美國信安金融集團 (PFG) 2013 Q4 法說會逐字稿

Good morning, and welcome to the Principal Financial Group fourth-quarter 2013 financial results conference call.

(Operator Instructions)

I would now like to turn the conference call over to John Egan, Vice President of Investor Relations.

Thank you, and good morning. Welcome to the Principal Financial Group's fourth-quarter and full-year 2013 earnings conference call. As always, our earnings release, financial supplement, and slides related to today's call are available on our website at www.principal.com/investor.

Following a reading of the Safe Harbor Provisions, CEO Larry Zimpleman and CFO Terry Lillis will deliver some prepared remarks. Then we will open up the call for questions.

Others available for the Q&A are Dan Houston, Retirement Investor Services and US Insurance Solutions; Jim McCaughan, Principal Global Investors; Luis Valdes, Principal International; and Tim Dunbar, our 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. Now I'll turn the call over to Larry.

Thanks, John, and welcome to everyone on the call. As usual, I'll comment on three areas.

First, I'll discuss fourth-quarter and full-year results.

Second, I'll provide an update on the continued successful execution and long-term benefits of our strategy, and I'll close with some comments on capital management.

As John mentioned, slides related to today's call are on our website. Slide 4 outlines the themes for the call.

Fourth quarter 2013 was a strong finish to a great year. Total Company operating earnings were $286 million in the fourth quarter, and full-year total Company operating earnings were a record, at nearly $1.1 billion.

The fact that we achieved record operating earnings while still facing the headwinds of low interest rates and emerging market volatility demonstrates strong business fundamentals and the power of our diversified business model.

This also makes us optimistic for continued growth in operating earnings as economic conditions return to more normal trend patterns.

Our competitive position remains strong in the US and is gaining momentum globally. We manage assets in more than 60 countries, and we've expanded our retirement leadership position to key countries in Latin America and Asia.

We continue to deliver innovative investment, retirement, and protection solutions, such as Total Retirement Suite, lifecycle funds, and business owner and executive solutions that competitors are not able to match. And we export these ideas to markets outside of the US to create long-term growth.

Total Company full-year net cash flows of $17.4 billion helped drive assets under management to a record $483.2 billion.

Following are key additional growth metrics that highlight our success in 2013.

Full service accumulation, full-year sales of $10.3 billion, which was the second-highest on record. Margins in this business continue to improve as we strike a better balance across all plan sizes. Full-year recurring deposits, an important growth metric for the business, were up 12% year over year.

Principal Funds continued to deliver strong sales growth, with full-year sales up 26% to a record $19.8 billion. This, along with strong market performance and solid net cash flows, produced record account values at year end. Principal Global Investors had record assets under management of $292.1 billion at the end of 2013 and full-year net cash flows of $4.2 billion. Unaffiliated assets under management also ended the year at a record $109.4 billion.

Principal International assets under management were $104.5 billion at year end, despite an $11 billion negative currency impact. Net cash flows remain strong, at $8.5 billion for the year, or at 12% of beginning-of-year assets under management. This is despite the emerging market volatility in the last half of 2013.

US Insurance Solutions premiums and fees were a record $2.4 billion. Specific to Specialty Benefits, full-year sales grew 5% over 2012, and the loss ratio for the year was favorable and at the low end of our projected range.

Individual life sales were down year over year, primarily due to an intentional slowdown of Universal Life with secondary guarantee sales. Individual life sales, excluding Universal Life with secondary guarantee, are up 21% year over year.

Our business market focus continues to be a differentiator for us with non-qualified deferred compensation and business owner and executive solutions making up 57% of full-year sales.

Again, the fundamentals of our business remain strong. We continue to build a leadership position in the markets where we operate, providing continued momentum into 2014 and beyond.

Next, I will comment on the continued execution and long-term benefits of our strategy.

Our Investment Management Plus strategy has created a durable and globally-diverse business model, with a set of highly-integrated businesses that is unique among our peers. With global investment management at the core of our strategy, strong investment performance is crucial to our success. As slide 5 outlines, investment performance remains competitive and is a leading indicator of future sales and flows.

To be a global investment management leader, we must also attract top investment talent.

During the fourth quarter, the Principal earned the top spot in its category in Pensions & Investments' annual survey of the best places to work in money management for the second year in a row. We view this as a significant accomplishment, one that speaks to our ability to attract and retain top investment talent.

Within Principal Global Investors, we take a unique approach to executing our multi-boutique strategy. We've acquired and built expertise across multiple investment strategies, with particular focus on meeting increased demand for global equities, fixed income, and alternative investments.

We drive efficiencies in our boutique model through a shared access to a world-class distribution and operational platform. We will continue to look for ways to increase scale and efficiencies, while maintaining our leadership position across multiple investment categories.

Moving to Principal International, Cuprum was a meaningful contributor to bottom-line 2013 results, better than our expectations when we completed the acquisition one year ago today.

In addition to achieving strong financial results, Cuprum was once again ranked at the top for both investment performance and customer satisfaction, as published by the Chilean pension regulator in December.

Cuprum has topped all of its peers in customer satisfaction 19 out of the past 23 rankings. Maintaining these high scores is testament to the exceptional job the team did to ensure a smooth on-boarding of Cuprum.

