美國信安金融集團 (PFG) 2014 Q1 法說會逐字稿

Good morning and welcome to the Principal Financial Group first-quarter 2014 financial results conference call. There will be a question-and-answer period after the speakers have completed their prepared remarks.

(Operator Instructions)

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

Thank you and good morning. Welcome to the Principal Financial Group's first-quarter 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 the reading of the Safe Harbor Provision, 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 and 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 today 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 filed by the company with the Securities and Exchange Commission.

Now I'd like to 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 first quarter results. Second, I'll provide an update on the continued successful execution and long-term benefits of our strategy. And I will 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.

The Principal achieved strong results across our businesses in the first quarter with record total company operating earnings of $317 million. Coming off record operating earnings in 2013, the momentum in our businesses continues despite persistent headwinds including a low interest rate environment and a strengthening US dollar. The ongoing success proves our ability to execute, the relevancy of our strategy and the power of our diversified business model.

Strong earnings growth is continuing to increase return on equity, which expanded to 13% at quarter end, a 90 basis point increase year to date. As we've communicated, we expect to once again achieve at least a 15% return on equity within the next few years despite the impact of historically low interest rates in the US.

Results this quarter continue to reflect strong underlying fundamentals as momentum continues across our businesses. We continue to win and retain business because of our strong investment performance, ability to provide outcome-oriented solutions, excellent customer service and the diversity and strength of our distribution partnerships. Total company assets under management were a record $496 billion at quarter end and total company quarterly net cash flows were $4.8 billion.

Following are additional key growth metrics from the quarter. Full service accumulation sales were $2.7 billion and net cash flows were $1.8 billion. Margins in this business continue to improve, in part, because of our efforts to achieve better balance across all plan sizes. We are achieving a combination of good growth and attractive margins that reflect our leadership in this business.

Principal funds sales were $4.5 billion for the quarter. Net cash flows were $760 million. This is the 17th straight quarter of positive net cash flows in Principal funds, reflecting strong investment performance and our ability to offer solutions that financial advisors and retail investors seek.

Principal Global Investors ended first quarter with record total assets under management of $298 billion including record unaffiliated assets under management of $112 billion. First-quarter total net cash flows were $1.1 billion and unaffiliated net cash flows were $100 million.

Principal International, assets under management of $109 billion at the end of first-quarter was also a record. Net cash flows for the quarter were $2 billion. Suppressed market conditions in Brazil negatively impacted net cash flows at the beginning of first-quarter but flows rebounded to normal levels by the end of the quarter.

Individual Life's business market focus continues to be a differentiator for us with 58% of full-year sales from non-qualified deferred compensation and business owner and executive solutions. The increased activity in the non-qualified market reflects enhanced confidence among business owners as the economy recovers.

Specialty Benefits premium and fees were up 5% from the year ago quarter and loss ratios continue to stay within our desired range. In total we had a strong start to 2014 and we remain optimistic for the full year as leading indicators such as investment performance and sales pipeline continue to be very solid.

Next, I'll provide a few updates on the continued execution of our strategy. Our diversified business model is extremely well-suited for the world's aging population and emerging market middle-class growth. We remain committed to helping business owners, individuals and investors around the world achieve financial security and success.

In Full Service Accumulation we have added nearly 1,500 plans in the past 12 months. This not only helps drive growth in recurring deposits, which increased 10% on a trailing 12 month basis, but we also have the opportunity to educate more plan participants about the importance of preparing for retirement. With more than one billion people over the age of 60 worldwide and that number expected to double by 2025, there's never been a more critical time to promote financial literacy and retirement readiness.

Our new Principal Plan Works program was introduced to help plan sponsors and advisors improve participant retirement outcomes. Through this program we have delivered thousands of retirement readiness reports to help raise awareness about income replacement needs, encourage effective plan design and positively impact participant savings behavior.

As mentioned earlier, and as Slide 5 shows, investment performance remains strong and is a leading indicator of growth for our retirement and investment management businesses. Principal Funds currently has 17 four and five star funds as ranked by Morningstar and we expect that number to increase over the next six months. Principal Funds was once again recognized by Lipper in March.

The Principal Global Real Estate Securities fund ranked number one for its consistently strong performance. This important third-party recognition validates our ability to offer high-quality investment options to investors. REITs will continue to attract assets in the future due to their above average yield.

Principal International had record operating earnings in the quarter. Cuprum continues to be a meaningful contributor to earnings and as we said last quarter, we consider the acquisition complete and are now moving into the second stage of integration. With regular deposits from the mandatory retirement markets in Chile and Mexico, combined with upside potential from growing voluntary savings opportunities, our Latin America businesses remain in excellent position for continued growth.

As another example of our strong position in Latin America, in April, assets under management in BrasilPrev, our joint venture with Banco Brasil, reached BRL90 billion which equates to approximately $41 billion in US dollars. On a local basis, the compound annual growth rate of BrasilPrev assets under management has been 32% for the past five years. Because of their focus on asset retention, BrasilPrev is the market leader with more than 60% of total net flows in the Brazilian retirement market over the past 12 months.

