美國信安金融集團 (PFG) 2010 Q4 法說會逐字稿

Good morning and welcome to The Principal Financial Group fourth-quarter financial results conference call. There will be a question-and-answer period after the speakers have completed their prepared remarks.

(Operator Instructions). I'd now like to turn the call over to Mr. John Egan, Vice President of Investor Relations.

Thank you and good morning. Welcome to The Principal Financial Group's fourth-quarter and full year earnings conference call. As always, our earnings release, financial supplement and additional investment portfolio detail are available 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'll open up call for questions.

Others available for the Q&A are Dan Houston, Retirement and Investor Services and US Insurance Solutions; Jim McCaughan, Principal Global Investors; Norman Sorensen, Principal International; 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.

Risk and uncertainties that could cause actual results to differ materially from those expressed or implied are discussed in the Company's most recent annual report on Form 10-K and quarterly report on Form 10-Q filed by the Company with the Securities and Exchange Commission. I would like to now turn the call over to Larry.

Thanks, John, and welcome to everyone on the call. This morning I will comment on three areas; first, I want to discuss fourth-quarter and full-year 2010 results. Second, I will provide an update on our capital management plans. And finally, I will talk about the longer-term opportunities of our strategy. Terry will then cover financial results in more detail following my comments.

As we talked about at our Investor Day in December, we remain well positioned for the unprecedented opportunities for long-term growth both in the US and in key emerging international markets. We remain convinced that our strategies are the right ones to capitalize on these opportunities and fourth-quarter results validate that based on the continued signs of growth across our businesses. As to fourth quarter, we are pleased with the operating earnings given the accounting noise that Terry will discuss, and we see increasing momentum in sales and flows as we mentioned on the last call.

Items of note for the quarter are record total Company assets under management of $319 billion, including record assets under management and record net cash flows for Principal International, record sales for Principal funds and strong Full Service Accumulation sales results with good momentum heading into 2011 and double-digit earnings growth on a combined basis for our high-growth segments, Retirement and Investor Services Accumulation businesses, Principal Global Investors and Principal International.

These results come in spite of an economic recovery that remains challenged, especially for the small/medium business sector with slow employment growth and constrained credit conditions. Our broad distribution footprint, best-in-class solutions and operational discipline have allowed us to return to something closer to a normal operating environment despite the economic challenges.

I would like to discuss full-year results in more detail as they better highlight key trends as well as indicators of what to expect going forward. Let me first discuss the sales and growth metrics for 2010.

First, as mentioned earlier, record total Company assets under management of $319 billion which gives us positive momentum heading into 2011. Full Service Accumulation sales of $6.6 billion, up 32% and net cash flow of $600 million against an industry still in outflow.

Record mutual fund sales of $9.3 billion up 21% from 2009. Principal International deposits of $25.8 billion helped generate record net cash flow of $4.7 billion, driving assets under management to a record $45.8 billion.

Fee revenue for Principal Global Investors of $467 million, up 9% over 2009 with solid investment performance across all asset classes. Individual Life sales up 21% over 2009 driven by an 81% increase in life insurance solutions focused on the SMB and business owner market.

In short, we saw momentum building across the growth metrics for our businesses during 2010 with a strong finish in fourth quarter, giving us an optimistic tone as we move into 2011. Next, let me discuss operating earnings results for our businesses in 2010.

Total Company operating earnings were $845 million, a 15% increase over 2009. This reflects the growth metrics beginning to come through along with our continuing expense discipline which creates operational leverage.

Full Service Accumulation earnings up $301 million, up 19% over 2009. Mutual fund earnings of $40 million, up 70% over 2009.

Record individual annuity operating earnings of $119 million, up 18% over 2009. Record earnings from Principal International of $137 million, up 15% over 2009 despite the negative impact of the reduced ownership in BrasilPrev, our Brazilian joint venture, as of June 2010.

Principal Global Investors operating earnings of $59 million, up 53% over 2009. US insurance Solutions operating earnings of $194 million, down 5% from 2009 but continuing to provide solid diversification to our earnings streams.

So as we look back at 2010 and think about how that positions us for 2011, we see a tightly integrated set of businesses. Our hybrid business model of asset management and risk products in US and emerging international markets is performing well as good momentum and exceptional long-term growth prospects even in an economy that continues to be challenged. Now let me move on to capital management starting with our investment portfolio.

Our portfolio performed well in 2010 with losses coming in lower than our beginning of the year expectations due to ongoing recovery in corporate credit and commercial real estate. Regarding CMBS, as we said at investor day, we expect delinquencies to continue to rise in 2011.

However, our accounting processes require that we impair the securities whenever losses are anticipated which is often 12 to 18 months before the actual bond losses occur. We monitor this portfolio closely and the losses continue to be within our expected range overall.

We expect CMBS related impairments to be approximately $25 million after tax lower in 2011 than 2010. In short, this is an improving picture.

Now let me touch on capital. As of year-end, we have approximately $1.6 billion in excess capital which we are defining as capital above that needed for a 350% risk-based capital ratio. As we mentioned in the last call, regulators continue to review capital standards and reserving methods coming out of the financial crisis.

So we have been cautious in expressing a timeframe for deploying the excess capital. Just before year-end, the NAIC released their capital requirements for CMBS portfolios using Blackrock's model.

This change reduced excess capital by approximately $250 million in the short term. In the longer term, we continue to believe that our portfolio will perform to our expectations and that our earnings and net income will remain strong.

