美國信安金融集團 (PFG) 2010 Q1 法說會逐字稿

Good morning, and welcome to The Principal Financial Group first quarter 2010 financial results 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 John Egan, Vice President of Investor Relations.

Thank you, and good morning. 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 the reading of the Safe Harbor provision, CEO, Larry Zimpleman, and CFO, Terry Lillis, will deliver some prepared remarks and then we'll open up the call for questions. Others available for the Q&A are Dan Houston, US Asset Accumulation & Life & Health Insurance; Jim McCaughan, Global Asset Management; Norman Sorenson, International Asset Management & 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 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.

Now I would like to turn the call over to Larry.

Thanks, John. And good morning to everyone on the call.

As most of you probably already know, John Egan recently joined The Principal as our new Investor Relations officer. He's replacing Tom Graff who will be retiring later this month after 38 years of service with the organization. I'd like to take this opportunity to thank Tom for his significant contributions over the course of his career and to welcome John to the Company.

Moving to results, first quarter was a very solid start to the year for The Principal as we delivered our best operating earnings quarter in two years and our best net income quarter in two-and-a-half years. Each of our growth engines delivered strong improvement in Assets Under Management which, coupled with ongoing expense discipline, produced strong operating leverage. It was a quarter in which the continuous implementation of our strategy, even during the crisis, began to show positive results. In a quarter in which our investment portfolio continued to perform well and in line with our expectations. Compared to the same period a year ago, we achieved strong improvement across a range of key measures. At $256 million, operating earnings were up $92 million, or 56%, driving earnings per share up 25%. Net income was up $78 million, or 69%, as realized capital losses remained manageable and continued to emerge as expected. Assets Under Management were up $57 billion, or 24% to $293 billion.

As of quarter end, we had recovered more than three-fourths of the drop in Assets Under Management from our high as of year end 2007 to our low on March 31, 2009. And book value, including other comprehensive income per share, was up 212%. This reflects continued improvement in net unrealized losses, including nearly a $1billion of pretax improvement in the first quarter for fixed maturity securities, primarily from narrowing credit spreads. In addition, on a sequential basis, total Company operating return on equity improved to 11.5%, up 90 basis points from year end after improving 40 basis points in the fourth quarter. While down from a year ago this reflects our May 2009 equity raise, the full impact of which will be realized next quarter. Overall, across a broad range of measures, from the bottom line measures of operating earnings and net income to top-line items like sales, flows, and Assets Under Management, results are emerging in line with or better than our expectations for the businesses.

While we're benefiting from improvement in the credit and equity markets, we believe the results demonstrate continued strong execution of our diversified business strategy. This has enabled to us deliver very solid results, even as high unemployment continues to effect each of our employee benefit businesses. As the economy improves, we'd expect to see an acceleration of our growth, given that small and medium businesses have historically been the primary source of job creation. Terry will follow my comments with further detail on the quarter, including a discussion of the investment portfolio. I will focus my comments on execution.

Our ongoing progress implementing our strategy to grow our Asset Accumulation businesses in the US, Latin America and Asia, and our Global Asset Management business. As I mentioned, operating earnings improved substantially from a year ago. Our growth engines, the US Accumulation businesses, Principal International and Principal Global Investors, contributed $90 million of our $92 million improvement, more than doubling from a year ago on a combined basis. These gains reflect improvement in the investment markets, the depth and breadth of our Asset Management and Accumulation offerings, and our increasing momentum with key third-party distribution alliances. The gains also reflect the ongoing positive benefits of our prior expense actions and continuing expense discipline, which is producing strong operating leverage as Assets Under Management continues to build.

In the first quarter 2010, the US Accumulation businesses delivered $950 million of positive net cash flows, down from a year ago when we had a single large retirement sale but solidly better than the past three-quarters. On $1.7 billion of sales in the first quarter, Full-Service accumulation delivered $640 million of net cash flow. Total retirement suite accounted for 63% of sales during the quarter based on assets, and continues to provide a competitive advantage in the marketplace. Driven by our steady improvement in sales, transfer deposits for the first quarter were 9% higher than our results for the last two quarters of 2009 combined. Full-service Accumulation sales pipeline and quote activity continues to build steadily as advisers renew their focus on growing their business, though still down from 2008 levels.

However, small business owners reported little pickup in their sales or confidence in March with only one of the ten components of the small business optimism index showing improvement. The environment also continues to pressure recurring deposits which were down 5%, or $170 million from a year ago. The good news is that many of these pressures are easing. For the first time in four quarters we saw a sequential increase in total eligible plan participants. And plan sponsors are beginning to restore matching contributions, and we've seen a small number of employers rehire eliminated positions. As a quick reminder, second quarter has historically been our lowest quarter of flows for this business with seasonally low sales resulting in seasonally low transfer deposits.