It is important to understand that due to the expertise of our team, the Principal International businesses in our select emerging markets are performing well on a local level. The strong fundamentals of these businesses, our proven ability to execute and our relationship with premier partners allow us to weather short-term volatility, including foreign currency movements, to achieve long-term growth.

Principal Global Investors continues to build scale in the business which is driving margin expansion. Trailing 12 month pretax margin was 25.2%, an increase of 180 basis points over the same period last year.

Principal Global Investors multi-boutique business model with our diversified investment platforms combined with the strength of a share distribution capability allows us to maintain positive net cash flows as client demands shift. This, along with our strong investment performance and a robust pipeline gives us confidence for continued growth and margin expansion.

An important part of our overall strategy is to provide a better experience for advisors and customers to increase operational efficiency and to drive productivity through innovative uses of technology. The Principal was recently recognized in this regard by InformationWeek for the 17th year as a top business technology innovator in the US.

I'll close with some comments on capital management. With record operating earnings and strong net income, we remain well-positioned to increase shareholder value through a variety of capital deployment options. In the first quarter, we paid a $0.28 per share common stock dividend and bought back more than $72 million of shares outstanding.

Additionally, last night we announced a $0.32 per share common stock dividend payable in the second quarter 2014. This 14% increase over the first-quarter dividend demonstrates confidence in our ability to grow fee-based earnings and generate higher percentages of deployable capital. We remain focused on increasing our dividend payout ratio to our target of 40% on a growing net income base.

Finally, there is an active M&A pipeline that includes opportunities to further enhance our global investment management expertise. Our fee-based business model allows us to generate deployable capital and strategically deploy it to create long-term value for shareholders.

Before I close, I want to mention one other recognition the Principal recently received. For the 12th consecutive year Principal Financial Group was named one of the top companies for executive women by the National Association for Female Executives. We share their commitment to women succeeding in their careers and we are honored to receive this recognition.

In closing, we are very confident that the execution of our strategy and diversified business model will continue to enhance shareholder value. Terry?

Thanks, Larry. The first quarter results were a strong start to the year. While earnings were aided by one-time items that I will address shortly, our strong business fundamentals and proven ability to execute are driving continued momentum. This morning I'll focus my comments on operating earnings for the quarter, net income including performance on the investment portfolio, and I'll close with an update on capital deployment.

Total company operating earnings of $317 million for the quarter were up 36% over first-quarter 2013 results. Net revenues increased 13% over the year ago quarter, while operating expenses only increased 4%. This led to strong earnings growth and margin expansion. Total company assets under management increased to $496 billion at quarter end.

Excluding the corporate segment, 67% of the company's earnings in the quarter were from our fee-based businesses. These fee-based earnings come from higher multiple businesses that put less pressure on our balance sheet and provide more free cash flow. We strongly believe that our current business mix provides the right diversification for continued growth.

At quarter end, our return on equity, excluding AOCI, was 13%. This is a 320 basis point improvement compared to a year ago. Organic growth contributed 130 basis points of that increase. The remainder came from the addition of Cuprum and the negative impact of the actuarial assumption review in 2012. We believe that an ROE of 13%, driven mostly by operating earning expansion rather than just capital deployment, is a strong result. We continue to expect 50 to 80 basis points of annual ROE expansion into the future.

Looking at Slide 6, first-quarter 2014 operating earnings per share was $1.06, a 34% increase when compared to a year-ago quarter. As noted on the slide, we normalize first-quarter 2014 earnings for three items.

In Full Service Accumulation, results benefited by $15 million, predominantly from a true-up of a prior-year dividend accrual. In addition, RIS Guaranteed operating earnings were helped by $6 million from higher than expected variable investment income. These benefits were partially offset by higher than expected claims in Individual Life, which hurt earnings by $4 million in the quarter. Combining these items, we believe that the normalized earnings per share for the quarter was approximately $1, a 28% increase on an adjusted basis.

Now I will discuss business unit results. Starting with the accumulation businesses within Retirement and Investor Services, operating earnings were $185 million, an increase of 30% over the year ago quarter. As shown on Slide 7, net revenue was up 12% over first-quarter 2013 and 14% on a trailing 12 month basis. Trailing 12 month pre-tax return on net revenue improved to 33%.

Quarterly operating earnings for Full Service Accumulation at $119 million were up 38% from the year ago quarter. As I mentioned, the current period was helped by $15 million, most of which was a true-up on a prior-year dividend accrual. As a reminder, the year ago quarter benefited from an $8 million dividend accrual true-up. Excluding the true-ups from both quarters, earnings were still up more than 30%.

Net revenue was up 13% due to growth in the business and the strong equity market performance while operating expenses were only up 4%. As a result, the trailing 12 month pre-tax return on net revenue for the business unit improved to 33%. Full Service Accumulation sales, at $2.7 billion for the quarter, were strong as we continue to focus on striking the appropriate balance of growth and profitability.

Net cash flows for Full Service Accumulation were $1.8 billion for the quarter. Large case withdrawals can be lumpy and we did not have any in the first quarter. We still expect net flows for the year to be 1% to 3% of beginning of year account value.