Therefore, we still expect to be able to deploy approximately $700 million of capital over the next 12 months for appropriate merger and acquisition and share buyback while still retaining our desired capital cushion. We will be disciplined as we deploy this as well as continue to keep our eyes open, looking for further accounting or regulatory changes that could have an impact.

Let me close by reiterating a few key points from our investor day as well as discuss the longer-term opportunities that we continue to make good progress with. First as we mentioned at Investor Day, we've taken a number of steps to further de-risk our businesses including getting out of the CMBS securitization business, winding down our medical business and reducing our investment-only business.

These decisions not only create a remaining set of transparent and integrated businesses, but they create meaningfully larger amounts of free cash flow and higher return on equity over time. With our current business profile, we expect that approximately 65% of operating earnings can be used for merger and acquisition or return to shareholders.

And we remain confident in our ability to achieve 50 to 80 basis points improvement in overall Company return on equity annually, growing to a return on equity above 15% over time. This is the power of our hybrid business model with purposeful diversification.

2010 was another year of good success in implementing our long-term global strategy, with an example being our entry into the mutual fund markets in Thailand and Indonesia. The need for US workers to save for their retirement is real and the growth of a middle income class of investors in emerging markets over the next 25 years is undeniable.

Thus we see continuing growth and improved operating earnings from our key growth engines. Retirement and Investor Services Accumulation businesses, Principal International and Principal Global Investors on a sustained basis for decades. This is the right strategy for long-term success and the fact that we have had this strategy in place for over 10 years gives us a substantial lead over others who have now begun to focus on these opportunities. I am proud of our effort and accomplishments in 2010 and am excited about the long-term value for shareholders that we are creating.

Before I turn the call over to Terry, I want to point out three nice recognitions for this quarter. The Principal was ranked number 159 on Newsweek's Green Rankings, an exclusive list of America's 500 largest companies assessed on their environmental impact and reputation among environmental experts.

This is the second year The Principal has made the list. I'm very proud of this recognition of our sustainability efforts.

As another example of our efforts, Principal Real Estate Investors continues to gain recognition as a leader in the development of green real estate. Additionally this quarter, Principal Global Investors became a signatory for the United Nations backed Principles for Responsible Investment.

Signatories commit to considering the six principles of responsible investment related to environmental, social and corporate governance issues in the course of doing business. It is The Principal way to conduct business with integrity, so our signatory status is a natural extension of our core values and further reflects our commitment to responsible global citizenship.

And finally, I want to mention the recognition that Principal Funds received from Baron's over the weekend. Principal Funds finished third in the rankings of Best Fund Families for 2010 and also finished as the seventh best fund family for the past 10 years.

These are powerful recognitions for Principal Funds and are the result of their asset management discipline and retirement expertise. This recognition will provide even further momentum on top of the strong year that Principal Funds had in 2010. Terry?

Thanks, Larry. This morning I will focus on operating earnings for the quarter and full year, including continued strong expense management, net income including continued solid performance in the investment portfolio and the strength of our capital position and strong balance sheet as we enter 2011.

We view the fourth quarter and full-year 2010 as a continuation of an improving picture that began earlier in 2010. We continue to see positive trends in our businesses and as Larry said, we are excited about the growth opportunities in 2011 and beyond.

Starting with total Company results, most notably for the year, we finished 2010 with a record assets under management. At $319 billion, our assets under management exceed our pre-crisis high through positive net cash flows despite volatile investment performance. Total Company earnings improved 15% to $845 million for 2010 on 14% higher average assets under management.

There were a number of items influencing comparability between the full-year periods. Some of the bigger items include the reduced economic interest in our BrasilPrev joint venture as of June 1, the scaleback of our investment-only business and the impact of the equity markets on deferred acquisition cost amortization expense and the assumption changes on net GAAP reserves. On an adjusted basis, full-year earnings were up 27% on a 14% increase in average assets under management compared to 2009, a very solid result reflecting strong operational leverage.

Fourth-quarter 2010 operating earnings were up 5% to $214 million or $0.66 per share compared to a year ago. This result was negatively impacted by $0.04 due to an increase in net reserves in individual life following a periodic long-term interest rate assumption review.

Adjusting for this item, the run rate of earnings for the quarter is $0.70. DAC amortization expense benefited from the favorable equity markets during the quarter but these benefits were offset by the impact of lower future fees in our Mexican pension business.

Now let me discuss the business unit results. Retirement and Investor Services earnings were up 21% in the fourth quarter and 14% for the full-year 2010 compared to the respective periods in 2009.

Full-year 2009 results benefited from $17 million in additional after-tax fee income from the opportunistic early settlement of investment-only liabilities. Adjusting for this, operating earnings for 2010 are up 18% on 10% higher average account values, again reflecting strong expense management.

The Accumulation businesses had record account values of $160 billion at year-end. Full Service Accumulation's fourth-quarter 2010 operating earnings were up 13% from a year ago quarter on a 10% increase in average account values. Sales in the fourth quarter were very strong at $3.2 billion which put total Full Service Accumulation sales for the year at $6.6 billion, a 32% increase over prior year.

As Larry mentioned earlier, we ended the year with positive net cash flows of $600 million compared to the negative cash flows projected for the industry by Cerulli. In the fourth quarter we satisfied all of the withdrawal requests in The Principal US Property separate account causing our plan count to decline by more than 1400.

In addition there were several economic factors contributing to the negative plan count trend as we have seen over the last two years. The economic pressures that small to medium-sized businesses are facing played a big part in the overall decline. We saw 50% fewer startups which is consistent with the industry and 20% higher plan terminations as employers eliminate their retirement plans.