Moving to Principal Funds, on $2.1 billion of sales, we delivered $110 million of net cash flows in the first quarter. This was our best quarter of flows since June 2008 and compares to an industry in outflow for the quarter. Excluding money market, Principal Funds achieved net cash flows of approximately $170 million for the quarter and more than $600 million over the trailing 12 months. Principal Funds long-term sales improved 15% from a year ago. This reflects continued success with our national channel of outside broker dealers, our largest distribution channel for funds, which delivered a 35% improvement in sales from a year ago. It also reflects good success with recent product launches, such as our Global Diversified Income Fund, which captured $210 million of new investments in its first quarter of active marketing. Global Asset Management had unaffiliated outflows of $1.2 billion during the first quarter. Institutional search activity in the US and around the world remained subdued and substantially below 2008 levels.

Over the past couple of quarters, we've also seen outflows from our Stable Value Funds due to rebalancing as well as rebalancing out of equities as some institutions have taken gains after the market run-up. But here again, we see an improving picture, unaffiliated deposits increased more than 20% from year end, including more than a $1billion of funding during the quarter from new clients. Recent new client wins have covered a wide range of offerings, from Large and Small Cap growth to Asia Equities, to Fixed Income for clients in the US, Europe and Asia.

We're also seeing search activity pickup in a number of areas. In North America, where consultants are estimating that search activity will pick up by 10% in 2010, and in Latin America, Asia, and the Middle East where we're seeing significant pick up in search activity from sovereign investors. Moving to Principal International, first quarter net cash flows were $700 million excluding money market withdrawals in India. Over the trailing 12 months Principal International's net cash flows exceeded $3 billion, or 13% of beginning of period Assets Under Management.

As announced last Friday, we've signed a definitive agreement to renew our joint venture with Banco do Brasil for an additional 23 years. BrasilPrev is a pension market leader in Brazil reflecting the strength of Banco do Brasil's distribution platform as the largest bank in Latin America and a Principal's expertise in retirement. Our joint venture has enjoyed remarkable success in its first ten years including compounded annual growth in operating earnings of 25% over the past five years and 30% compounded annual growth in Assets Under Management. We believe the future opportunity is even greater as a result of recent acquisitions by Banco that further expand their distribution platform as well their client base which now stands at 54 million customers. As an early sign of this, customer deposits since signing the Memorandum of Understanding in October 2009, are up 57% compared to the same period a year ago.

I mentioned earlier that we've continued to execute our Global Asset Accumulation and Asset Management strategy even in the face of the financial crisis over the past two years. As another example of this, about a year ago, we expanded our distribution relationship with Bank of America-Merrill Lynch, which previously covered Mutual Funds, separately managed accounts, and nonqualified deferred compensation to also cover defined contribution plans and our offshore Dublin Funds. Over the trailing 12 months this relationship has produced $1.1 billion of sales on a combined basis. This translates into 27% growth over the same period ending a year ago, and illustrates the competitive advantages we gain by offering multiple Asset Management and Accumulation products on Alliance Partner platforms.

I'd also like to comment on our current equity and excess capital positions. At $8.7 billion at quarter end, stockholders equity is at its highest level for The Principal as a publicly traded Company. This reflects improvement in asset valuations, capital raising activities in 2009, and growth in retained earnings. Excess capital at $1.8 billion is also an historical high for the Company. This means we are at one of the strongest financial positions in our history, which is a positive given that some environmental uncertainties remain. While we're committed to holding higher levels of capital in the future, we believe our strong earnings profile and improving market fundamentals will present an opportunity to increase shareholder value over time. As always, we'll look at capital deployment options in a disciplined and thoughtful way.

I'll take one more minute to cover three unrelated areas. First, we believe US commercial real estate values have bottomed, and that the rebound in the REIT and CMBS pricing will continue to provide additional positive momentum. This momentum will ultimately bring positive cash flows to the market. Second, we're see good results and positive feedback around our America Rebuilds media and advertising campaign. Individuals are increasing their focus on financial planning and their commitment to savings. We expect this to have a very positive impact on The Principal brand.

Finally, I would like to mention that we've been fortunate to receive some very important third-party recognition in 2010. For the eighth straight year we were named a Top 50 Company by the National Association of Female Executives. We received two Lipper Fund awards for consistent multi-year performance, an achievement that showcases our investment expertise and long-term view. Brazil Prev was recognized as the number one company in the pension segment for customer service. And The Principal was recognized again by the [SS Fear] Institute as one of the world's most ethical Companies, one of only three financial services companies to make the list. We believe these awards demonstrate the true character of the organization and that The Principal remains a Company that customers and investors can rely on. Terry.

Thanks, Larry.

This morning I'm going to focus on three areas. Operating earnings and how results are emerging as the economic recovery builds, net income, including the continued solid performance of the investment portfolio, and our strong capital position. Starting with first quarter 2010 results, total Company operating earnings improved $92 million, or 56% compared to a year-ago quarter. This reflects 20% higher average Assets Under Management, prior expense actions, and ongoing expense discipline against 19% growth in fee revenues from a year ago we kept operating expenses essentially flat. Our three Asset Management and Accumulation segments drove the improvement in operating earnings from a year ago.