This successful acquisition will continue to provide long-term growth opportunities as the mandatory pension market continues to grow and we expand our focus on the voluntary market in Chile.

Our combined operations in Chile, Brazil, and Mexico make us the second-largest pension provider in Latin America. Building additional scale and increasing our leadership position in these countries is a priority as middle-class growth continues at a rapid pace.

The Principal is uniquely positioned to provide the long-term savings and retirement solutions this middle class is seeking.

Principal International continues to build its leadership position in Asia, as well. In Hong Kong, all five of Principal's MPF pension funds were winners of benchmark Fund-of-the-Year awards in 2013, including one Best-in-Class fund.

In Malaysia during 2013, assets under management in our new PRS pension company grew tenfold, and we now have the second largest market share. These accomplishments continue to position Principal International as a retirement leader as these markets mature.

The Principal continues to be a leader in the US retirement and employee benefits market as well. In this highly competitive environment, we have the right mix of products and solutions to meet the needs of small- and medium-sized businesses, their owners and their employees.

Our ability to manage both qualified and non-qualified assets through Total Retirement Suite and our competitive employer-paid and voluntary employee benefits products make the Principal the right provider to help business owners attract and retain employees.

In addition, our comprehensive Business Owner Executive Solutions are unique among our peers and complementary to our other businesses.

The Principal has been a leader in helping individuals prepare for and manage income and retirement for more than a decade. Our ability to win and retain clients has led to an increase of more than 700,000 eligible retirement participants since 2010.

The growth opportunity in helping eligible participants in the plans we manage prepare for retirement is tremendous.

Retirement Readiness solutions, such as auto-enroll and auto-escalate features built into the plans, as well as continued work site efforts, will help drive further increases in recurring deposits, and will allow the Principal to remain a leader in the retirement market as Baby Boomers enter retirement and Millennials begin to save.

Principal Funds also plays a critical role in our long-term growth strategy. Our unique, outcomes-based solutions and solid investment performance have led to strong sales and net cash flows for several years. As a result, Principal Funds continues to add market share, and is now the 17th largest advisor-sold mutual fund family in the US, up from 19th a year ago.

Advisor growth continues in our funds business. We are now doing business with more than 50,000 advisors; yet this is still a fraction of the entire advisor universe.

In addition, sales in our Defined Contribution Investment Only, or DCIO channel, have doubled since 2011, as we continue to successfully place our funds on other non-affiliated recordkeeper platforms.

Finally, we announced at the end of December that the process to deregister the Principal Financial Group and our other holding companies as savings and loan holding companies was complete. As a result, we are no longer subject to supervision by the Federal Reserve Board.

Principal Bank will continue to offer individual retirement accounts that complement our full lineup of retirement savings and income solutions to meet the needs of our clients.

I will close with some comments on capital management.

Last night, we announced a first-quarter 2014 common stock dividend of $0.28, an 8% increase over the fourth quarter 2013 dividend, demonstrating continued confidence in our ability to grow fee-based earnings and generate higher percentages of deployable capital.

We continue to focus on increasing our dividend payout ratio on a growing net income base.

As we said on our outlook call, we expect to deploy $500 million to $700 million of capital in 2014. Our broad strategies for capital deployment will not change. As always, our capital deployment strategy is aimed at providing the best long-term value for shareholders.

In closing, we're we are very pleased with the strong results in 2013, especially in light of continued macroeconomic volatility.

We remain confident in the strength of our business mix and fundamentals, our long-term opportunities for growth, and our experienced teams' ability to continue to successfully execute on the things they can control. Terry?

Thanks, Larry.

The fourth quarter was another strong quarter, resulting in record full-year operating earnings. Achieving these results in a volatile global economy demonstrates the strength of our businesses and our ability to execute. We are very excited about the continued momentum of our businesses.

This morning, I'll focus my comments on operating earnings for the quarter and full year; net income, including performance of the investment portfolio; and I will close with an update on capital deployment.

Total Company operating earnings for the quarter of $286 million were up 19% over reported fourth-quarter 2012.

When looking at full-year results, operating earnings of nearly $1.1 billion were up 31% over reported 2012 results. Even after adjusting for the third quarter 2012 actuarial assumption review, earnings were up 19% for the full year.

Excluding the Corporate segment, 63% of the Company's record operating earnings in 2013 were from fee-based businesses.

This reflects our scaling back, or exiting businesses that produce more than $150 million of spread and risk-based earnings, and replacing them with less capital-intensive fee-based earnings. These fee-based earnings come from higher multiple businesses that put less pressure on our balance sheet.

We strongly believe that our current business mix provides the right diversification for continued growth.

Fourth quarter 2013 operating earnings per share was $0.96, a 19% increase compared to the year-ago quarter. For the full year, earnings per share of $3.55 increased 20% over adjusted 2012 results. This is a strong result, especially in light of macroeconomic volatility in the quarter.

Earnings per share growth for the year was higher than our expected 11% to 13% annual growth rate, due to the addition of Cuprum, favorable equity markets, and disciplined expense management.

Looking at slide 6, you will see that fourth-quarter 2013 earnings were impacted by some normalizing items, which in total had no impact on earnings per share.