We continue to maintain pricing discipline to protect margins. And we have taken additional steps over the last several quarters to offset this negative trend in plan count, including enhanced internal processes to better identify, predict and retain at-risk clients; an intensified focus on unbundled solutions through third-party administrator distribution platforms to attract and retain business.

This complements our Total Retirement suite bundled solution. And choice pricing rollout, allowing clients the ability to tailor service models and pricing to better meet their unique needs. And the overall plan count is down, Full Service Accumulation average account values, which drives revenue growth, is up 16% over 2009.

Principal Funds continues to demonstrate its strong growth potential. Operating earnings in the fourth quarter were up 24% to $11 million on a 15% increase in average account values.

Principal Funds also delivered record sales of $2.6 billion in the fourth quarter and a record $1.6 billion in net cash flow for the year, helping drive account values to $36 billion at year-end. We continue to see success through all of our distribution channels and a broad array of fund offerings.

Individual annuity earnings were $33 million for the fourth quarter, up 37% compared to the year ago quarter on 7% higher average account values. This primarily reflects strong investment income performance in the quarter including higher asset free payment fee income.

Earnings from Principal Global Investors improved 51% for the quarter to $19 million and 53% for the full year to $59 million compared to the respective periods in 2009. The improvement reflects higher average assets under management, strong expense management and an increase in transaction fees which continue to trend up.

Solid investment performance resulted in higher performance fees as well. Principal Global Investors lost a long-only sector equity mandate of $1.3 billion, contributing to unaffiliated outflows of $900 million for the fourth quarter.

This was offset by more than $900 million in new real estate mandates in the quarter. Though we are disappointed in the loss, the fees from the mandate were low. Since new inflows to real estate and international equities are on much higher fees, we saw increased revenue from fourth quarter flows.

Investment performance continues to be good. More than 90% of our asset allocation options rank in the top half of their peer group on a one-year basis.

We continue to be optimistic as we look into 2011 and see increased searches in specialized investment options where we have expertise such as real estate, currency, high yield and international equities. Moving to Principal International, operating earnings were down 22% to $31 million for the quarter and up 15% to a record $137 million for the year compared to their respective periods in 2009.

Fourth-quarter and full-year 2009 results include higher economic interest in our Brazilian joint venture, BrasilPrev. Fourth-quarter 2010 results were also reduced by the impact of DAC amortization adjustments for lower future fees in our Mexican pension business.

Adjusting for these items, inflation in Latin America and foreign exchange, operating earnings were up 18% this quarter over a year ago quarter. Principal International finished the year with a record reported assets under management of $46 billion, up $11 billion or 32% from year-end 2009 on record net cash flows of $4.7 billion for the full year.

A reminder that our assets under management of our Chinese asset management joint venture were up 15% during 2010 to $6.9 billion and are not included in the reported assets under management. Our partnership with Banco do Brasil continues to prosper as we see growth in assets under management and cash flows in this business in excess of 35% annually.

US Insurance Solutions operating earnings decreased 7% to $52 million for the quarter and were down 5% to $194 million for the year compared to their respective periods in 2009. Individual life had operating earnings of $22 million compared to $31 million in the year ago quarter. The shortfall primarily reflects a one-time increase in net reserves following a periodic long-term interest rate assumption review.

Other impacts such as a strong equity market performance offset some of the decline. On a combined basis, run rate earnings were reduced by $11 million after-tax. The run rate for individual life operating earnings remains at $30 million to $32 million per quarter.

Turning to specialty benefits, operating earnings were $30 million for the fourth quarter 2010 compared to $26 million in the prior year quarter. This increase was largely due to better claims experience and improved investment income.

Overall, sales were good for the quarter, up 50% over the year ago quarter due to increases across all products particularly in the group lines which faced intense headwinds in fourth quarter 2009. We saw growth in membership, particularly in the second half of the year with in-group membership up in the fourth quarter for the first time since first-quarter 2008 and overall membership up for the second straight quarter.

Premium and fees also grew for the third straight quarter. The corporate segment had operating losses of $39 million in the fourth quarter compared to a loss of $30 million in the year ago quarter.

As a reminder, corporate expenses include corporate debt, preferred stock dividends and overhead previously allocated to the health division. As we manage down corporate overhead expenses over the next 12 to 18 months, we anticipate the corporate operating losses to decrease over time. We expect full-year 2011 operating losses for the corporate segment to be approximately $120 million.

Total Company net income was up 40% this quarter to $199 million and up 13% to $666 million for the year compared to their respective periods in 2009. After-tax net realized capital losses continued to trend lower at $37 million in fourth quarter compared to $59 million in the year ago quarter.

We continued to see a pattern of improvement in credit related losses. We also continued to see sequential improvement in commercial mortgage whole loan losses while CMBS losses continue to be manageable. Our investment portfolio performance continues to reflect the benefit of broad asset diversification.

Quickly looking at other financial metrics, book value per share excluding AOCI ended the quarter at a record $27.82, up 6% from a year ago quarter. At $900 million in net realized capital gains, we were up $2.3 billion from fourth quarter 2009 and down $600 million from last quarter.

During the quarter we had a $600 million gain due to the tightening of credit spreads offset by $1.2 billion of losses from the impact of rising interest rates. Let me remind you that the change in net unrealized gain or loss due to interest rate movement does not have an economic impact because of our strong asset liability management.