US Asset Accumulation earnings improved $64 million, or 69% on $22 billion, or 16% higher average account values. Full-Service accumulation earnings increased $25 million, or 49% from a year ago to $76 million for first quarter 2010, primarily due to a 24% increase in average account values. Individual annuities earnings increased $26 million from a year ago to $31 million for first quarter 2010. The improvement reflects an 11% increase in average account values and $17 million of higher amortization of deferred policy acquisition costs for first quarter 2009, primarily due to unfavorable equity market performance in that period. Principal Funds earnings increased $8 million from a year ago to $10 million for first quarter 2010, primarily due to a 27% increase in average account values.

Principal International's earnings improved $21 million, up 123% from a year ago quarter. Roughly one-third of the improvement reflects strong performance on a local basis. The remainder reflects improvement from the unfavorable macroeconomic conditions that dampened prior year quarter results. Principal International had added more than $12 billion of Assets Under Management over the trailing 12 months to reach a record $35 .7 billion at quarter end. The gain reflects not only strong investment performance and favorable currency movements but also continued strong net cash flows as Larry noted.

Principal Global Investors earnings improved $5 million, or 76% on 13% growth in average Assets Under Management, excluding real estate where asset values declined modestly from a year ago, investment management fees increased 21%. At the same time, PGI reduced total compensation costs by 2% and held total expenses flat. At $70 million in the first quarter compared to $72 million in the prior year quarter, earnings for the Life and Health Insurance segment were also solid. Individual Life earnings were $31 million compared to $23 million a year ago. The increase reflects growth in the block of business and ongoing expense management. Premium and deposits for the division are up 13% from a year ago, reflecting a strong increase in single premium Universal Life sales and steady improvement in UL and VUL renewal deposits.

The Health division had operating earnings of $26 million in first quarter compared to $32 million a year ago. The change primarily reflects a decline in the insured medical covered members. The division continues to invest in building proprietary networks and improving claims management in order to improve pricing and gain traction on both new sales and retention. Specially Benefit earnings were $14 million compared to $17 million in first quarter 2009. The decline from a year ago primarily reflects unfavorable group disability claims experience. We do not view this as a systemic issue, incidence is down, and we view the higher average new claims we experienced this quarter as a temporary phenomenon.

In thinking about our run rate for total Company earnings on a go forward basis, investors should consider several items. There is seasonality in certain businesses. The Health division has seasonally high earnings in the first quarter with losses in the fourth quarter, and Specialty Benefits earnings are low in the first quarter, reflecting seasonally higher Group Life and Dental claims. I would reiterate our expectations that earnings for the Life and Health Insurance segment will be essential flat in 2010 compared to 2009. However, there are some unknowns around cost of compliance with healthcare and regulatory reform that could influence results for the Health division and the segment.

I would also remind you that the definitive agreement related to BrasilPrev changes our economic interest in the joint venture reducing Principal International's earnings run rate by approximately $10 million to $12 million per quarter after tax, starting in the third quarter, with about half of that impact in the second quarter. Reflecting this change in earnings run rate we expect segments to return on equity at year end 2010 to be approximately 9%, returning to 11% in 2012. As one final item, investment only earnings benefited by about $0.03 per share in the first quarter, primarily from a receivable recovery and our opportunistic early redemption of medium term notes. At $191 million in the first quarter, total Company net income was solid as well. Net realized capital losses were $57 million, a fifth consecutive quarter of very manageable losses in the $50 million to $60 million range. This reflects strong asset liability management which enabled us to avoid forced selling and broad asset diversification, which lengthens the period over which losses emerge in a downturn, making losses more manageable.

Losses on fixed maturity credit related impairments and sales improved 21% from a year-ago quarter as lower losses on Corporate Bonds more than offset higher losses on CNBS and Residential asset-backed securities. Losses on commercial mortgage whole loans were also down from a year ago, a drop of 42%, and at $11 million, our lowest quarter of losses since year-end 2008. We continue to expect credit related losses to improve, and estimate they will be approximately $100 million lower in 2010 after tax than in 2009.

Let me quickly cover our limited sovereign exposure to Portugal, Ireland, Italy, Greece and Spain. As of March 31, it totaled $70 million. In addition, we have no exposure to Greek or Portuguese banks. Let me also comment on our risk-based capital ratio and capital position. As of quarter end we estimate our risk based capital ratio to be in the range of 440% to 450%. We also have substantial cash at the holding company providing additional flexibility. Relative to a 350% RBC ratio we had $1.8 billion of total excess capital at quarter end, about $1 billion at the Life Company and about $800 million at the holding company. Given the strength of our balance sheet, investors are refocusing their attention on our growth prospects.

So let me close with a few thoughts on the strength of our position going forward. PGI starts a second quarter with $212 billion of Assets Under Management, 17% higher than this time a year ago. Combined account values for Full-Service Accumulation and Mutual Funds totaled $132 billion, up 30% from a year ago. Finally, Principal International goes into the second quarter with a record $36 billion of Assets Under Management, an increase of 52%. This increase in Assets Under Management and account values positions our fee-based businesses, businesses that are not capital intensive and do not rely on general account guarantees, for continued strong revenue growth in 2010.

This concludes our prepared remarks. Operator, please open the call to questions.

(Operator Instructions).

We'll pause for just a moment to compile the Q&A roster.

The first question will come from Steven Schwartz of Raymond James & Associates.