In Principal International, the encaje returns in Chile benefited operating earnings for the quarter, but were essentially offset by one-time impact of the change in Mexican tax law that we mentioned on our outlook call.

Higher-than-expected prepayments in individual annuities, and better-than-expected operating earnings in individual life, due in part to the improved mortality, were offset by one-time negative items in corporate.

Now I will discuss business unit results.

Starting with the accumulation businesses within Retirement and Investor Services, operating earnings were $153 million, an increase of 15% over the year-ago quarter.

As shown in slide 7, net revenue was up 14% over the year-ago quarter. Trailing 12-month pretax return on net revenue improved to 32%.

Quarterly operating earnings for full-service accumulation, at $93 million, were up 15% from the year-ago quarter. Net revenue was also up 15%, due to growth in the business and strong equity market performance.

The trailing 12-month pretax return on net revenue for the business unit was 31%. Sales at $3 billion for the quarter were strong as we continue to focus on striking an appropriate balance of growth and profitability.

Net cash flows for full service accumulation were $143 million for the quarter. Increases in the equity market impact withdrawals more than deposits, as recurring deposits are not directly correlated to market returns.

Principal Funds operating earnings were $22 million for the quarter, a 63% increase from the year-ago quarter, as the strong sales over the last several years are now translating into bottom-line results. On a trailing 12-month basis, revenue was up 24%, and operating margins have continued to improve due to increased scale in the business.

For the quarter, retail mutual fund sales were $4.1 billion, leading to $550 million of net cash flow. While down from a year-ago quarter, these results were solid relative to the industry.

Individual Annuities fourth-quarter operating earnings were $32 million. The segment benefited from higher-than-expected prepayments in the quarter. This more than offset the spread compression due to the low interest rate environment.

Bank and Trust operating earnings for the quarter were $6 million. With the repositioning of the bank as part of the deregistration process, this is the new quarterly run rate for earnings.

Slide 8 covers Guaranteed Businesses within Retirement and Investor Services. Fourth-quarter operating earnings of $26 million were up 37% over the year-ago quarter.

On a trailing 12-month basis, pretax return on net revenue was 81%. Investment-only operating earnings improved 33% from the prior year quarter, to $15 million, as increasing spreads more than offset a decrease in account value.

New business continues to be more profitable than business rolling off. We continue to approach this business opportunistically and will write business when market conditions generate attractive returns.

Full-service payout operating earnings were $11 million for the quarter, a 44% increase over the year-ago quarter, and sales were $205 million. We believe that the rising interest rate environment will allow us to add small- to midsize-pension close-out business at attractive returns.

Slide 9 shows Principal Global Investors operating earnings were $30 million, up 15% from the year-ago quarter. Fourth-quarter revenues grew 41% over prior-year quarters, driven largely by stronger-than-normal performance fees in the current quarter.

The performance fees were generated by boutiques where we do not have full ownership; therefore, the impact to revenue is larger than to the impact to after-tax earnings.

The full-year pretax margin for Principal Global Investors of 24% is a 150-basis-point improvement compared to 2012. The margin is down sequentially due to the higher performance fees in the fourth quarter.

The very strong performance fees in the quarter will also impact the revenue growth rates that we laid out in our outlook call. We now expect 2014 revenues to be similar to 2013, with pretax margins improving to the 26% to 28% range previously disclosed.

Unaffiliated assets under management were $109 billion at year end. Unaffiliated net cash flow for the quarter was $1.1 billion. There is continued demand for our diversified investment product portfolio as we move into 2014.

Slide 10 shows fourth quarter 2013 operating earnings for Principal International of $62 million. Encaje returns for the quarter were better than expected in Chile. That benefit was largely offset by the one-time impact of the tax change in Mexico.

When compared to the prior-year quarter, results this quarter were also negatively impacted by the prospective change to the amortization pattern of the intangible assets in Brazil, as discussed in our outlook call in December.

In addition, operating earnings growth from the year ago was suppressed by 11% due to continued strengthening of the US dollar. Quarterly net cash flows for this segment were a record $2.7 billion, helped by a return to normal cash flows in Brazil.

Principal International ended the quarter with $105 billion of assets under management, despite the strengthening US dollar. US Insurance Solutions operating earnings were $60 million for the quarter.

These results were flat with the year-ago quarter, but the mix between the underlying businesses shifted slightly.

As shown on slide 11, reported Individual Life operating earnings were up 17% from the year-ago quarter, to a strong $33 million. Results in the quarter benefited from improved mortality.

On a trailing 12-month basis, pretax operating margin was 14%, compared to the 15% to 17% communicated for the year. Higher-than-expected mortality in the early part of the year was the main reason for the variance.

As shown on slide 12, Specialty Benefits operating earnings of $27 million were down $5 million from a very strong year-ago quarter. Both quarters benefited from favorable loss ratios. The decline in the current quarter was primarily driven by several one-time expenses.

We continue to expect our quarterly loss ratios to be in the 65% to 71% range, with fourth quarter at the favorable end of the range due to seasonality of claims.

Trailing 12-month pretax operating margins of 11% was slightly above our expectations due to favorable claims experience for the year.