Additionally, our debt to capital ratio is 15%. The strength of our balance sheet reflects the ongoing improvement in credit markets as the US economy rebuilds.

Moving to capital adequacy, as of quarter-end, we estimate our risk-based capital ratio to be 420%. Relative to a 350% RBC ratio, we have approximately $1.6 billion of total excess capital split roughly even between the life company and the holding company.

Total excess capital in the quarter was impacted by our dividend payout and the NAIC year-end review of CMBS portfolios. The year-end RBC ratio was negatively impacted by approximately 25 points due to this change.

Our moderate risk scenario reflects the improvement in the CMBS market and our expected losses have actually improved. However, the negative impact of the RBC ratio is one of the reasons we are committed to holding a higher component of excess capital as cushion to absorb some of these capital changes.

We have a very strong enterprise risk management framework and are focused on the future as we examine potential regulatory and accounting proposals. As we said at Investor Day, even with our additional capital cushion, we still plan to deploy approximately $700 million of capital over the next 12 months for appropriate M&A and share buybacks.

Our hybrid business model gives us the opportunity to continue to generate deployable free cash flow throughout the year. All four of the rating agencies now have the life insurance industry on stable outlook.

With improving market fundamentals, a business model that requires less capital to support organic growth, and our ability to generate free cash flow, we have enhanced our ability to increase shareholder value over time through strategic capital redeployment. We are excited about the financial flexibility our balance sheet gives us in 2011 and beyond.

We're very pleased with our results in 2010. While many of the challenges of the slow economic recovery persist, we are building momentum and are excited about the increasing signs of growth in our businesses. This concludes our prepared remarks. Operator, please open the call for questions.

(Operator Instructions) John Nadel, Sterne Agee and Leach.

I have two questions for you. Terry, just following up on the comment on the $700 million of capital deployment, just want to clarify that that is in addition to common dividends and interest expense on your debt, so that we should be thinking about that as true return of capital.

Yes, John, this is Terry. Yes, you are absolutely right. That is in addition.

Okay, and then I was hoping we could just get an update on the pipeline when you are thinking about Full Service Accumulation. Maybe you can throw Principal Global and Principal International into that as well.

And specifically, I guess I'm interested in your views on first-quarter sales outlook in FSA. Historically that has been seasonally your best sales quarter and I'm just wondering given the strength of fourth quarter 2010 sales whether that pulled something forward.

Sure, John, good morning, this is Larry. What I think I'll do if it's okay is have Dan comment a little bit on his thoughts relative to FSA, have Norman talk just a minute about PI and have Jim talk just a minute about PGI. So we will start with Dan.

Thanks, Larry. John, good momentum leaving Q4 going into Q1. If we just look at that created pipeline which we've talked about in previous calls at the end of 2010, that number is up about 20% from where it was the previous year. So again, we've got a lot of good opportunities and our close rate continues to tick up in Q4 and lead us right into hopefully a very strong first quarter of 2011.

ESOPs and defined benefits seem to be coming back in terms of being part of our discussions with our Total Retirement Solutions products. And again, those were two products that were pretty flat over the course of 2010.

Norman?

With January behind us, the January sales in the Company were very, very strong. Brazil for example doubled sales in January from January of 2009, Asia is pulling together as well. Our deposits and net cash flows are increasing as they were in fourth quarter. So we estimate a fairly interesting first quarter.

Jim?

On the institutional market, we are seeing very good command and a lot of conversations about real estate, about US commercial real estate, about international equities. The investors are much less keen on US equities and there are very good allocations to international equities particularly emerging.

We're seeing interest in our currency product and in some of the high-yield products, notably high-yield and preferred securities. So the demand is moving towards the higher added value specialty products.

I don't want to deduce from one quarter where we lost that one large mandate on a very low fee, but it looks to us as if many investors, many institutional investors are cutting out these large lower added value businesses and going for the specialty higher added value mandates which actually suits us with our multi-boutique strategy.

Okay, that's awesome. Thank you for the color. I appreciate it.

You bet.

Nigel Dally, Morgan Stanley.

On the excess capital deterioration that you saw this quarter, in particular the hit from the Blackrock modeling of required capital, what was it about your holdings that drove such a large charge? We haven't seen similar hits at other companies, so perhaps you can provide some additional color there.

Also with the $700 million of capital earmarked for M&A and buybacks this year, if you don't find any M&A opportunities, should we expect a full $700 million to be applied to buybacks? And perhaps you can discuss the likely timing as to when you'd like to start your buyback program. Is there anything in particular that's leading you to hold back from buying back currently? Thanks.

OK, Nigel. I will maybe take the first one and then kick it over to Julia to talk a little bit about the Blackrock modeling. Certainly as we had said, we think there's somewhere around $700 million over the next 12 months that's deployable relative to M&A and/or do share buybacks.

Having said that, we also commented that we're a little bit cautious relative to what seems to be an ongoing parade of sort of capital, regulatory and accounting changes. And we certainly have seen this in the banking sector and we've started to see it in insurance sector albeit there's a bit less of it than there has been.

So I think that common sense would indicate that while I think some level of usage of that 700 could start in the first half of the year, I also think it's likely that we'll want to be slightly cautious and conservative. So we certainly wouldn't plan to have all of that or necessarily even the majority of that in the first half of the year.

It's likely to be more toward the back half as hopefully the economic picture improves. And I'll have Julia talk a bit about why our portfolio was impacted a little bit more.

Good morning, Nigel. Yes, the Blackrock model tended to impact the originally rated AA and A tranches of the CMBS CUSIPS.