Good morning, everybody. Just a couple of quickies. First, Larry, you're talking about sales and what's going on, and things seem to be improving. I want to ask, how important is that? How indicative is that? We've missed - - in a sense, we've missed the first quarter renewal. We're going into the lowest cash flow quarter of the year. How meaningful is that statement really?

Okay, Steven, didn't know if you had another question there or not. I would say that we've been commenting over the last couple of quarters that we have been seeing increases in what we call created pipeline, which is sort of the new business that's dropping into the pipeline. Again, there's several cuts that we could take but we've been seeing increases in creative pipeline. So I guess I would take a bit of exception to the notion that we sort of missed the first quarter renewal.

I think that we have seen a participation in the first quarter renewal when you saw the $1.7 billion. So I think it is meaningful. I think again you're seeing that creative pipeline pick up. Just to give you a sense of it, in the first quarter the creative pipeline was up about 36% or so. So I think, again, we're seeing this build quarter by quarter. We're seeing it build in terms of new sales, we seeing it build in terms of transfer deposits, so I think we are definitely riding the wave that's going along. I don't think there's any indication we've missed any of that.

So I guess my question is do we see that creative pipeline come through, through the next three-quarters, or does it - - do we wait again for the annual renewal period beginning January 1?

The answer to that would be, is that we in time will see that come through, okay. Again, these typically the lag time on employer based retirement sales is somewhere around two to three-quarters. So again, just because it goes into pipeline this quarter, it may well be a 7/1 or 10/1sort of effective date. But we are seeing actual close rates continuing to actually increase a bit. I think our close rate was a little over 10% in the first quarter which is, again, well within the norm, probably a little bit to the high side. So, again, I would say every indication here continues to look positive.

Okay, good. And then if I may, Terry, any bank exposure outside of Greece and Portugal, Ireland, Italy, Spain?

Maybe I will have Julia cover that, if that's okay, Steven. That would be great.

Good morning, Steven. Well, we don't have a lot of exposure outside to banks at all other than the Spanish banks. And our US exposure to Spanish banks is about $175 million. But I would say that really is exposure to the two largest global banks domiciled in Spain, which would be Bank [Cendendair] and BBVA. So we're very comfortable with those exposures.

Okay, great. Thank you very much.

Thanks, Steven.

The next question will come from Andrew Kligerman with UBS.

Okay, thanks. Good morning. Just shifting over to the Health and Specialty areas. Starting with the Health Insurance, it looks like you had a seasonally favorable loss ratio but the membership count came down by 21% year-over-year, the lapse rate was 13%. Maybe a little color on stabilizing the member count.

Okay. I didn't know again if you wanted to go with both of those. You had a - -

I'll follow-up with Specialty in a second.

Okay. Well, I'll make a couple of comments, then have Dan talk about the Health membership. Again, I think we've said consistently over the last couple years that there are two elements to the rebuild if you will of our health strategy.

The first element is to run the business in a profitable way, to control the loss ratio, and I think the experience of the last several quarters has indicated were very much in good shape on that. The second element, which is a little bit more difficult, is ultimately stabilizing and growing the membership base. We think that that should happen probably sometime in - - basically should stabilize in that 2010, and we would be hopeful that we'll start to see membership growth in 2011. But let me see if Dan wants to add anything there.

Yes. Maybe just a couple of comments. When we did our analysis on the cases that we actually lost, we saw that the average loss ratio in the cases lost were 122%. So, again, we lost the right cases. We're being more thoughtful in our renewal efforts to Larry's point. The best way for us to turn around this business is to make some modest investments in certain areas.

One is around network development which we're doing in Tennessee. We're doing it in Georgia, we're doing it in Texas. This will take several years for us to turn this business unit around, but the network development clearly is a big part of that turnaround strategy, as well as renegotiating some of our lease networks. And then maybe the last comment, as it relates to the healthcare reform, we don't have all the answers today. We're studying that very closely, and again this minimum loss ratio is one of the key drivers that we'll have to respond to very quickly here in the course of the next couple quarters.

Okay. And then just tying in the Specialty, - - difficult loss ratio of 84.5%. I think during the commentary you implied that it was more of a blip. But as I take a step back and I look at the pressures on member count and health. I know you're saying, it sounds like you're fixing it, or it may even we fixed, but any change in the thinking about whether or not to retain these businesses? Are they really a cross-sell, and perhaps they should be divested.

Well, this is Larry, Andrew. I'm not sure if your comment or question was really in regard to Specialty Benefits or Health.

I think both. I think both.

Let me just make a couple comments generally. Again, I think that we - - one of the reasons, quite frankly, Andrew, that we have come through the financial crisis in 2008 and 2009, in my opinion, better than many of our peers, is because the balance and the risk diversification that we have in our businesses. And one big element of that is the risk-based nature of those businesses. So I actually look at 2008 and 2009, and I think it was actually very beneficial for the organization to have those businesses and to have the relative stability of the operating earnings that they provided.