Principal Funds operating earnings were $25 million for the quarter, a 31% increase from the year ago quarter as the strong sales over the last several years are translating into bottom-line results. On a trailing 12 month basis, revenue was up 21% and operating margins continued to improve due to the scale-based nature of the business. For the quarter, Principal Funds' sales were $4.5 billion, contributing to $760 million of net cash flows. While down from a very strong year ago quarter, these results were solid relative to the industry.

Individual annuities first quarter operating earnings were up 17% to $34 million. Increased fee revenue in our Variable Annuity business due to market appreciation has more than offset spread compression on our fixed deferred block of business. As macroeconomic factors improve, we expect individual annuities earnings to be around this level going forward.

Slide 8 covers the guaranteed businesses within Retirement and Investor Services. First quarter operating earnings of $32 million were up 13% over the year ago quarter. On a trailing 12 month basis, pre-tax return on net revenue was 81%. Investment Only operating earnings improved 15% from the prior-year quarter to $17 million.

In addition to the benefit from variable investment income this quarter, business rolling off the books is being replaced with higher-margin new business. Full-service payout operating earnings were $15 million for the quarter, a 12% increase over the year ago quarter, aided by variable investment income. We continue to approach these guaranteed businesses opportunistically.

Slide 9 shows Principal Global Investors operating earnings for the quarter were $27 million, up 33% from the year ago quarter. Total net cash flows for the segment were $1.1 billion for the quarter. Assets under management increased 9% to $298 billion leading to revenue growth of 11% over first-quarter 2013.

Unaffiliated assets under management ended the quarter at $112 billion with $6.5 billion of deposits coming in during the quarter. There's continued demand for our diversified investment options, especially as investors seek yield. The percentage of our assets under management in equity investment options, which generate higher revenues, has increased to 38% of the total, up from 31% compared to the year ago quarter. Diligent expense control resulted in expenses only growing 6% over that timeframe. Trailing 12 month pre-tax margin for the segment improved to 25%.

Slide 10 shows first quarter 2014 operating earnings for Principal International of $63 million. These record earnings were a strong result especially considering the impact of the strengthening US dollar. Adjusting for Cuprum, operating earnings were up 14% over prior year quarter on a local currency basis. This highlights the strength of our businesses in the local markets.

While exchange rates have negatively impacted our US dollar financial results, we feel very confident in the growth prospects for the markets where we do business. Quarterly net cash flows for the segment were $2 billion, contributing to an increase in assets under management to a record of $109 billion at quarter end.

Turning to US Insurance Solutions, operating earnings of $43 million were up 22% from the year ago quarter. As shown on slide 11, Individual Life operating earnings were $17 million for the quarter. Results in the quarter were negatively impacted by elevated claims severity. When compared to the prior-year quarter, sales in first quarter 2014, excluding Universal Life with secondary guarantees were up 11%. We continue to intentionally change our desired sales mix to be less focused on Universal Life with secondary guarantees, thus improving the risk profile of our sales portfolio.

As shown on Slide 12, Specialty Benefits operating earnings of $26 million were up 25% from the year ago quarter. The loss ratio for the quarter was 68%, right in the middle of our 65% to 71% expected range. For the quarter, total company net income was $294 million, a 65% increase over prior-year quarter. Realized capital losses continue to trend down at $23 million for the quarter. Credit related losses continue to improve and at $12 million for the quarter, are down 39% from the year ago quarter.

Turning now to capital deployment as outlined on Slide 13, we have announced plans to deploy more than $475 million of capital so far in 2014. This includes a 14% increase to our second quarter common stock dividend that we announced last night and $100 million debt reduction that was executed on March 1. In addition, during the first quarter, our board authorized a $200 million share buyback program. This is in addition to the $55 million remaining from last year's authorization. Year to date we have spent $100 million on share buybacks, leaving $155 million of authorization for additional buybacks.

Our capital deployment strategy is fluid with multiple options available to enhance shareholder value. We believe that we will end the year on the top end of the $500 million to $700 million capital deployment range that we discussed in our outlook call.

In closing, we are extremely pleased with the strong results in the quarter. We are well-positioned for future growth across all of our businesses and our business diversification enables us to be successful in various economic environments. This concludes our prepared remarks. Operator, please open the call for questions.

(Operator Instructions)

John Nadel, Sterne Agee

Good morning, everybody. Larry, I'm not too shy to admit that I'm very surprised at the level of expense control in the quarter and maybe I shouldn't be so surprised by it, but I am. Can you give us some sense, you hit on the operating leverage, but you didn't really go into any details on what's driving the expense controls here. I just want to get a sense for -- is there anything in the first quarter level of overall general expenses -- I'm not talking about DAC or amortization -- that you think was sort of one-time in nature where we ought to expect it to pick back up as we look throughout the year?

Good morning, John. This is Larry.

Good morning.

I think in response to your question, John, what I would say is that the years 2010, 2011, 2012 were very, very challenging relative to the issues around expense control. Some of that was because -- it was a good news thing -- because we were having a lot of growth. We were bringing on a lot of assets. Obviously there is an acquisition cost associated with that.