So basically they had some severe scenarios that took cumulative losses up through those AA originally rated bonds. Now if you had more AA's and A's going into this, it would impact your portfolio more, and we did. Those bonds however under other rating scenarios are currently still rated anywhere from BBB to BB. So other rating agencies including ourselves are not rating them as severely as this model is.

Okay, very good. Thank

This is Larry. I'd make two additional comments. One is that as Julia said, the Blackrock scenarios are fairly draconian.

So for example, they still have about a 25% probability -- in the range of scenarios, they still attach about a 25% probability that we will actually see a second double dip as it relates to commercial real estate. And I think most folks would say that is becoming increasingly less likely.

The other point I would just make on this is that that is a snapshot as of 12/31 and we have already started to see some of the pricing in the marketplace improve fairly substantially on those securities. So again, we've seen quite a rally already. Whether that holds and over what period of time that 250 comes back is yet to be determined, but just recognize that sort of in our view, that 250 is likely to come back over time.

Okay, very good. Thank you.

Jim Bhullar, JPMorgan.

Larry, you've mentioned the deposits. Obviously they were pretty strong. But I wanted to see if you could talk about withdrawals in both the FSA and asset management businesses increasing this quarter, and what's really driving that, whether that's some competition, and also what caused the loss of the large account you mentioned in PGI. And then secondly, longer term, do you see an impact on your business from a few of the changing rules in the 401(k) market like higher fee disclosure or the new fiduciary standards for distributors?

Okay, thanks, Jimmy, appreciate the questions. Let me just sort of set the context and then I can have Dan talk for just a minute about the FSA withdrawals as well as the regulatory changes and Jim can address PGI.

But as we have seen in prior quarters, when the S&P is up substantially during the quarter, it always tends to put pressure on net cash flows. And just as a reminder, we saw the S&P up 10% in the third quarter and we saw the S&P up 12% in the fourth quarter.

So the nature of that or contract withdrawals tend to be processed toward the end of the quarter if not on the actual end of quarter date, you'll get the full reflection of that on the payout side and you don't necessarily have that on the deposit side. So just kind of understanding that in periods when the market is up substantially, it will pinch net cash flow, and obviously the reverse when the market goes the other way. Having said that, we don't think there's a systemic problem in FSA. I will let Dan talk a little bit more about that and then we will shift to Jim for the PGI question.

Very good. Thanks, Larry. Jimmy, a couple of quick comments. When we look at those withdrawals, we have dug into the gory details and it's around our emerging and dynamic segment, it's not our institutional division. We've identified specific clients and some of it is a little bit of a hangover from the recent RESA queue with both the advisor community as well as with some of those clients.

We've also been very aggressive rolling out our TPA solutions for those clients who want local third-party administrative services. And then if you take it down one more level of detail, you find out that there were a couple of defined benefit cases that had terminated and one ESOP that flat out went out of existence and those three cases were a fairly significant impact on the withdrawals.

As it relates to your question on fee disclosure and fiduciary standards, we are on it and we have been in active conversations in the debate with the Department of Labor. As you know this summer, there will be disclosure requirements for plan sponsors that still frankly are influx and no final decisions are yet made.

And then the participant piece comes at year-end. We're fully prepared to do that. We're making the necessary systems adjustments. It does level the playing field.

There's no one that's going to be held out as an uncompetitive -- and I would tell you given the fact that we have got our group annuity contract as well as our registered product, we would probably have as much flexibility as any 401(k) provider out there, and I would also pile on top of that to say, as you know, about 65% of our business is Total Retirement Solutions.

So it really is a more consultative discussion around their DB, their DC, their non-qualified in their ESOP. The other issue that's open right now is around fiduciary standard. Today we do help our plan sponsors in giving them choices for their investment options.

The question becomes will they have to be more self-serve on that score and work more closely with their advisor, and they're advisor becomes in fact a fiduciary to the plan in the helping and the picking and the choosing of those investment options. And again, I would tell you that we have active conversations going on in Washington to debate the merits and the extent by which these fiduciary standards are going to be levied across 401(k) service providers. Hopefully that helps.

Jimmy, thanks. On the $1.3 billion lost mandate, that was a broad sector exposure for one of the world's top 10 investors. It had been in place for about four or five years.

It had performed in accordance with what they wanted. They were happy, but they decided to move away from that sector in terms of a broad exposure.

As far as we are concerned, it was only on a 15 basis points fee which befits such a very large mandate. It's one of those interesting things in the institutional business, institutional asset managers tend to have on average something like 40 to 45 basis points as their average fee.

But we're seeing with the changing mix of business quite a lot of range around that, and obviously a 15 basis point fee even on over $1 billion is a lot less attractive than the type of business that Terry referred to in real estate and international equities where the typical fees are more like 50, 60, 70 basis points.

It's that change of mix, modest change of mix which is why the flows in the quarter even though they saw a capital outflow actually saw incremental revenue so far as we are concerned. And I think looking forward, obviously we don't want to lose assets, we want to gain assets too. But it's more important that we gain revenues. So thanks for the question, Jimmy.

Okay, thanks, and if I could just ask one more from Terry. In the $0.70 run rate number that you mentioned for earnings, you didn't indicate anything being abnormal in the group benefits business, so I was just wondering if the $30.2 million that you reported in the specialty benefits segment, is that a normal run rate that we should expect going forward or -- ? It seemed like the benefits ratio was the best that it has been since the middle of '06 or

Yes, Jimmy, this is Terry. You're absolutely right. I think the $0.70 run rate is an appropriate rate for this quarter.