The Corporate segment reported an operating loss for the quarter of $45 million, higher than our forecasted range of $35 million to $40 million of operating losses. Results this quarter were negatively impacted by higher expenses, as well as tax adjustments that are housed in the Corporate segment.

Full-year losses in Corporate of $149 million are at the lower end of the range we laid out at the beginning of the year. Expectations for losses in 2014 are $130 million to $150 million.

For the quarter, total Company net income was $233 million. Realized capital losses for the quarter were $52 million, with credit-related losses making up $25 million of the total.

Full-year credit-related losses were $84 million, a 24% improvement from the previous year, and were better than our pricing assumptions. Our return on equity excluding AOCI was 12.1% at year end, a strong result improvement year over year, even taking into account the impact from the actuarial assumption review in 2012.

Full-year earnings grew 19% over the adjusted prior year, while average equity, excluding AOCI, increased just 5%.

As I mentioned at Investor Day, growing operating earnings 10% to 12% while managing the equity growth will deliver a 50 to 80 basis point annual increase in return on equity.

Looking now at capital adequacy, we estimate our year-end risk-based capital ratio to be 430% to 435%. This allows us to redeem a $100 million surplus note in first-quarter 2014, and still manage to our targeted RBC ratio of 415% to 425%.

As outlined on slide 13, we announced plans to deploy more than $480 million of capital in 2013 in line with our guidance for the year.

This included a record full-year common stock dividend of $0.98, which was a 26% increase over the dividend paid in 2012. Our dividend payout ratio for the year improved to 33% on an increasing net income base.

As we move to 2014, we expect to deploy $500 million to $700 million of capital in the year. And over the long term, we expect to deploy 65% to 70% of our net income, with volatility in any given year.

In closing, we are extremely pleased with the strong results in the quarter and the full year. We feel that we are well-positioned for future growth across all of our businesses, and that our diversified business mix will generate successful results across the various economic environments.

This concludes our prepared remarks.

Operator, please open the call for questions.

(Operator Instructions)

John Nadel, Sterne, Agee.

I was hoping we could talk about capital markets relative to the assumptions you had built into your 2014 outlook. And really, I'm thinking about both, or I guess the combination of global equity market weakness, long-term interest rates are lower, foreign currency pressures have actually increased. So I'm just wondering, when you combine these factors, can you give us an estimate as to how much pressure on a combined basis this is placing on your outlook relative to that original guidance provided in early December?

Then I'd also like to look at the flip side of that. As a result of some of these pressures and dislocations, are you seeing any increased opportunities, especially on the acquisition side?

Good morning, John, this is Larry.

Hi, Larry.

On your first question, John, as you know, we did our outlook call in early December and we don't really update or comment on it after that point. Now you went through in your comments, or in your question, a number of factors that certainly would -- the world might look a little bit different today than it did back in early December. But having said all of that, I guess I would make a couple of points.

One is that the companies in the local markets outside the US for Principal International continue to grow at double-digit rates. While there has been some noise in terms of the currencies, the actual local economies continue to do quite well.

Okay.

Those companies continue to grow at roughly double-digit rates. Some of them grow faster than that. So, for example, Brazil has historically grown at something closer to 20% to 25%. But the main point is that the local companies continue to grow at double-digit rates.

Okay.

I would say that the currencies in January, the currencies have probably added another couple of percent headwind. So, from what it was in December, we would have reflected some modest headwind when we made that call. That headwind might be a little bit tougher today.

But I think if you net everything out and you think about our capital deployment, I would say, as I said in my comments, we still expect to see growth in operating earnings, growth in EPS during 2013. And I would emphasize again the fundamentals of the business remain very, very strong.

Now in terms of M&A, I think your question is an interesting one, because for every challenge, there is an opportunity. And it could be that with the capital flexibility we have with a more fee-based business model, that there could be opportunities for M&A. And we are aware of some that have come up. And it is potentially likely that others may become more attractive in time.

Then if I could just follow up on that. So if we assumed that Principal did not issue any equity to do a deal, but rather used existing cash resources -- or capital resources. And I guess there's some modest debt capacity, can you give us a sense of about how much that in total would get to?

I'm not quite sure that I understand your question, John.

How big a deal could you do, I guess, without raising equity?

Again, I would say that the deal that we could do without raising equity would probably be in the $500 million to $1 billion range.

Okay.

But I guess I would look at this sort of net -- M&A for us, I would say, John, we look net-net on an accretive basis. In other words, we would only do things that we were confident we could execute on first of all, because they have to be consistent with the strategy. And number two, I would say, they have to be accretive, and they have to be more than accretive with other uses of capital within a three- to five-year period.

Now we all know the way M&A works is it tends to be accounting unfriendly. That's just reality, so you're not going to necessarily get the accretion versus other uses of capital in year one. But we would want to build an acquisition plan we could execute on, so that by three to five years we are seeing accretion as compared to other uses of that capital. Regardless of how we finance it, that's how we think about it.

Yes, that's entirely consistent. Understood, thank you very much.

Thanks, John.

Christopher Giovanni, Goldman Sachs.

Thanks so much, good morning. Wanted to focus again on the emerging markets. And obviously, there's been a lot of focus and not going to change your long-term approach, I think.