As I've said before, I think to some extent we were emphasizing a little bit too much growth and a little too much at the expense of profitability. I think that the team did a great job in 2013 of doing a good balance between growth and profitability. So we started to see some improvement in margin expansion in 2013.

I think when you roll into 2014 and when you look at the first quarter, John, it's probably two things there that are worth mentioning. One is sustainable, which is that as the interest rates begin to move up a little bit, as your discount rate moves up for all of your employee benefits, that has a positive and sustainable element to expense control.

The other one, which is a little bit more one time, was again in the asset management business. We had sort of higher expenses in the fourth quarter associated with essentially, employee compensation, particularly within the asset management group, that doesn't necessarily recur in the first quarter.

So that one, we hope, is actually going to be back later in the year because every time we are paying high performance fees it's because the funds did well and there were good flows. So a good chunk of it is sustainable. Some of it is a bit of seasonality. I hope that helps a little bit.

Yes, that's helpful. Any chance to give us some sense for how much the corporate pension and benefit plan costs may be down in 2014 versus 2013? My sense is it's actually a pretty reasonable tailwind.

Yes. It's probably in the range of about $60 million pretax.

Okay, that's very helpful. Thank you very much.

You bet.

Erik Bass, Citigroup.

Hi. Thank you. Can you provide a little bit more detail on the results in the international business at a country level? And in particular, can you comment about the local currency flow and earnings dynamics in Brazil, Chile and Mexico and how those compared to your expectations?

Yes. I'll let Luis comment on that. I would just say again, would emphasize that Principal International had a really nice quarter and a nice quarter not just in terms of earnings, but a nice quarter in terms of flows, in terms of sales, in terms of expense control. As Terry said in his earlier comments, if you look at our PI local companies operating in their local markets and their performance in local currencies, you've seen a 14% increase year over year aggregate across all the PI member companies in local terms.

So I think that validates very much that the issues here, to the extent investors have concerns around emerging markets, what they should not have concern about is the performance of the companies in local terms. When you translate that back to USD you may see some diminishment due to the strength of the US dollar. But at the local market level, I think it's really important that investors understand these companies continue to grow at double-digits. So with that, I'll throw it over to Luis.

Yes. Thanks. Erik, as Larry said, year over year in local currency we are showing a double-digit 14% growth year over year. But if you are paying attention to quarter over quarter and you're paying attention to our last quarter 2013, in terms of USD we are showing a growth equal to 3%, which is pretty interesting but in local currency it's an 8% percent.

We continue showing a very, very dynamic growth in our companies in PI. Having said that, this is the proof that we have a very resilient business model in our markets and certainly we are not just working in emerging markets.

We are working in, again and again, in select emerging markets which is the main difference. So it's a very resilient model and again, repeating, in a very interesting number of select emerging markets.

About FX, we faced very important headwinds in the last year, 14% on average in Brazil and Chile, it kind of represents 6% in Mexico. What we are being able to see in the last quarter, that the situation is much more stable for these emerging markets. And our expectation is that going forward FX for emerging markets are going to slide probably about in the same level that they are today.

Does that help, Erik?

Yes. Maybe if you could just add a little bit more in terms of the flow dynamics where I think you commented for Brazil that, if I have this right, January was a pretty weak period when you saw the height of the turmoil, but the flows have recovered in February and March. And I assume that's continued probably through April. Then is it fair to assume that Chile and Mexico, the activity levels are a little bit more stable since it is a mandatory system?

Yes. I think all of that is very, very accurate. And again, we have seen the situation in Brazil sort of return to what you would consider to be normal in March and April.

Okay. As we look year over year in terms of the earnings comparisons on a local currency basis, are there any unusual things that we should factor in in making the comparison? I know you had some tax changes as well as the accounting changes in Brazil that may affect the year over year.

This is Larry. I don't think there is anything unusual. We had the fourth quarter commentary around Mexico tax changes and we also had the change that we opted to make to upgrade our amortization of the intangible relative to BrasilPrev. That was in fourth-quarter. Nothing in first quarter and nothing that we can see going forward, although of course, one never knows.

Okay. Thank you for the color.

You're welcome.

Seth Weiss, Bank of America.

Hi. Good morning. Thank you. If we could talk a little bit about accumulation and the run rate implied by this quarter in terms of how it fits in with your margin guidance of 30% to 32% for the full year. Even after sort of normalizing for the items you mentioned, if we run rate this out the full year, we'll, I believe, significantly outperform what your guidance was. So maybe could just help us think about run rate earnings. Terry, you had spoken about this being a decent run rate for individual annuities. If you could touch on FSA, which on a normalized basis was running over $100 million, that would be helpful as well.

Seth, this is Larry. I suspect both Dan and Terry will want to comment. I would just, again for those maybe not quite as familiar, I want to drop back and maybe remind everybody that in the outlook call we had at the end of last year looking into 2014, we talked about net revenue growth for the accumulation businesses in that 6% to 8% range and we talked about pretax return on revenue in that 30% to 32% range. Obviously at the moment, the higher equity markets from 2013 give us, if you will, a tailwind coming into 2014.