The only item that we really called out was the increase in the life reserve and that was about $0.04 from the reported basis. The other items kind of offset each other.

But on the group business, you're absolutely right. The fourth quarter was a better quarter and there's typically a little bit of seasonality associated with that, the fourth quarter being the best quarter. First quarter might have a little bit higher dental claims, but I think that's an appropriate run rate for this quarter.

Randy Binner, FBR Capital Markets.

Just a couple of follow-ups on the excess capital questions. I guess just back to the Blackrock study, appreciate all the commentary so far, but is that kind of the final answer from Blackrock and the NAIC or is this still something that can be debated since it's a relatively new test?

It's Larry again. I would say that this is sort of like a baseball game. So we just played first inning and again, we had known that this was coming, we didn't know what it was going to mean again until sort of late December. And while they had done some sort of preliminary interaction if you will with the companies, it was very, very late before they finally said okay, so here are the scenarios and here's how you apply them. I do think that there will be more iterations of this. So there again just like a baseball game, there will be more innings and it will change a little bit over time, but let me have Julia comment a little further.

Yes, I think, Randy, that for 2010 it is likely that that is the results we're going to see, but we continue to be in communication with the NAIC on our views around more transparency around the scenarios, the impact to certain CUSIPs etc. So I do believe we're going to have a lot more communication going for 2011 and the impact for 2011. I think it will be more positive.

Okay, thank you. And then just hitting excess capital in another direction with FSOC just wondering since we last discussed it at the Investor Day in December, if there is anything substantive that came out of the first round of documents out from FSOC, we found them to be pretty inconclusive. But wondering if you get anything there or the NYU study that came out that might affect your excess capital thoughts, specifically quantitatively.

Thanks, Randy. That is a good question and it is one of the things that we do have our eye on. So maybe just to make a couple comments around FSOC, as you know, they have begun a rulemaking process to further flesh out what would be so-called systemically important financial institutions, and they've mentioned that I think there are approximately six criteria that they use in that determination.

There has also been the NYU study that was done, and I think out of sort of 10 names that were in there, there was about four that were insurance companies. We've begun an active dialogue on two fronts, not to take you through all the gory details.

But one is to begin or to at least consider how we can have more interaction with sort of the folks at NYU since it appears they're working under some arrangement with FSOC to have more dialogue with them to sort of explain methodologies that we think make more sense. That would be one point.

Second point would be that as it sits right now, I think there's something like 13 members under Dodd-Frank on FSOC and three of those if you will are allocated to the insurance side of the business. Unfortunately today, only one of those three is actually named and in the seat and actually taking part in the discussions.

Two of those have not yet been filled. So we are also working hard to make sure that we get those two seats filled so that the discussion going forward can actually involve a greater level of expertise from the insurance industry relative to what systemically important really means. So again, a lot more to come.

It is one of the reasons we're a little bit cautious where we're not only just watching it very carefully, but we are very, very fully engaged in that discussion and we're going to do everything we can along with the industry to guide that going forward.

And then just one more. I guess the bottom line is though I think as investors, we should all plan to think of you as being included in FSOC? Is that fair just to be conservative?

I wouldn't draw that conclusion just yet. I think again what it comes down to is this elusive concept of interconnectedness.

I think that is of the criteria that FSOC laid out. I think it is the interconnectedness one that will probably be the one criteria that's going to be more significant than others.

I think if you think about just generally speaking across financial services where does there tend to be more interconnectedness, I think that ends up being more in the banking industry and in some of the Wall Street securities firms I think tend to be have much higher levels of interconnectedness than the insurance industry. So that would be my feeling at this point.

Steven Schwartz, Raymond James.

Most of my questions are answered. I do have a question though with regards to unbundling.

As long as I have been covering the Company, the story here has been really Total Retirement Solutions, TRS, and seemed to be less of that at least in the prepared remarks, more about unbundling. I was just wondering if you were seeing some type of sea change in the business.

Yes, Steve, good question. I will have Dan comment.

My kind of overview on that would be is that if you think about TRS, what TRS does is of course it creates a stickier model. But what TRS does is it drives assets.

TRS tends to be a concept that has more appeal across the sort of middle sized and larger sized clients. So we have profiled and continue to talk about TRS and again in fourth quarter, I think 69% of our sales at that $3.1 billion were on TRS.

So, what TRS does is it drives assets. The reason you've heard us talk a little more recently about some of the activities around TPA and unbundling is because that has more implications relative to case count. So as people have talked about case count and what are you doing around case count, part of the answer to that has been the TPA.

So it's a little bit of a question of sort of what metric are you talking about. So that's sort of my take and I'll let Dan comment further.

Yes, sure. The other item I might add is that they're not mutually exclusive. Our TRS clients could either be a bundled solution or through one of our third-party administrative partners.

And so again, that's a pretty powerful tool if I'm a local TPA and I have the benefit of tapping into The Principal Financial Group's TRS way of doing business not only for record-keeping, but for administration, employee communications and the like. So again, probably my fault for not having been more clear in the past on that score.

Okay, very good. And if I may, just a quick one for Jim McCaughan. Performance fees at least relative to how I model sees that PGI looked a little bit short. I was wondering if that was on the performance fee side, maybe Jim could talk about how they did.

I'm not sure how you are modeling them, Steven, but we have a fairly modest amount right now for performance fees on an annual basis. If you went back over the last five years, there was one quite large one in real estate three years ago.