But obviously, if you could comment some around maybe a bit more on what you're hearing or seeing on the ground? And would be particularly interested in Jim's thoughts around what you guys are hearing, maybe from your emerging markets, specialist boutiques, kind of like Finisterre.

Yes. This is Larry, Chris. I will start that, and Jim may want to make comments. Luis may want to comment.

I would start by saying first of all, that we are in very carefully selected emerging markets. We are not a broad, emerging markets company. We are not out there in 40 or 50 emerging markets. We are in very, very selected emerging markets.

We take a very, very hard look at the economies, and frankly, the political systems that are in place before we would use our capital to invest in these companies. For example, Argentina was a country we exited, as an example. So we believe that we are in emerging markets, but we are in the stronger economies within the emerging markets. So I think that's an important kind of distinction to recognize.

Second point is the one that I said in relationship to John's question, which is that this sort of emerging market kind of hiccup is an interesting one. And it is a bit different in the sense that there has not been disruption in the performance of the local economies. It's a capital flow issue, not a local economy issue.

In other words,, the local economies continue to trend -- growth trend continues to be give or take what it was before. For example, the Chilean economy, even the Brazilian economy is still in that 2% to 3% growth mode.

So the local economies continued to be strong, and that's really what our expectation is for 2014. We don't see anything on the horizon that would indicate that the local economies are going to struggle to meet the growth targets that we put into our outlook for 2014. So with that, maybe I'll have Jim talk about what he hears from his analysts.

Yes, thank you. To Larry's point about selected invest -- emerging markets. I'd also add the diversification point.

If I look at, for example, Finisterre, whom you mentioned, they're long-short. And that actually means they can do quite well in up markets and down markets.

And in fact, they had not a great, but quite a good 2013, if you research their investment performance. It was mostly around the double-digits mark, which for an emerging specialist in dollar terms was actually pretty credible. And the reason that that was so was the long-short part of it.

Our other emerging bond capability at Principal Global Fixed Income has actually focused on dollar-based emerging market debt, and so has been spared a lot of the worst stuff. And I think that highlights the sell activity point that Larry made, and also I think illustrates the diversification point I'm making.

If you look at emerging equities, it's been interesting to see at Origin, we have a quantitative approach, very strong performance record, which is actually leaping to some interest by clients. Which is maybe counterintuitive, because it is at a time when most emerging market funds are seeing outflows. So really that would be my main point about, to add to Larry about the markets, is the diversification. You talk to our equity analysts, it's really the point that the underlying economies continue to do fine, but they are worried about financial squeeze, credit cycle, currency stability.

The other point I'd make, though, and this relates to how we are placed to defend against the ups and downs of markets, is that -- and this applies to Principal Global Investors and also to Principal International -- by and large, our revenues in emerging markets, or in international currencies, are broadly matched by costs in those markets. So it is actually a matter here of translation rather than of a mismatch, which is something that happens with many companies in emerging markets.

So, we feel we are managing the risks. They are likely to stay volatile, but I think that with the sell activity and the diversification we've talked about, and also the structure of our businesses, we are managing the risks quite effectively in a temporarily tough time.

Does that help, Chris?

Very helpful. And then just one last quick one on capital, recognizing your long-term philosophy around capital management.

Curious if the recent weakness in your stock causes you to change maybe the near-term approach, entice you to maybe look at buybacks more? Is that still too shortsighted?

Yes, this is Larry. I will make a couple of comments.

Again, we've thought about share repurchase, and again, it's sort of a two bucket approach. The first bucket would be to make sure that we are managing share count, and therefore repurchasing shares relative to any newly issued equity, primarily as a result of deferred compensation. So that piece we would do as kind of a standard part of our capital management.

The second bucket would then be that more opportunistic bucket. And I think to your point, Chris, while we haven't made any final decisions on that, I think to your point, we've always maintained a zone or a range of intrinsic value of the Company. And we are obviously coming closer to that range of intrinsic value. I think it is one of the real items of capital flexibility that we now have.

As Terry said in his comments, we are a much more balance sheet-like organization, and able to deploy much higher levels of free cash flow for capital management. So we think that gives us a lot more flexibility. And certainly we recognize that there's perhaps been a little bit of over baked nature to the emerging market concern that may give us opportunity. We will see what happens going forward for some opportunistic share repurchase, as well.

Understood. Thanks so much.

Yaron Kinar, Deutsche Bank.

I have a couple of sensitivity questions. One is on encaje. Should central banks actually start raising interest rates to combat the declining currencies? What kind of -- can you give us some sort of sensitivity as to what impact on EPS that may have on overall results?

Yes, Yaron, I will have -- this is Larry. I will have Luis comment. Just as a broad reminder, going to Luis' comments in Chile, the encaje is a somewhat more diversified portfolio, so it includes both equities and fixed income. And it even has a dab of sort of global equities in it.

In Mexico, the encaje, which is smaller, but that encaje is primarily a fixed income kind of sovereign investment there, so that would be impacted by rates. But Luis, do you want to comment?