Net revenue, at least in the first quarter, was growing above the top end of that range. In our outlook call, what we assume is that you have 2% per quarter equity market growth going forward.

So if, in fact, that's what you have, then that 12% net revenue growth is going to start to come down a little bit. And when that happens, I think we're also going to start to come down toward the top end of that range. So that's a general set of comments looking forward.

Terry, do want to make any further comment on it?

No, not on that one, Larry. But I think on what you're talking about, Seth, is also on the variable annuity block of business being a little bit higher than what we had seen in the past -- $34 million this quarter. We see that the variable annuity block has benefited from some higher fees because of the equity market run up and that's more than offsetting some of the fixed deferred annuities spread compression that we are seeing.

We see that this is a pretty good run rate on a go-forward basis. So that observation of it being a bigger block of business for us on a go-forward basis is a good observation.

And then I'll ask Dan maybe to comment a little bit for you, Seth, on full service accum.

On full-service accum, it's refreshing because, although we've had some benefit from the equity markets, a lot of things are working down into the trenches of the business itself. You'll note that we had good retention of existing plans.

We also have added roughly 1,500 new plans in the last 12 months. And if you don't lose many, and you're able to add those new plans, you get that flywheel going relative to deposit, which all contribute to improving on your margins.

The other note I would make is we are continuing to see strong investment performance from Principal Global Investors. It's giving us more product to sell, more competitive product, which means a higher percentage of our sales going towards proprietary.

And then, as mentioned in Larry's prepared comments, on the mutual fund side which also is just a very leverageable business, we have really strong investment performance with 17 funds now with four and five star ratings from Morningstar. Again, very strong margins and again, over the course of the year I think the best way to look at whether it's net cash flow or sales or margins is to look on a trailing 12 month basis and I'm still very comfortable in that 30% to 32% for our S accum.

Okay, thanks a lot. And Dan, maybe just to follow up on FSA, because even assuming that 2% normalized run rate, I'm still getting very strong earnings growth there. Should we assume that if markets stay favorable as they are, there may be a higher re-invest in terms of the expense line in FSA?

The demands there are always high so we constantly are making investments in distribution and technology and of course the mobile technology is a big part of that. We know that we are in the top quartile relative to margin and profitability for Full Service Accumulation, so there is what I'll call some restrictions in the marketplace. But again, don't lose sight of the fact that we are very deliberately focusing on that mid to small sized market plan as opposed to the jumbo plans, which is going to just naturally contribute to having higher margins than maybe what we had two or three years ago.

Okay. Thanks a lot.

Christopher Giovanni, Goldman Sachs.

Thanks so much. Good morning. Wanted to see if you could comment on a few regulatory areas which thankfully, for you guys, haven't been much of a focus. But first at the federal level, and given your size and the disposal of the bank maybe not an issue, but certainly a lot of focus not just on insurers, but asset managers as well. So anything you guys are participating in or preparing for from that regard?

And two at the state level, it's hard to ignore the influx of the insurers moving into Iowa. And just wondering if that's having any impact on either trying to poach your talent or issues in terms of how you run your business.

Yes. Those are interesting questions, Chris. I appreciate that. This is Larry.

Let me again just kind of back up because I think your question is interesting and one of the things that I think has differentiated Principal over the period since the financial crisis, because we've had within the industry and across all of financial services, we've had very significant both legislative and regulatory change that has gone on. The two most noteworthy ones, I think, would be the Affordable Care Act and Dodd-Frank.

I think, to the credit of this management team, I think they've done an excellent job in managing and maneuvering around the substantial change that both of those pieces of legislation are going to bring, broadly, to financial services. The very effective wind down, very successful financial wind down of our medical business, difficult as the decision was, I think really position us well.

And then as you noted, the de-registration of the bank. Again we are still in the banking business, but we've changed the charter of the bank so that we no longer have a Federal Reserve oversight Principal holding company.

Those are really significant items that may not get full credit for those who maybe aren't as close to our industry or our businesses. I'd say going forward, most of the regulatory things that could snag us, for the most part we have maneuvered around.

There is still, as you know, the potential around we don't know what systemically important definitions are going to be around asset managers. I would say, we're sort of in the range of somewhere between 25 and 30th largest Global Asset Management Company, and I'll let Jim comment in a minute.

So it's kind of hard to see that we would be in anything approaching the first phase of any definitions of systemically significant. So I don't really worry too much about that. Again, I'll let Jim comment.

On your point about Iowa, that's an interesting question. Actually if you dig into that, what you find is the company is re-domesticating. But in many cases, and I think this is true both of Symetra and Fidelity and Guaranty Life, they are re-domesticating, but if you actually look at the jobs that they are going to bring here, it's sort of numbers in the hundreds.

They're going to keep many of their existing -- they're going to keep their locations and their existing employees. So maybe over time, in 5 or 10 years it has some impact. But we're talking maybe 100 to 200 jobs that they will be bringing here over the next year or two. So I don't see it as a big factor. With that, maybe I'll throw it over to Jim.

