is much less business moving so there tends to be more focus on the large plans.

If you look at our FSA sales in 2009, we only (inaudible) plans over $100 million, they just weren't out there to be had. We had 14 of those in 2008. If and when a large plan, a jumbo plan comes to market in today's world, you can bet it will get a lot of attention. I wouldn't try to form too much of a conclusion off of a handful of single cases. There will always be competitive situations out there.

Thank you.

Your next question comes from the line of Ed Spehar from Banc of America, Merrill Lynch.

Thank you. Good morning. Couple questions. First on the statutory, I guess Terry, if we look at the combination of the capital contribution and the re-rating, you had 40 to 45 RBC points of benefit. Is that about right?

Yes. That's about right.

Can you give us some sense of statutory operating gain in 2009 and any reason to think that changes for next year?

Statutory gain from operations was a little over $600 million in 2009. Do we expect it to decrease next year? No.

Be about the same.

About the same.

Larry for you, the comments you made about the net flows in full service accumulation and the expectation of some -- I think -- I can't remember exactly what you said, but you said a return to more normal levels as the economy and job state improve, should we be looking for -- given what our view is, your view is on the economic back drop and pipeline, should we be thinking about net cash flows that are positive for full year or should we be thinking about a quarterly turn in cash flows.

Well, I think again, you look at 2009, net cash flows were 2.5% of account value positive that was against an industry that was about 1.6% beginning of account value negative. It continues to demonstrate the strength and competitive of our offering. Cerulli is projecting net outflows for the industry for 2010. I think it depends again, Ed, on your forecast of unemployment and your forecast of whether the pipelines continue to come back.

As I said in my comments, every element of it that I'm seeing, as it relates to employment picture, as it relates to the investment markets, as it relates to the economy, things continue to get more positive. I certainly do expect we will continue on an annual basis to be net cash flow positive for the business. Whether that returns in first quarter, second quarter, third quarter, it is a little bit hard to say. You just have to remember, again, we are against outflow for the industry, but we have had positive trends in very difficult times and I'm confident about our ability to do that going forward.

Just to be clear, Larry, where we sit today, obviously, there is uncertainty. Where we sit today you would expect for the year to have positive cash flows for FSA for 2010?

That's correct.

Thank you.

Your next question comes from the line of Eric Berg of Barclays Capital.

Thanks very much. Good morning, Larry and (inaudible). I'm hoping we can re-visit -- I know we have talked about it in the past -- I want to perfect my understanding of this contents of quote activity and pipeline. My specific question is how good or not so good should we feel about this? Obviously, it is a better thing -- it sounds like it is a better thing to have more quote activity and a bigger pipeline. I want to refine the idea a little bit. What exactly has to happen for something to be in the pipeline? What is the definition of a deal in the pipeline and to what extent does the pipeline translate necessarily into assets or is it an indicator that may or may not bear fruit in terms of assets?

Eric, that's a really, really good question, and I think one of the things that I feel very good about is our ability to be much more scientific, if you will, around that pipeline is much more the case today than it would have been five or seven years ago.

Your question really is a good one and you do have to be somewhat careful in thinking about it. There is a lot of science that goes into it. I will ask Dan to comment on it. We could probably go on the rest of the call here, which we're not going to do, but we will give you a little bit of high level understanding of that.

I will read that code, Larry, to keep it somewhat short and sweet. We looked at the end of 2009, the gross pipeline that we had was $46.8 billion, that was the gross number. From that you start paring it back down for what we view as that portion that is actionable. When we do that, we get to an active pipeline at the end of the fourth quarter of roughly 24.9 or $30 billion.

The number I shared with you earlier was the created pipeline. The created is what comes in new during that period and in the month of January what I said was we had created a new pipeline of $3.6 billion, which was up from a year ago January 2009 of $2.7 billion. So the reality is it is a nice increase in terms of the number of advisors taking plans out to bid, seeking quotes, et cetera. Now, it gets down to close rate and the close rate is our success in being able to convince both the plan sponsors and those advisors that our value proposition is as good or better than the competition. That is what we will be focusing a lot of time on throughout 2010.

That's helpful. My second question, Dan, is actually to you. In an answer to an earlier question, I believe you were pointing out -- I think you were saying that the loss of assets at the plan level in the December quarter could be traced in good measure to one plan or -- was affected vitally by one plan with assets of about $300 million leaving you and this was the result of a price competition, but you are responding. I know you have touched on this, but I'm hoping you can build on your earlier responses. What sort of price cutting in terms of magnitude are we seeing and are you where you need to be right now to respond to whatever discounting is out there or can we expect to lose more of this business? What is the magnitude of the price cutting and are you where you need to be to be competitive? Thank you.