Yes, certainly. This is a pretty interesting question because in the country that we're pretty much more exposed to the encaje is Chile, as Larry said. And the main debate that you could see in Chile right now is when the central bank is going to lower the interest rate, instead of to raise the interest rate in Chile. And that's precisely in order to be living anticyclic about the financial term or that emerging markets are living in.

So, we don't really see in a very important risk about interest rates going up in Chile. And in fact, the central bank, last week they made a decision in order to keep the interest rate as it was, and probably in their outlook, is whether saying is that probably they have a much more stronger opinion in order probably to lower the interest rate going forward.

In Mexico, the situation is a little bit different. And also, we don't see that the Mexican central bank is going to raise the interest rate, and that's our opinion.

We were able to see some interest rate going up in Mexico during January. But nothing in comparison with what happened in May and in June of last year that went up like 130 basis points in two weeks. So it 's been a kind of mild movement in comparison with what happened in the very first part of, or last part of the second quarter in 2013.

Does that help you, Yaron?

Yes, it does. Thank you. And then, Larry could you talk a little bit about the new legislation that was proposed by Senator Harkin on private pensions, and what impact that may have on Principal?

Sure. Sure. I think last Thursday, Yaron, Senator Harkin introduced -- actually dropped a bill. He had been talking about this for maybe almost a better part of two years. He dropped a bill.

I think broadly it sort of called the USA accounts. And the USA stands for three words. I can't quite remember, I think it's like universal secure and adaptable, or something like that.

The essence of, I think, the Senator's proposal is that he would mandate contributions among all employers, if you will, into a defined contribution plan. If you were a small employer that didn't already have a plan in place, you would effectively go to the, I guess, the government-sponsored plan. The government-sponsored plan would then be managed by the private sector. So that's a little bit different than the MyIRA proposal that President Obama talked about in his State of the Union.

We, Principal -- obviously, Senator Harkins, the Chairman of the Health Committee. He's obviously the -- he's a junior senator from Iowa, despite the fact he's been in the Senate a very long time. We obviously work very closely with his office. I talk with Senator on a regular basis.

I think his primary purpose in dropping the bill was to continue, which I view as a positive, continue to put some emphasis on the fact that Americans need to save more for their own retirement. That's the bottom line, I think, the bottom line message that the Senator is trying to make.

Now whether this particular approach of mandating contributions is one that will see the light of day, I think even the Senator might be a little bit skeptical about that. But I think his purpose is to stimulate the conversation. And we think simply stimulating the conversation is going to be helpful for our businesses, because the reality is we do all need to save more for retirement, whether that's mandated or whether that's just done on a voluntary basis.

We actually think net-net, it helps to put the focus and spotlight on this issue. And it will perhaps cause people to redouble their efforts to make sure they are saving at the rate they need to do for their own retirement.

Great, thank you. I will get back into the queue for my other sensitivity question. Thank you.

Eric Berg, RBC Capital.

Good morning. My first question of two relates to your guaranteed area. When -- if my memory serves me correctly, when you announced several years ago that you were going to limit your exposure to guaranteed investment contracts, I think you left the impression that this would be a business with shrinking earnings. Well this morning we are reporting sharply higher earnings in your crediting improved net interest margins in contrast to what's going on in your life insurance business, where interest rates are actually pressuring your business.

Two-part question. One, why the difference between the effective interest rates on the life business from the guaranteed business effect? And should we expect this business, this guaranteed business prospectively, to be a growing business in terms of earnings rather than the shrinking business that it had been for some time? Thank you.

Thanks, Eric. This is Larry. Yes, your questions are kind of interesting.

Actually, what we've been trying to manage within the context of what you call the guaranteed business, which another term for those may be not quite as familiar that we apply to this business is the investment-only business. So Eric is talking about investment-only business as compared to the individual life business. What we've talked about managing in the investment-only business is the account value of that business relative to the general accounts.

Our general account, what we've talked about is managing the investment-only to be roughly 18% to 20% of the total value of our general account. And that's still our best guess. It's sort of within that range now, and it is probably at the lower end of that range. And we would expect to stay within that range.

Now as the general account grows, that means that we'll grow that investment-only account value, and it also means that earnings will grow, albeit they'll grow at something that's closer to a mid single-digit rate. So, 4% to 6%, or something like that.

The life business, on the other hand, again, as we said, we are making a little bit of a transition in the life business, sort of away from UL with secondary guarantees toward more term products, toward more variable life products. And so we have -- absolutely have plans to continue to grow that business, again focused primarily on business owner and executive solutions.

I think, Eric, what you should expect going forward would be that sort of low -- or excuse me, that sort of mid-single-digit growth rate in operating earnings. Actually, in commenting on fourth quarter here, you would note -- or you should have noted that the individual life business also had very nice improvement in operating earnings, albeit it was more from mortality than the spread, whereas in investment only, it was more from the spread.

If I could just ask my second and final question regarding Chile. Why is there -- and this obviously could be an extended response, so you'll need to give me an abbreviated one -- but why is there a voluntary opportunity? And how should we think of the size of this opportunity and the potential earnings from it?

Okay, this is Larry, I will make a few comments. Just quickly on the size, and then I will let Luis talk about why the government decided to add a voluntary layer rather than just extend the mandatory. Just to give you a sense of the voluntary opportunity, basically the mandatory system stops at a salary level that's about $38,000. You're required to contribute roughly 10% of your salary, up to the first $38,000, US dollars of your compensation.