And I'm very, very much aware of that as we go forward, and I would be very concerned about anything that would tend to cause a loss in the diversification. Second thing is, obviously I think we continue to do a good job of managing it financially. Our ROEs remain above a 15% level which I think is a very, very strong performance. And third, I just say that any sort of sale that would result from those businesses, and I don't know why I would do that since I like the diversification and the return. But any sale that I would make of those would end up being a dilutive sale by the time I ended up paying taxes, losing the covariance benefits and then having to deal with orphaned overhead. So it doesn't seem to me, given the significance of those businesses to our SMB strategy that I can find very much reason to want to do that.

Got it. Thanks, Larry. And then just two or three quick stats. Just statutory operating and net income, and then any potential RBC charge coming on commercial mortgage loans. I know the NAIC is thinking about raising the charge on that, so just those stats.

Yes, I'm not sure if you were asking for first quarter, you wanted stat numbers. I assume you're asking for first quarter.

Correct.

As it is a relates to commercial mortgages, again, I would say we're studying that. We're obviously, we have a different view of that as do many of our peer companies in the ACLI, I think the significance of that would be around $250 million to $350 million. That's not insignificant, but again it's about 25 basis points to 35 basis points. I'll have Terry cover the statutory.

Yes, this is Terry. The statutory gain from operation was about $140 million as of first quarter, and the net income was about $59.4 million.

Perfect, thanks a lot.

Thanks, Andrew.

The next question will come from Jimmy Bhullar with JPMorgan.

Hi, thank you. I had a question first on your Health business. You did mention the seasonality and I was just trying to get an idea on how seasonally - - is this going to be similar to the first quarter of last year or is it going to be similar to how 2008 or 2007 looked in terms of earnings? What I mean is, in the first quarter of last year I think in the Health business about - - it accounted for about 84% of your earnings in 2009. And if you use that as - - guidance, then that would imply earnings of about $30 million this year in the Health business. So not sure if you can comment on that?

Second, I had a question on the 401K flows. Your commentary on the pipeline has been relatively positive for awhile. And the sales haven't really come through. So I was wondering if you could maybe speak about what is it that is causing people, clients to be reluctant who are in the pipeline, from actually just putting business towards Principal.

Okay, this is Larry, Jimmy. I guess I will start with your second one, I guess, and maybe we just - - maybe I just see it a little bit differently. But I think at $1.7 billion of sales in first quarter, I think that's a significant improvement. And it does reflect, I think all of the elements that we have been talking about over the last couple of quarters. As, again, we understand this business well, we get created pipeline that leads to opportunities, that leads to close ratios, that leads to business, that leads to transferred deposits.

So I think all the elements are working. And I think, again, t's just a matter of understanding this takes two to three-quarters. But I think at $1.7 billion that's a very, very solid result and does, I think, back up all the comments we've made. In terms of Health, I guess what I would say, maybe Dan will want to comment, but I would say you're not out of the ballpark with the estimate that you gave.

That's correct. That's probably a pretty good estimate. The other thing I would remind you of that we're doing in 2010 that we didn't necessarily execute on 2009 is the deployment of this network development. Again, that does take resources, it requires you to be on the ground in the markets that we've identified with personnel, working with doctors, working with hospitals, attaining the appropriate discounts, renegotiating with existing lease networks, and then some technology investments we're making to get ourselves up to speed on claims processing and data management.

And you mentioned the expected slowdown in the second quarter because of seasonality. But just to get an idea on what your flow expectations are, I think the past couple of years about half of your flows, roughly, in the 401K business have come in the first quarter. Is it reasonable to assume that the relationship won't be too different this year, or are you expecting a big ramp-up in the second half?

Well, this is Larry, Jimmy. I guess I would say that all that depends on your view of the economic recovery. And I think that in your view of when, particularly the SMB sector, is going to start to see recovery. And I think that the expectation would be, reasonable expectation, would be is it will probably be a little bit more of a back-loaded year. But that's, again, not based on anything other than I think a working assumption that the recovery will be somewhat slow and steady but will build over time, and, therefore, we will see continuing increases as each quarter goes forward. But we would see seasonally low sales in the second quarter, and we probably we would probably see it build a little more towards the end of 2010.

Oh, thank you.

The next question will come from Suneet Kamath with Sanford Bernstein.

Thank you and good morning. Wanted to focus on the FSA segment again. If I look at the revenue margins, and by that I mean the fees, the average Assets Under Management, it seems like we're continuing to see some downward pressure there. Based on my math it was 82, 83 basis points in the first quarter, versus 86 full-year 2009, and something in the 90 to 100 basis point range in prior years. So, can you provide any color in terms of what's going on there? And what are your expectations in terms of this margin going forward? Should we continue to expect it will gravitate downward, or is there the chance that it might build back up? And then I'll have a separate question.

Okay. Suneet this is Larry. I will make a more general comment, then maybe Terry can deal with the specifics. In terms of overall all ROA, I think if you did the math this quarter I think it's somewhere around 31 basis points, which is pretty consistent with I think, the general range that we've communicated, which is sort of, we'd say, somewhere in the range of 28 to 32 basis points. So I think, again, things would look to be very, very much along historical trend we'd expect. But I'll let Terry comment on your first part.