Yes, to that specific question I didn't mean to overly imply that that specific case of $300 million left just because of price. It had only been with us for a few years. A consultant brought it to us originally. It was a single case, had no prior business. It was a relationship we had with the employer and ultimately the advisor chose to move this piece of business.

I think it had as much to do with style differences in who he really wants to work with as opposed to our inability to compete on price. So, again, I did not want to overly imply that that $300 million was based just on price. Does that help?

It does, but still I have the sense from this call -- not the sense -- I think you have said specifically that price competition is greater than it used to be and what I'm trying -- what sort of price cutting are we seeing? 20% off of full service rates? 30%? Can you match that at current service levels, at the current economic levels of the business, and earn target rates of return?

My response to that, Eric, we are looking at service levels those employers not wanting all the services we provide. That's the modular pricing discussion which we have had before. I don't feel there is an across the board price cost cutting going on. This is a case by case scenario. Any new client, any existing client of principal with more than $5 million in assets, we're going to be able to look at the profitability on that piece of business and where you get the socialized pricing is less than $5 million, and I would say we are very competitive in that marketplace. There is far more discussion about price, but that doesn't necessarily translate into we're going to lower our prices and provide the same level of services.

Let me add one other piece of context around this and I think we all understand in terms of full service accumulation and its meaning and importance to the Company. I think we would also be remiss if we didn't again like we did in our earlier comments that outside of your full service accumulation, whether it is mutual funds, whether it's (inaudible) accounts, and particularly as it relates to Principal international, we are building a whole set of other asset accumulation businesses with incredibly strong performance and incredibly strong cash flow that, quite frankly, make full service accumulation still a very important part of the business, but let's not lose site of what that represents as a percentage of Principal's total gathering asset capability.

I think we need to put this in context as I said earlier as what the track record was with regard to both PI and PGI. I think we need to consider that as well.

Yes, thanks to both of you.

Thanks, Eric.

Your next question comes from the line of Colin Devine of Citi.

I have a couple questions. First on FSA. And Larry, I appreciate you and Dan and Larry going over why transfer deposits are down so much, in fact 38% now for the year. What nobody has talked about is what is happening with transfer withdrawals. As far as I can tell based on speaking with Tom, recurring deposits, which are down 5.3 kept pace with recurring deposits out, what is going on with transfer withdrawals? That to me seems to get to the heart of the answer as to what is going on with FSA net flows. That's question 1.

Question 2, the health business set a record loss for the quarter as far as I can tell. In all of your comments when you talk about retirement and principal strategy and I think we are all familiar with it, clearly this business doesn't fit. I'm not sure your group business fits. Why are you still in these businesses and why are you not, then, taking the action you are doing with the investment only business, moving on from it, and focusing at what the Principal is really good at.

And lastly you didn't comment a lot on the President's budget, and, particularly the one I thought would have had you pretty excited, was the marching orders to Treasury to figure out how to amend ERISA so we can get retirement income options more directly into 401(K) plans?

Let me comments on those. I'm sure we'll have others along the way, Colin. First of all, again in terms of withdrawals, as we said before 2008 is going to be by definition, it is going to be a tough comp because retention was at an all time high. Having said that, I can tell you for example, Colin, in 2009 the number of employer contracts, the number of employer contracts that withdrew for a variety of reasons typically moving to another platform, whatever it is, is down by about 500 contracts, is down in 2009 versus 2008. So, 2009, again you are seeing the withdrawals higher than 2008, but very much in line with historical trends.

In terms of the health business as I have said before, health business remains the first benefit that a small-medium owner puts in. It remains the most active part for many employee benefit advisors. It is an entree for us and gives us great opportunity for us to sell other products, primarily for the advisor. I certainly have mentioned in the past, there is not a lot of cross sell between health and pension. But what that forgets is there is a lot of cross sell at the advisor level. the advisor who sells health insurance often sells employee benefit products.

Now, we would -- we would be the first to agree that in order to be in the business you have to run it profitably. If you look at the ROE in the health business, the ROE in the health business was 15% in 2008 and it is 11% in 2009. I view that as acceptable performance albeit with the ROE we have in 2009, we have to strengthen the platform. We need to do to make sure we're doing the things around managing care so we get a proper return in those businesses. I think you have seen ROEs take similar trends for other competitor companies. I think again it is a trend you see across the industry.

In terms of the President's budget, again, I appreciate you pointing that out. I think for the first time we are seeing serious intent on the part of the Congress, excuse me, on the part of the administration in terms of Department of Labor and Treasury to think about what we need to do as a nation given that we accumulated $3.7 trillion of 401(k) assets, what are we going to ensure that that money be used for the retirement security of the baby boom generation. We're very excited about that. As you know, we have a full range of payout solutions. I think we are well positioned to be a net winner, if and when Congress decide they want to do something in regards to income solutions. Let me stop there.