Again if you make $75,000, you are only contributing on half. So that's where the cutoff between mandatory and voluntary occurs, is that that $38,000 of income level in US dollar terms. Now I will ask Luis to talk quickly about why the government decided to go voluntary rather than mandatory on that upper income piece.

Eric, this is mainly because going and trying to raise the bar in the compulsory system is implied of a lot of political pain, if you want. You have a lot of resistance about employees and employer to go in that direction, so the Chilean government is pretty much more keen in order to go after a voluntary solution, complementary solution. And that's where they are adding another more incentives in order to develop that market.

Having said that, they are putting and they're moving this limit that Larry mentioned a little bit, but pretty much more timid. They put a law in 2008 that is moving those limits. But I'm saying those moves are very timid, and the need for having a very strong voluntary market in Chile remains as it was since the beginning of this decade. That's my answer why the Chilean government is pretty much more clear in order to put forward a voluntary market rather than a compulsory one.

That's a good start, thank you.

Thanks, Eric.

Erik Bass, Citi.

Thank you. Was hoping you could comment a little bit more on what you're seeing in terms of activity in the US 401(k) market? I guess particularly around recurring deposits and RFP activity?

Yes. Sure, Erik. This is Larry. I'll have Dan comment.

I would say broadly, we are finally, I think, 2013 to some extent was the year of the rebound as it relates to recurring deposits. On the trailing 12 months, we've seen those in the fourth quarter, they were up about 12%, but I'll let Dan give you some color.

Yes. 2013, Erik, was really a solid year if you look at it from an operating earnings perspective, but more importantly, just that mix of business of small, medium and large plans. You may have noticed that we wrote a net new 1900 plans on a full-year basis of plans of less than 1000 employees. And on plans of more than 1000 employees, we actually increased that by 8%, and we -- on a trailing 12-month basis improved our return on net revenue.

Your primary question is around what's the outlook for 2014. And it is not that different than other years, where we had a lot of volatility in the equity markets. And when we see volatility, we see the actual pipeline get smaller, less -- fewer plans going out to bid when the equity markets are performing exceedingly well, or if they are incredibly volatile. So they are down slightly, so I would anticipate we could have a light first-quarter sales year, but we will have to see.

Okay. Yes, thank you. Any comments you can make on the competitive trends, and I guess any changes in strategy or pricing you're seeing from either other life insurers or the asset managers in the market?

I don't think there's been a significant change. As I think about the latter half of 2013 and the first part of 2014, the traditional players by each of the three market segments. One of the advantages we have is really strong investment managed performance, getting our fair share of the slots for active asset management. That serves us very well, and Jim and his team have done a superb job giving us a good product to sell, whether it is in the DCIO space or the full service.

You'll note that our results for 2013, over $10 billion. That's our second best year ever. The other number I'd break out for you is we did another $4 billion in DCIO, so over $14 billion to that core SMB space between full service and DCIO mutual fund sales.

Okay, thanks, Dan.

Thanks, Erik.

Seth Weiss, Bank of America.

Hi, good morning. Thank you, and maybe just to follow up on Erik Bass' question, get a little bit more granular on recurring deposits.

2013 was a pretty strong year in terms of recurring deposit growth. I believe some of this was from the return of Company matches. Could you just talk about that dynamic, maybe on a year-on-year basis, full year in terms of how much Company matches came back? And how much more room there is for runway for recurring deposit growth going into 2014?

Yes, good question.

I want to make a quick opening comment, if I could, Seth. One of the -- and I commented on it briefly in the opening comments, but I think to your point, there is a real opportunity to see some meaningful growth in recurring deposits, primarily focused around this initiative that we broadly call retirement readiness. Which is to say, in responding to the question earlier around Senator Harkin's proposal, the reality is, is that many, many -- the majority of our participants are not saving at the level they need to. And we as a retirement provider need to engage much more actively with each and every one of those participants, often in the workplace, in order to get their contributions up to the level that it is needed.

Again, broadly what you'd say, is if you're not saving in the double-digit range with your own contributions, you may not have a sort of retirement lifestyle that you are seeking. Today, participant deferrals are sort of in that 7.25% range. So we need to get that closer to 10%. That's going to take a lot of work. It's going to happen over time.

But that gives you some sense of where that recurring deposits dream could go. If you had every participant at 10% instead of at 7.25%, and then maybe with that, I will pass to Dan for his comments.

Just a couple additional things to add to that, Seth. The first one would be, just remember that we're starting to finally see some employment growth. And if we looked at de annus business, which they track that very closely on our group benefits business, we saw a trailing 12-month basis of a growth of about 1%.

Remember, at the worst, that was shrinking. So we are starting to see growth there, we're starting to see job ads.

To Larry's point, it is about plan design, as opposed to trying to continue to go down this path of just education. And so requiring, if you will, plan designs that would have auto-enroll and auto-escalate, which will lead to the results that Larry described.

I do anticipate that profit-sharing contributions start coming back. We saw good profits by small- to medium-size business.