Thanks, Larry. In terms of regulation of asset managers, if you go back to the financial crisis, the one piece of the asset management business that was really at the center of the troubles was money market funds and whether they could preserve the buck. I think, appropriately, if one listens to what regulators are doing related to asset managers, their focus is on money market funds and that's where the systemic risk might be. But fortunately and deliberately, that's a pretty small business for us.

We handle clients' cash in appropriate ways and Larry talked about our bank and the insurance separate accounts. So money market funds is something we are not at the center of.

If I look at regulation and how it affects our asset management activities, it's much more the second order effect of how it affects the parties we trade with. So we had a new market system came in in 2007 with a lot of controversy about equity trading. Like all big equity houses we have much more sophisticated metrics and controls now than we used to have to cope with those competitive markets.

Then of course in the bond market, as you know, we are a big high yield manager. We deal in a lot of relatively illiquid bonds like preferreds.

I think that the consequences of Dodd-Frank and the fact that the banks are devoting less capital to bond trading are something that we have worked on, upgraded our trading capabilities and essentially were able to work on it. So I think it's more second order than first order for us in terms of asset management regulation.

Just to close, of course there is a lot going on in Europe. I think that may actually turn out for us with the alternative products we have in Europe and the new regulatory framework there, it may turn into an opportunity.

I appreciate the thoughts and then one just quick follow-up. In the past quarters you've talked about RBC ratio as well as excess capital and didn't see that in the first quarter press release. So Terry, maybe if you could give us an update on where you stand and any changes in your targets there.

Sure, Chris. Our targets for long-term for the end of the year for the RBC are still in that 415% to 425% range. We make estimates during the year and that's still a pretty good range for us.

We were up 439% at the end of the year. We brought that down purposely because of the $100 million of surplus note redemption. So we're back down into that range and expect to be there at the end of the year as well.

Thank you.

Thanks, Chris.

Ryan Krueger, KBW

Hello. Good morning. A question on the M&A pipeline. One thing I'm wondering about is, does that comment include opportunities to buy in additional stakes from boutiques that you already own?

Yes. Ryan, this is Larry. Our comment around M&A would be broadly inclusive of any deployment of capital. So if we were to buy a bigger ownership share of some of our existing boutique, obviously that would be a deployment of capital. So yes, that is part of our commentary when we talk about the M&A pipeline.

And then, my understanding was that you had to accrue as if you already owned 100% of these boutiques under the statutory accounting regime. So one, am I right and if I am, would that suggest that when you do buy into additional stakes it actually doesn't really impact your RBC ratio at all?

Right. I'll let Terry comment on that and then Jim may want to comment as well.

Yes. Ryan, this is Terry. The non-controlling interest that we have is reflected as mezzanine equity on both a GAAP and statutory basis. So we already have reflected the obligation that we have to acquire some of these boutiques that can be actually put back to us.

We recognize that already, but as Larry says, as we deploy that capital to buy a bigger share of that, then we get the earnings in it and then we'll release it as well. But it doesn't have an impact on the RBC ratio.

Jim, maybe do you want to comment about how we view the relationship between what we own versus what each boutique management owns?

Yes. There's two different types. The boutiques that are consolidated, you're correct that we put in 100% of the boutique into our income statement, but then we deduct for the minority interest. So if we buy in some of that minority interest, it has a positive impact on earnings.

The other sort is where we are on a smaller stake with our non-consolidated equity method accounting. In those cases, if we buy in some more then we end up with a bigger share on the equity method and eventually it will trip into consolidation at a point for debate between our CFO and our auditor. That would be the technical side of it.

In terms of the business side, we are keen eventually to buy in some of these minority interests, but when we've bought a stake in a boutique, particularly from a fund or an entrepreneurial manager, we like them to keep some equity in the boutique for the rest of their careers, in effect. So buying in tends to be related to succession planning.

If a retired partner in a boutique -- if he retires -- he or she retires, then we will buy back their stock and sometimes have limited recycling to the next generation, but that's more difficult, technically. So I think on balance, we view positively that evolution, but we take it in a measured way because we like to keep the equity for alignment.

Understand that. That is very helpful. And then just lastly on the PGI pipeline, you mentioned that was robust. Any more color on how does it compare to recent quarters and what types of mandates that you're currently seeing demand for?

It's Jim McCaughan here. In terms of the pipeline, you know sales so far this year are up high single-digits percent from last year, which was a record year for sales. So far this year the sales are looking quite buoyant and the pipeline, with its visibility is at least as good as it's ever been for us.

I think it's the same story as it's been for the last two years on sales, which is increased amount for specialty products. Terry mentioned yield in the script and we have a remarkable array of yield-biased investment capabilities from real estate, other alternatives through high yield equities, high-yield bonds, preferred securities and all the real estate products.

So if you add it up, we are really in good demand for investors seeking yield. Also more broadly, specialty products; things like small cap and emerging markets.

Emerging markets may not be this year's theme but they're coming back. So we are well-positioned we believe, to continue building that pipeline, which as I say, has been quite strong this year.