Yes, Suneet, this is Terry. As you look at the revenue as a percent of the account value you are seeing a change in the mix of the account value going from a few years ago it was low in terms of general account, which has a higher revenue per account value, and then you saw during the financial crisis more focus on that, and actually an increase, about a year ago, in terms of the general account as a percent of the account value. What you are seeing now as the economy is recovering, is that general account is actually declining as not only in terms of absolute dollars, but in terms of a percentage of the account value as well.

So those higher revenue dollars, coming from the general account type of investment, is declining as both a dollar amount as well as a percent. So that's contributing to that revenue decline as a percent of account value. Now that being said, there's less cost of providing the interest credited to them. So there's an offset in the benefit claims of settlement as well. So that gets down to the point where Larry had talked about is the return to profitability, even though you're seeing a decline in the revenue, you're seeing a decline in the expenses as well and improving the margin overall.

Okay. I'm just looking at page 35 of your supplement where you show the FSA Assets Under Management, and you show the general account. To be honest it looks like it's pretty close to $10 billion for the past several quarters, and even if I go back to 2008, 2009/2008, and 2007, you're still in the ballpark of $9 billion to $10 billion. So it that really the driver?

Yes, what you see, Suneet, Terry's point is that for example, a year ago it was $10 billion on 78, today it's about $9.8 billion on 100. So that's the point where it's declining as a percentage and declining in absolute amount. So that was really the point of his comment.

Okay. And then the second question on FSA goes back to something that Dan mentioned on the last call, which was some comments about aggressive pricing. And I think in particular, Dan, you called out one insurance company that's in the 401K business that took down some big jumbo cases with, I think you described as aggressive pricing. Has that moderated at all in the current quarter? Are you still seeing that pressure? Thanks.

Yes. This is Dan. I think that's correct. We're seeing what I would consider to be kind of a normal competitive environment. Always a lot of conversation around the competitiveness. As you know, there's some regs coming out here in May for employers and in the fall for participants. So fees will certainly be part of the discussion. And I would also say that as investment markets continue to return and our investment performance and our for example, Lifetime Funds has improved, our Fixed Income Funds performance has improved, it puts us in a more favorable position than it did, certainly a year ago.

Got it. So some of that activity that you talked about last quarter is kind of run its course?

I'm hopeful that that's true. Yes. We don't seem to be having the exact same pressure we did a quarter ago.

Great, thank you.

Thanks, Suneet.

The next question will come from Ed Spehar with Bank of America.

Thank you. Good morning. Just two quick questions. Larry, on FSA Fund flows, we have had periods in the past where fourth quarter flows have been, as a percent of assets, have been close to first quarter, below, but close. And I guess without pinpointing any specific number, given the flows in the first quarter, and given what you see in terms of the trends, is a reasonable guess still at this point that you can at least have a couple percent positive flows? For the year?

This is Larry, Ed. I didn't know, again, if you had a couple, but I would say - - again, I think that's in the range of reasonableness. Again, a lot of this will depend on the economic recovery building over time and the speed with which SMBs come back to the market. Advisers are coming back to the market. That's clearly happening. So, again, I think that's a reasonable expectation for 2010, yes.

Okay. And then on,Terry, on the comments you made about International, and the ROE guidance, it seems to suggest that you are going to end 2010 at an earnings level that's slightly below the first quarter, despite the earnings give up from the change in the JV ownership. And then grow earnings at sort of a 15%, 16% compound annual rate over the next couple of years. That sort of in the ballpark?

Actually, Ed, I'm going to have Norman Sorenson cover that since those are his businesses.

Ed, thanks. Basically the change in ownership (inaudible) entails going from 46% ownership to 25% ownership but it's our largest operation in Latin America. And therefore the ROE will be impacted the rest of the year.

So the second, third, and fourth quarter, mostly the third and fourth quarter, we will take about a $10 million to $12 million reduction in earnings. That will affect ROE, of course. ROE is expected to end around the 9% this year. The growth in the business, however, will be impacted by, positively, by the growth in the network. So the bank is acquiring another 5 million to 6 million customers to networking engagements and other acquisitions. So the growth of the business will recover to the 16% to 20% range.

I guess the question is overall, if I'm looking at that time equity for this business, I think it was around $1.3 billion, based on the numbers in the supplement at the end of the first quarter. Is that - - with the change in the owners what's going on with BrasilPrev? Do we need to adjust the equity at all or does that just build based on earnings expectations going forward?

Equity will continue to build around earnings expectations. The equity does not decrease on that level.

Okay, maybe one last quick one for Terry. Terry, on the RBC going from 426 to the estimated range of 440 to 450 in the 1Q, is that the kind of normal sequential movement we would expect to see for the balance of the year, everything else being equal?

Normal - - well - - there's a lot of moving parts, Ed, in RBC calculation, as you look forward, a lot of things can happen. But right now what we're seeing is that improvement from 425 to 440, 450 is because of the strong growth in the statutory capital. The risk-based capital basically offset. We had some drift, we had some sales, we had some freed up capital from the IO scale-back as well as organic growth, and they all kind of netted off to each other. So depending on what happens in the future, you expect to see 450 - - excuse me, 440 to 450 RBC later in the year as well. But a lot of things can happen as you build up the statutory surplus as well.