That one though is on a five-year cycle, so there won't be anything on that one in 2010 or in 2011. And then also remember two or three years ago, there was a pretty big performance fee on the post hedge fund business, but we sold that business to management. So there will be performance fees going forward, but I think not the sort of big hits that we got twice in the last five years.

Okay, thanks, Jim. I appreciate that.

Colin Devine, Citigroup.

Just a couple points to clarify. First on the reserve addition, what type of life liabilities were those against? Was it the old closed block, some ULSG you wrote? If you could just clarify that for us?

Second, with respect to M&A, I just wanted to be sure, is it still the most likely scenario something in Jim's area? And perhaps Jim wants to clarify what he is out there shopping for as opposed to the something in the 401(k) space.

And then lastly for Dan, it was great to see transfer deposits up as dramatically as they were, but it also looks like withdrawals were up fairly significantly too, and perhaps you could just give us a bit more color. I assume transfer withdrawals is what was behind that. Does that reflect increased competition or just plan terminations? Just a bit more as to what is going on.

Okay, thanks, Colin. I'll just take the first one in terms of the reserve addition. That increase in GAAP reserve was attributable primarily to UL with secondary guarantee policies, so that would be what that was on.

In terms of M&A, broadly what I would say is that our priority remains international and asset management as our sort of initial area with also some focus around the retirement space, and maybe I'll ask Norman to comment briefly as well as Jim sort of on their thoughts within those sectors.

Well there are a number of -- this is Norman, Colin -- there are a number of properties that have become available at some of these large banking institutions, go back to their core businesses which is basically taking deposits and commercial banking. So we're looking at some of those both in Latin America and Asia as well as some potentially attractive mutual fund acquisitions, relatively small but potentially attractive to bundle onto our operations there.

And on the asset management side, Colin, our main aim here is to find further boutique asset managers that would benefit from being part of our multi-boutique structure. We have quite a good track record of adding such boutiques and what we're looking for there is attractive products which will be useful to our clients or alternately, capacity in areas that are capacity constrained.

So what that tends to mean is international both equity and bonds with a bias towards finding something in emerging markets. Those are really the things we're looking at most intensely.

And it's been a while since we have done a boutique asset manager. But I would remind you that we really want to see the culture, the product, the distribution appetite aligned.

We don't want to force it for the sake of it, but I'll be disappointed if we don't find some nice boutiques that are attractive to our clients and where we can partner with very effectively sometime in the next year or so.

I'll have Dan talk just quickly about transfer deposits.

Yes, well, in particular on the

Yes, more withdrawals

Yeah, right. So on the withdrawals, not unlike what I had just mentioned, Colin, we do think this is an emerging and dynamic issue. We washed out as you know the 1400 RESA accounts that impact not only the case count but impacted withdrawals as well.

We have looked closely at it, we do not feel we've got a systemic issue. The competition is out there, but a number of things that we're doing to address competition, one is to be more aggressive in rolling out that TPA strategy.

If we looked at assets retained and new business with our TPA strategy in 2010, that number was $900 million, that is a significant increase from where it has been in the past. We've also designed a model to go out there and look at where some of these clients are at risk and working with the advisors more closely to try to anticipate if they might move.

I will tell you that the significant improvement that we've seen in our investment performance with Jim's manufacturing for us also helping us go out and make a very strong argument that the proprietary and the boutique investment strategies that we have here at Principal are viable. And what probably gives me some confidence around the stemming of the tide on these withdrawals is just the sheer strength that we have right now going into Q1 on sales.

If you look at Q4, you had 12 alliance firms that had more than $100 million in sales compared to $7 million in 2009. And if you also look closely, you'll find that we've been able to hold up our margins fairly well.

So we are losing perhaps some of the lower margin non-TRS small 401(k) account balances and that is something we will just have to continue to adjust our model to reflect. Hopefully that helps, Colin.

Okay, just to drill into that just so we're clear on sort of our run rate here, the 1400 RESA cases you mentioned left, how much did they represent in withdrawals? I assume that is sort of a one-time thing and you'd sort of like us to back that out of the $5.3 billion to get a sense of what is going on?

It's not a meaningful number, Colin, I don't have the total of it, but it's not a meaningful number. These average balances at that point were down to a fairly de minimis amount.

Which is about $50,000 for each one of those accounts.

The 5.3, that is the real number, okay.

Joanne Smith, Scotia Capital.

I thought I'd ask a question that you haven't talked about a little bit for a while, and that relates to again the withdrawals and the FSA business. But in the past you've talked about as employees leave employment and either retire or move to another employer, they have taken their assets and you have been able to retain somewhere around 50 to 60% of those. Can you just give us an update, and if you can tell us if there is anything related to that that might be impacting this withdrawal situation?

Sure, JoAnn, This is Larry. First of all, it's nice to have you back and we appreciate you picking up coverage. So thank you for the work involved in that.

What we're talking about here, what we have been talking about here over the last couple of questions around withdrawals is essentially, and again to your point, we need to be perhaps more specific. But these have been what we have been talking about have been contract withdrawals.

So those are situations where an employer in association with their advisor decides to move a plan from Principal to -- and then pick your other provider -- much as we get plans coming the other way from Fidelity to Principal or from T. Rowe to Principal or whatever it happens to be. So we are discussing sort of these contract plan-to-plan kinds of transfers.

To your point on participant withdrawals, we continue to see about 50 to 52% retention of those participant withdrawals, and that trend has been stayed very, very consistent quarter by quarter and year by year. And there's been certainly no deterioration in that.