Great. Thank you very much.

Thanks, Ryan.

Mark Finkelstein, Evercore.

Good morning.

Hi Mark.

I guess I wanted to go back to Eric's question, I think it was. Just looking at the earnings internationally and again, if you look at the AUM growth, in particular in Brazil, very strong, outstanding. But it actually doesn't feel like, when you adjust from a constant currency basis, it doesn't feel like the earnings are catching up with the AUM growth. I understand there's amortization changes and there's other things going on.

But I guess the real question is, are there any dynamics that you're currently seeing, particularly in Brazil to start, that would suggest that going forward earnings shouldn't keep up with AUM? Are there any market dynamics, case sizes, anything that would -- fee pressures, anything that would influence that?

This is Larry, Mark. I'll offer a few opening comments and then Luis can comment as well.

As I said in my opening comments, if you look at AUM, assets under management, when you look at assets under management over the past five years in BrasilPrev, what you'd see is about a 32% compound annual growth. So we are at, again as we said, we're at BRL90 billion which is $40 billion. When we bought into that joint venture in 1999 it had less than $1 billion in assets. So I'd say that's a pretty amazing growth rate.

In terms of operating earnings, I think that we're in the range, in terms of again, five-year compound annual growth, we are in the range of 25% per year compound annual growth rate. So they correlate, but similarly to say Full Service Accumulation, you're not going to see your OE growth rate be parallel with your AUM, but they're going to be in the same ZIP Code would be the way that I think about it.

Now on your question about is there anything in the market that could disrupt, change that, there are competitive pressures in Brazil just like any other market, although there's a fewer number of players. Basically the significant players are the banks, particularly the private banks; Bradesco, Itau.

The thing that might enter into it in the long-term is that BrasilPrev for the most part, has pursued the retail market. One of the real opportunities that is there to even further the growth of that company if that seems even likely when it grows to 30%, would be to be more active in the corporate pension market in Brazil as compared to just the retail pension market.

Again, we're only going to do that if it makes sense financially, but that would be an example of where you might see increased growth, but if you try to measure it profits per dollar, you might be able to make compromise because again, it's the corporate market as compared to the retail market. This is an amazing company and again, for those who maybe aren't quite as familiar, if you want to hear more or see more about the performance of this company, it is part of a publicly traded company in Brazil called BB Seguridade and you can get some great insight into this very fast-growing, very profitable company.

So Luis, anything you'd like to add?

Mark, this is Luis. Probably what you have to keep in mind also if you're looking at the train of BrasilPrev, which is a very, very interesting company and as Larry said, a company that is having a very interesting performance in the last five years, is certain things are happening also in Brazil.

First, the interest rate is going down. That has been the trend for the last five to six years. The market is getting a little bit more competitive. So we have seen a very moderate as well, margin compression in BrasilPrev, but that is totally normal in that kind of environment going forward.

Does that help?

Yes, it does. Thank you. One quick question maybe for Dan.

There have been some recent actions, Dan, largely on the fiduciary standards, largely directed toward plan sponsors, relate to sub-account options, investment options for participants. It sounds like it's largely directed at plan sponsors in terms of the responsibility.

But I'm just curious if you see any impacts towards your business in the fee structures that you're able to collect or PGI is able to collect on 401(k) accounts.

Yes. Thanks, Mark for the question. So really there is a couple of issues. First is around the appropriateness of the fees. The second is whether or not there is adequate investment options available to the plan participants.

As you know, we've run a multi-manager, multi-asset class, multi-style approach for over a decade and that's even true within our target date funds. As it turns out Principal Global Investors does manage a generous portion of those, but we've also taken the approach that we're going to put best in class investment managers into those respective lineups.

So you could go right through our target date funds. You could go through many of our standalone investment options and find that we have a mixer of both proprietary and non-proprietary.

As far as fee disclosure and fee reasonableness goes, that gets scrutinized by the advisor and the plan sponsor every year. Most of those discussions take place annually.

So I don't see any issues that we're up against that the rest of the industry isn't. As a matter of fact, I think we are well-positioned because of our willingness to go multi-manager and our willingness to have very adaptable fee schedules depending upon what the plan sponsor's looking for in terms of services for their participants.

Does that help?

Yes, it does. Thank you.

Thanks Mark.

Eric Berg, RBC Capital.

Thanks very much and good morning to everyone in Iowa. My first question is directed to either Larry or Dan, whoever feels best suited to answer it. It seems like there continues to be a lot of commentary about how the 401(k) business is going to change in a big way with some people who are self-proclaimed experts and some people who are genuine experts, I suppose, saying that we are going to see all sorts of new options; private equity, liquid alts, hedge funds, ETFs, this, that. It boggles the mind, all the choices.

I consider you guys absolutely to be experts on the 401(k) business. If there's anyone who knows whether this can happen and to what degree, it would be you. Where's the business headed in this regard?

Yes that is interesting. This is Larry. That is a really interesting question.