To your specific question about matching, we think that maybe we are about 80% back from where we were originally, from employers having a stated match in their plans, and so maybe a little bit more upside on the matching contributions. Hopefully that helps.

That's great, and maybe just one follow-up on that 7.25% deferral rate. Is there any difference by plan size in terms of contributions? Do you see small- or medium-size contributing less than large-size, or is it all pretty stable across?

It has more to do with actual plan design itself. If you have an employer matching contribution, strong employer endorsement and support, you're going to get a better result. Whether that's a small, medium or a large plan, which again is why we get pretty selective and disciplined about the pricing of these plans. We've got to have the attention of the employer to support meaningful employee engagement and profit-sharing contributions, matching contributions.

And then, of course, sector. Retail is pretty difficult. That's where you see the plan designs that aren't quite as advantageous for the plan participant. We just call out.

We continue to see growth in that not-for-profit sector. We have a large business around hospitals. Hospitals generally have pretty generous benefits, and so we again see good engagement, high participation, high salary deferral, and nice employer contributions.

Okay, thank you.

Thanks, Seth.

Mark Finkelstein, Evercore.

Good morning. A couple follow-ups.

I guess one of the comments made, I think in a couple questions earlier, was on the first-quarter sales outlook being a little bit light. I think it was Dan, you made that comment. What is that attributable to, do you think?

I think it is in large part, just the equity markets were very strong, and so there's fewer RFPs out. Now the corollary to that is we will likely retain a lot of business, because we don't see our plans being put out to bid either. So we've seen that in other periods.

It's a halo effect of strong investment performance per plan. They're probably less likely to put that out to bids; therefore, the pipeline gets a little smaller. So better retention and perhaps a little bit lighter pipeline.

Yes. Mark, this is Larry. What I would say on that is if you go back and look at prior calendar years, you will see a very definite trend towards -- if you divide the year into two pieces -- first half, second half -- you see definite trend towards years where sales are lumped toward the front end, where sales are lumped toward the back end.

I would say, to Dan's point, we think because of just the psychology of most plan sponsors, given the strong markets in 2013, we will see growth in sales in 2014. It's more likely to come in the back half of the year.

Okay. Maybe just following on on that. I think, Larry, in your opening remarks, you talked about the objective of having a better balance across all plan sizes in the US. And you talked about it in the context of margins and sales.

And I guess sitting where we are sitting, what should we expect to see it as you somewhat remix that business, I assume into small and medium? But what should we actually see?

Actually, I'll go ahead and let Dan -- I'll just say that, again, we think about this again with sort of, there's a small, medium, large component. Small is what we call emerging, kind of medium is what we call dynamic, and large is what we call institutional.

So there's different ways to look at it. You could look at it by revenue. You could look at it by AUM. But I will let Dan give you what we would like to have for the breakdowns.

So clearly, if we could put one-third in each bucket -- small, medium and large -- we would be satisfied with that result. But not all plans are created equal, so on those very large plans, again, it depends upon what the employer support is and what they are looking for from Principal. And I give you an example. Larry cited better plan designs.

Well, we use Retire Secure as a way to engage that plan sponsor and plan participant to improve the outcomes of the plan. We have seen some withdrawals this year from plan sponsors that flat out wouldn't support a better plan design. And if we have to adjust the pricing, they may very well leave Principal.

So again, maintaining pricing discipline, encouraging the use of Retire Secure, better plan designs, and then I would tell you again, our strong investment platform allows us to garner a larger percentage of the Principal branded funds on those platforms. And that's what's going to lead to profitable growth. We gave you on the guidance call that 27% to 29% returns, and I wouldn't alter that at this point in time. We still feel good about that as being our long-term objective.

One of the really positive points, Mark, about the performance of our block is that we continue to have about two-thirds of the assets and about two-thirds of deposits going into what we would call proprietary options. So that's a very, very high number, higher than I think -- needless to say, any competitor. And that's really a key to driving the kind of revenue growth and profitability that we need out of that business.

Okay, one very quick final question. You talk about the voluntary opportunity in Chile and I'm just curious, do you have the permissions and have you started marketing that to that Cuprum customers at this point? Or are we still trying to get that all ironed out?

I'll let Luis comment on that. Luis?

The answer is certainly, yes. We can market voluntary product to our Cuprum customers. Using right now the voluntary product which are being manufactured by Cuprum.

What we are looking for right now is being able to offer and to extend that offering, offering part of our products which are being manufactured by our mutual fund platform in Chile and adding some life insurance policies as well. So the answer is, yes, that we are willing to see, and we are working in order to see how we can extend and expand that offering.

Okay, thank you.

Thanks, Mark.

There are no further questions at this time.

This is Larry. I will make just a closing comment.

Thanks to everybody for joining us on the call today. We are very, very pleased with our fourth-quarter results, as well as our full-year 2013 results. We think that our strategy is clearly working.

I would just note, while 2014 has started off with some renewed volatility, I would remind you that we start 2014 with an asset base that's 20% above where was a year ago. And we believe that our higher asset base is going to continue to drive increased revenue and operating earnings for the Company during 2014.

With that, thanks, everybody, for joining us. I look forward to seeing many of you on road in the coming months. Have a great day.

This concludes today's conference call. You may now disconnect.