But wouldn't you expect the RBC ratio to continue to move upward considering the statutory earnings and realized losses expected to be sort of at the kind of level they were in the first quarter?

Exactly. That's why I'm saying the statutory earnings are going to improve throughout the year. You will have to see what happens on the organic growth as well as any drift, but we're not anticipating any drift. So you're absolutely right, you would expect to see it go up.

I think the 140 would be sort of normal expected, somewhere in the range of normal expected quarterly statutory earnings. So on that basis that would be - - that's, again, $140 million is about 14 basis points.

Ed, one more comment. We do have financial flexibility as well, and we have, as we pointed out, $1.8 billion of excess capital above a 350 RBC range, and moving that around the geography of it may have an impact on the RBC ratio as well, but it's more geography of that excess capital.

Okay, thank you very much.

Thanks, Ed.

The next question will come from Randy Binner with FBR.

Hi, thanks. I hope this isn't too redundant on Ed's questioning there. But as it relates to excess capital. To me the commentary from Larry was a little more open possibly to capital management. So I was just wondering if we should think about kind of a capital or cash buffer that you would want to keep at the Hold Co, and if you have an explicit RBC goal for year-end 2010?

Randy, this is Larry. I would say that there's no specific goal that we have for RBC for 2010. These things are managed in a real-time environment. But having said that I think that we're in a very, in my view, we're in a very favorable position on this. And as Terry just said, I think we have a lot of capital flexibility. Having said that I don't think that there's any senior management team or any board of directors that can come out of a set of years like 2008 and 2009 and not conclude that one of the learnings that you are going to have coming out of that is that you will probably be holding somewhat higher levels of capital going forward than you have in the past. And I think historically, what we've said is that we had sort of, in the old days a targeted level of excess capital, $400 million to $800 million.

You can think that the levels going forward will be somewhat higher than that. But at the same time, I don't know that would be $1.8 billion. But we still have a number of quarters, we've got to see an economic recovery that takes hold. We've got to see sort of stability in the drift, which we actually saw in the first quarter. And then finally what I would say is I think that so long as the four rating agencies all continue to have the US Life Insurance industry on a negative outlook, I think we'll need to see some changed views of the outlook going forward by the rating agencies in order to get them more comfortable around capital management as well. But it's sort of like the fed with their discussion of extended period. Maybe we're moving to where extended period is maybe not quite as extended as it used to be.

Understood. And just a couple of follow-ups there. More specifically with the comments earlier in the call on the NAIC proposal, or at least the proposal of a couple of states for the higher base rates on (inaudible) mortgages. The 25% to 35% you quoted, it seems a little bit higher than what some of the other companies are saying. Would that kind of take covariance and other offsets into play when you estimate the RBC impact of that potential change?

I think it just reflects a little bit higher level, percentage of commercial mortgages. But, Julia, do you have any comment?

Yes, when we calculated that that's a pretty blunt instrument. So that's why we have a pretty wide range. Right now, again, we want to reiterate, it's not decided that's what it's going to be. The industry is working closely with the NAIC on a different proposal, but that's why we gave the range.

All right. If I can do one more, Larry, with potential capital management, because you had a dividend that was higher before, is there any preference by the Board or yourself of dividend versus buyback if the economy does support that decision?

We've never had a particular view on that one way or another. The Board has never add a specific dividend policy, Randy. So, again, I think the Board will take a look at that later in the year and will take into account a lot of factors, what peer companies are doing, what the environment looks like, what our level of earnings has been in the meantime. But certainly this has been a good quarter. It's a very, very solid start to the year, as I indicated. And again so far, the business is emerging in line with or slightly better than what our expectations would have been. So I guess I will leave it there and see how the rest of the year goes.

Great. Thank you very much.

You bet.

The next question will come from John Nadel of Sterne, Agee.

Hi, good morning, everybody. Terry, I was hoping we could talk about items in the first quarter results that would you highlight as things we should not be expecting, and a run rate into second quarter. I know you touched in your remarks about Life and Health and Principal International and investment only. I was hoping could you also address the sustainability of the earnings in FSA and annuities. It appeared, and maybe you already touched on this in response to a question earlier on the mix shift in FSA. But - - in both FSA and annuities it looks like the benefits, expense and DAC amortization remain below what you have at least historically talked about as a long-term, sort of normal assumption.

John, this is Larry. You got a lot packed into that.

Well, how about let me - - are FSA and annuity earnings sustainable? How's that?

My view is that they are sustainable, assuming that market levels remain. But I'll have Terry comment on that.

Yes, John, this is Terry. As we look at the $0.79 of EPS for this quarter, and we attempted to normalize it by saying we took $0.03 off because of the investment-only business and a few favorable items there. We think that that $0.75, $0.76 is a real good run rate for a first quarter earnings number. Okay?

Okay.

We don't want to get into the point where you take that times four because there is seasonality of some of the businesses. For example, the Health businesses. As we talked about earlier, you are going see a decline in earnings, not necessarily a decline in earnings but less earnings in the last three-quarters that you do in the first quarter. You also, in the seasonality of our Group Life and our Dental business, that has seasonally lower earnings in the first quarter, and you should see some pickup in that throughout the year.