So again, this increase which I will argue is still primarily associated one, with the RESA queue; two, with a strong equity market performance which tends to push net cash flow, but again these are contract withdrawals more in the smaller and sort of mid-size plan count area. So I hope that helps a little bit.

Yes, that does. Just as a follow-up, I did hear you say that plan terminations were up 20%. I understand the difference between plan terminations and contract terminations and that new plan formation was down 50%.

I'm just looking at the overall flow trends and you had net negative flows in both of the prior two quarters, and I would have expected given the strong sales results that net flows would have been significantly better. Is this something that we need to just look a little further -- I understand Dan scrubbed these numbers a lot, but I'm just wondering if there's something else we need to be considering here.

Again, it's relatively straightforward and we are happy to sort of take it offline and go into more detail. The nature again of the new sales, so that $3.1 billion sales number, JoAnn, is that generally -- and again, this won't hold in every quarter. But generally only about 65% of that sales number actually shows up as dollars in the quarter in which it is counted as a sale.

So, the other 35% will come in over succeeding quarters. So again, when you think about net cash flow, it's not that every dollar of sales is a dollar that will show up on your doorstep that particular quarter, but we're happy to sit down with you in more detail and kind of walk through the sequencing of how that works.

Okay, and then just one other question with for Jim. And that's just -- if I would like a little bit more color when you're talking about the low fee business and how unattractive it has become to your clients. Can you just expand on that a little bit? I'm just wondering if we're going to see this wholesale across the industry as we go forward. Thank you.

Thank you, Joanne. I think the answer is possibly. We are seeing quite a lot of investment institutions with large mandates for example in core equities or in the case of the one we lost last quarter, sector equities.

And they're moving to essentially passive exposures to the sector and that is affecting those who for example manage a lot of large mandates in US equities. And I think that probably will continue because you're seeing long-term relatively limited added value for most managers in those types of mandates.

And of course that won't help us because we're not offering passive management in the institutional market. Having said that, it's kind of a core satellite thing. The more they put into these larger more passive or enhanced index mandates, the more appetite they have for the higher added value mandates which range through international equities and real estate and some of the high-yielding sectors that we're very good at.

So it would tend to be negative to us if it continues, which it might. It would tend to be negative for us in terms of the asset count. But it should actually ultimately be quite positive on the revenues given that we have a strong focus on those satellite or higher added value mandates.

Darin Arita, Deutsche Bank.

Had a question on FSA. We've talked about the sales and the transfer deposits and the withdrawals but on the recurring deposits as a percent of beginning assets, they were much lower than trend. Typically it's around 12 to 13%. Annualized it was 11% this quarter.

I was wondering what was the cause for that. And then also on the ROA, it seemed a little under pressure this quarter, and I was wondering what gets us back to the 30 to 32 bps target.

Right. I'll have Dan cover that. On the ROA, again I would not want to draw too many conclusions when you're going to annualize one quarter. I think if you actually annualize it, it's at 29 as compared to 30 to 32, and I would argue that's well within the bounds of just statistical fluctuation. But I'll have Dan talk about your first question.

Sure, those reoccurring deposits were down about 9% or $300 million, and really falls into a couple of different categories. One is that we saw strong improvement in the equity markets and had a bump up in interest rates which reduced some of the defined benefit funding that would've otherwise had come in for Q4.

There was a little bit of noise just lumpiness from one quarter to the next throughout 2010 on reoccurring deposits and we had some true-ups there. But if you were to just focus on the real drivers to reoccurring deposits, the good news is that both in the case of deferrals and in the case of match, those were both positive and upward.

So again I think that in large part as we see the economy continue to improve, we start seeing salary increases, we start seeing reinstituted matches and we see profit-sharing contributions perhaps in the first quarter of 2010, we will see these reoccurring deposits turn around again. Of the things we worry about, we think we've got this one calibrated quite well. Thank you.

Okay and then just one on international there. Can you talk a little bit about what has happened with the Mexican business and the DAC unlock and to what degree that affects go-forward earnings?

Sure, I will have Norman comment on that briefly.

Sure, basically every year, all the companies in Mexico, the pension companies in Mexico, Darin, go through a process of discussion with the regulator. And the regulator tries to level these fees on an industry-wide basis.

Our negotiations, our discussions with the regulator were successful but it resulted in a drop in the average fee that we charge our customers there. So we took a hit on DAC anticipating these future fees coming down a little bit.

Does that have an effect on the go-forward earnings to any degree?

Well it does. Obviously about $2 million a quarter temporarily until the growth picks up. But we anticipate for probably the next two or three quarters, about $2 million after-tax per quarter.

We've reached the end of our Q-and-A. Mr. Zimpleman, your closing comments please.

In closing, I just want to say thanks to all of you for joining us and your continuing interest in Principal. I actually want to close today by saying a few words about someone that's been an important part of our Company for 34 years and that is Ellen Lamale, our Chief Risk Officer who will be retiring in March as we announced earlier.

Ellen has had a tremendous impact on this Company throughout her career, but especially during the last few years of the financial crisis. So I just want to say thanks, Ellen, for all you've done to contribute to Principal's success and give you best wishes in this exciting new phase of your life called retirement.

We look forward to seeing many of you in the months ahead and hope you all have a great day.

Thank you for participating in today's conference call. This call will be available for replay beginning at approximately 8 PM Eastern time today until the end of day February 15, 2011. Conference ID number 34798317 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 for international callers. Thank you ladies and gentlemen. You may now disconnect.