Okay, Larry. Two quick questions coming back, though. I'm still not sure, certainly, not clear to me why transfer deposits have fallen so much. I get that there is no cases moving around, but transfer withdrawals appear not to have fallen at all. Maybe you can put hard dollars on to that? Secondly, with respect to the health business, should I infer from your comments that you do not believe you could take the capital -- the very capital intensive business that is supporting that business and re-deploy into your pension business toss achieve an even superior return?

Right now, on the second one, Colin, right now those would be -- they are about a push in terms of those businesses. Again, we are going to have to do the things over the long-term and if, in fact, it is proven we are not able to earn an acceptable rate of return, this is a management team that has demonstrated in the past that we know what it means in terms of running businesses for the long-term interest of shareholders. I will ask Dan to do a better job on the withdrawal question.

On FSA net cash flow, just look at these contract level withdrawals as a percentage of the average account values themselves. You go back and look at that time frame from 2005 to 2007, it would have been a negative 6.4%; if you come to 2009, that number was 6.7%, and that's a percentage of average account value. Our comparison year in 2008 was the best we ever experienced which was minus 5.3%.

Again, yes, the contract level withdrawals are higher but at the same time I would argue that it is in a very unusual time. If you want to look specifically at contracts, the difference in contracts from ' 08 to ' 09, we wrote 988 fewer actual contracts. We also had 260 increase in the number of plans that terminated. These were vaporized, these are gone, no longer a plan. They didn't transfer anybody else. We actually saw an improvement of 537 fewer contract lapses between 2008 and 2009. We attribute a lot of this to just how disruptive this economy has been throughout 2008 into 2009. We are hopeful starts bringing recurring deposits back, bringing back transfer assets, and a slow down to some of the plan terminations.

You are saying it is plan terminations that is the culprit?

There is 260 more this year in 2009 than there was in 2008.

At the overall level, the 6% level that Dan is talking about, Colin, that is very much in line with historical trends. That is not that much different than what it has been over the last ten years. We need to move on.

Your next question from Jeff Schuman with KBW.

Hi. I want to talk a little more about health insurance. You covered a lot of ground with Colin, but can you give me a little refresher on the background of your network? It's my vague recollection that at one point you had your own networks and then you needed better networks so you rented them and now you are building your own networks? Am I remembering the history right?

Jeff, this is Larry. I would say that in general up until three or four years ago, we have used the strategy that was more likely dependent on rental networks; and it became clear to us, you needed to have, if you will, more control not only to negotiate directly but, quite frankly, to negotiate better terms under the network agreements without getting too much into the detail. We begun the process of creating our own networks primarily in those areas where we know we can get competitive discounts.

What that does is it puts us in more of a regional capacity and frankly, it puts us in more of the geographic areas that would be, I would say, second tier markets. That would include things down through the Midwest, Iowa, Missouri, Oklahoma, perhaps over to Tennessee and to Georgia in that particular area. So, you don't see us, for example, in the heavy industrial areas. We we don't do a lot in the West Coast. That is the focus. As a result of that in the past couple of years, we have gained much, much more control of price competitiveness as well as reimbursement mechanisms and we have to continue to work at that. As the economy grows, you will see the membership begin to stabilize and then turn around.

Can you give us a sense a little bit of the market, if hypothetically, you wanted to transfer your membership to another party, would you be able to monetize that for some value at this point? What is the risk, if the political climate for health insurance continues to get worse? What is that risk that that value to monetize that membership actually goes down instead of goes up over the next couple of years?

You can build a scenario anyway you want, Jeff, as it relates to where the value may go from here. What I would say in regards to how others in the market look at it, what I would say is from my -- what I'm told is they tend to look at it based on local markets. You really don't have necessarily single players that would look at our entire portfolio and say yes, that is exactly what I want. You might have one player that is interested in a couple states and another one that is interested in a couple states. Again, this isn't quite as easy as one would necessarily just assume it is from the start. So those are just things you need to keep in mind. At the end of the day, our challenge to run it, run it well, run it in the best long term interest of shareholders and generate appropriate returns and that's what we are focused on doing.

Thanks a lot, Larry.

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

Thanks to all of you for joining us for the call, today. As we head into 2010, this management team is going to remain focused on executing our small-medium business retirement-centric strategy while adhering to the fundamentals to see us through the challenging times. I look forward to seeing many of you out on the road in the next few months. Thanks very much.

Thank you for participating in today's conference call. This call will be available for replay beginning at approximately 8 PM Eastern time until end of day February 16th, 2010. 48727511 is the access code for the replay. The number to dial for the replay is 800-642-1687, US and Canadian callers, or 706-645-9291, international callers. Once again, thank you for participating, you may now disconnect.