The investment-only business is scaling back and we're not going to go ahead and make any estimations of the opportunistic MT and buybacks that we've had in the first quarter so that you need to take into consideration. And as Norman mentioned earlier, the change in ownership in BrasilPrev will have more of an impact in the third and fourth quarter, more in that $10 million to $12 million range, and then half of that in the second quarter. So that kind of says that that 75, 76 normalized first quarter number will decline over the year. But at that time same time, Larry made a comment was, the operational leverage that we're seeing, the operational efficiency that we're seeing in the Full-Service accumulation business and the other accumulation businesses such as PGI as well. You are going to see that continue as the market moves up, the revenues increase, will not see expenses grow as fast as revenue growth.

Okay. That's really helpful. And then just a quick data point and follow-up to Ed and Randy's question on RBC. I assume in the move from 426 to an estimated 440 to 450 that there was no dividend from the Life Company to the Holding Company during 1Q. Do you expect any dividends during the remainder of the year or is your cash balance at the Holding Company sufficient?

Yes, John, this is Terry. The cash balance that we have at the Holding Company is sufficient, as you know. We have very little need for cash at the Holding Company. We have our debt as well as our preferred shares and any common stock dividends that we do year end. We don't have a maturity of any debt until 2014. So little need for it.

But we do have the capability and we do have the flexibility to move over $600 million out of the Life Company to the Holding Company. And we just to have to determine what is the best place for that, what is the best use for that capital. But we do have that flexibility between now and the end of the year. You are absolutely right, we didn't do anything in the first quarter in terms of dividend or return of any distributions.

So is it fair to say then, Terry, that you might decide to take a dividend out of the Life Company despite not necessarily needing that cash at the Holding Company, just because if you go through this whole year and you don't you lose that opportunity?

That's absolutely right, because it does give us that financial flexibility to have it in the Holding Company (duplicate speakers) and the Life Company. And as you know, we he do have limitations as to how much we can move out of the Life Company in a given year.

Got it. Okay, thank you.

The next question will come from Tom Gallagher with Credit Suisse.

Good morning. My two questions are, first, on FSA net flows. Do you expect the normal seasonality, just between 1Q and 2Q that we've been seeing for the last two or three years that as about - - a little more than a $1billion reduction of net flows sequentially? Or is there something different about this cycle because you might be seeing more of a cyclical improvement? That's my first question.

Second question, for Terry, on the full-service accumulation income statement. Are the revenues on the general account product just net investment income, or do you also earn fees there? And then I will have follow-up on that.

Okay. Well, I guess on the first one, what I would say, Dan may want to comment. But I think you would want a line up generally normal historical trends around net flows, Tom, between 1Q and 2Q. The only thing that could be maybe a slight positive helping those is that, again, we saw some drop-off in recurring deposits last year as a result of primarily reduced or eliminated matches. Those have come back to some degree in 4Q and to some degree in 1Q. So, again, a little bit of it will depend on how much additional lift we get from matches that have been suspended or eliminated in 2009, but they will be restored coming into 2010. We still haven't seen the full impact of that. But I think that covers flows and maybe Terry can cover the second question.

Tom, this is Terry. You are generally right that the revenue off of the general account is typically the net investment income. There is some through pricing. There are some fees, but they're very, very minor. And so for all intents and purposes you are absolutely right.

Okay, and then, Terry, just a follow-up. And I realize you may not have an explicit number so general would be great. The after-tax ROA you think you're making on the general account, would it be substantially higher than your 28 to 32 basis points? And understanding there's obviously going to be capital you need to hold. But can you give me order of magnitude what kind of ROA you think you make on that particular offering?

Sure,Tom, this is Terry. You are absolutely right this is more risk associated with the general account, and so you would expect higher ROA on it. The order of magnitude is you are looking at, oh, 60 to 75 basis points of after-tax profitability on that type of business versus a mutual fund which doesn't have as much risk associated with it, and therefore little - - less capital need as well.

And the only cleanup, Tom, I would do on that however, is remember that from an ROE perspective the general account wouldn't be - - wouldn't have as high of ROE as it does when it's in separate accounts. The other thing I would say is obviously there's much more free cash flow coming off of it when it's in separate accounts. So, it's really a trade-off of somewhat higher revenue in what appears to be somewhat higher margins for a lower ROE and less free cash flow. So those are the kind of trade-offs that are involved.

Understood, thanks.

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

Well thank you again to all of you for joining us. And we appreciate your continuing interest. We are going to stay very, very focused on execution in the coming months. Again, we are very pleased, we have a strong start to 2010 but we know there remains many challenges, and we look forward to seeing many of you in person over the coming months. Thanks for your ongoing support.

Thank you for participating in today's conference call. This call will be available for replay beginning at approximately 8:00 pm Eastern time until end of day May 18, 2010, 66747663 is the access code for the replay. The number to dial for the replay is 800-642-1687 for the US and Canadian callers, or 706-645-9291 for international callers. Thank you. You may now disconnect.