What I would say is that we often forget that the average participant in a 401(k) plan likely doesn't read the Wall Street Journal every day and they don't turn on CNBC Squawk Box or Bloomberg or Fox Business Channel or any of the other media that probably many of us on this call look at multiple times each and every day. So therefore we forget that the average 401(k) investor is in a very, very different world.

They're a middle income sort of person, focused on their job and their family, and they know they need to save, but they're probably not an investment expert. I think one of the unique elements of our business model and the platform that we've put together including the investment platform, is that we get that. We understand that and we understand that our role is to construct very solid, but also able to understand sort of investment options.

So when people start talking about ETFs and liquid alts and private equity and all of that stuff, I too chuckle a little bit because it's really hard to see how that is something that can be easily explained in a way that the average 401(k) participant is going to have any interest in. Now I will say, on the other hand Eric, I will say the area where it's possible those types of options could make some inroads would be to be a part inside some sort of target date structure.

So for example, taking 5% of an investment allocation inside a target date fund and then deciding whether some alternative investments like the ones you described might be a piece of that as a way to perhaps have higher investment performance or more stable investment performance. But that's something where the participant really doesn't need to be involved in that and frankly wouldn't be involved in that.

Eric, I'll pile on just a couple of comments and that is, remember that we still make available a brokerage window on plans where the advisor or the plan sponsor is keen on providing additional investment options. But most of these plans, and I've sat in a lot of trustees meetings, 10 to 15 options, 30% of these dollars generally flow to a target date or target risk like fund.

There's 30 minute group employee meetings that you've got to get that message out. They're too complicated.

My last proof point; even if you look at non-qualified deferred compensation which oftentimes funded with life insurance, on those that are funded with mutual fund options, they're not asking in that target market for exchange traded funds or hedge funds in that place as well. So I do think it's more of a after-tax investment option for many of the high wage earners.

Last question is for Jim. Jim, I would have thought, given the strength of sales in 2013 that your first quarter 2014 cash flows would have been better than they were. What were the dynamics in the quarter that held back the cash flow?

Yes. Thank you for that question, Eric.

There's a very rapid set of changes going on in clients' desires and needs. We've talked before about the move by clients away from active core products. That actually wasn't a big factor this quarter, but it's one that we must be vigilant about looking forward.

Our challenge, by the way, with clients who are in active core products, which may be less attractive in future, is to offer them some of these more in-demand products that I talked about earlier in the call. That's one element.

But in the particular quarter, there were a lot of moving parts. Some of this has to do with these kind of inevitable losses as clients' requirements change.

So for example, there's no one big theme, but, for example, we had a withdrawal in our currency group which was really related to the changed hedging policy of the client. We had withdrawals from stable value, which was, I think, well known in the move more into equities, more into target date funds as people gained confidence.

We had some profit taking in real estate. That leads to an outflow, but it also leads to a happy client who hopefully will come back for more when we've got propositions to offer them.

I think this will continue to be a theme. The fact that we have the attractive products to replace it with is why, structurally, we feel confident that we'll continue to have positive flows in the institutional space, but I do think it's very important that we be continued diligence and vigilance about dealing with those clients.

Thank you.

Hope that helps, Eric.

Steven Schwartz, Raymond James & Associates.

Hello, everybody. The last part was something that I wanted to ask about. Jim, the clients that you reference, these changes that you reference, this is all on the PGI direct side, right?

Yes. That's correct.

Okay, just wanted to make sure that that was correct. Just a couple.

Terry, early on you talked about the pension expense. There was some discussion with regards to the net revenue margin for FSA and others in FSA being very, very high. The guidance that you gave late last year, did that incorporate this lower level of pension expense in it?

Steven, this is Terry. Yes, it did. That factored in.

Now that will come in all year long. In fact, one of the things that we talked about the guidance is that it will also reflect some other changes such as variable income. That's somewhat spotty throughout the year as well, but over the long period, as Dan talked about, that you'll see this revenue and expense get back to that higher end of that 30% to 32% return on net revenue range.

Okay. And then on the variable investment income, it's correct that it was all -- or real estate, it was all allocated to guarantee and in individual annuity, there's nothing else out there that's not being accounted for?

Steven, this is Terry. The variable annuity that we called out was a little bit bigger in the guaranteed businesses. The investment only, the full service payout, you can actually reflect it there, but there was also some variable income that was spread among all the other businesses.

What we found in those other businesses, that there was some partial offsets to that. For example, the individual annuity. It got some variable income as well, but that plus a lower effective tax rate somewhat offset some of the higher amortizations of DAC. We looked at it as, what was a good number for each of the businesses and called those numbers out.

Okay. And then one more, if I may, on China. I don't believe that you all have participated in the RQFII process yet. Are you intending and if not, why not?

I'll look to Jim to maybe answer that one, Steven.

I think the answer to that is yes, we're looking at it. We have QFII capacity through our joint venture so it happens through CCB Principal Asset Management which is part of Principal International.

We at Principal Global Investors are managing or advising rather on those QFII assets. Our QFII is expanding, it's relatively modest as far as global asset managers are concerned, but we do expect to be involved.

This is Larry. I think one of the interesting things is that the challenges have been so significant in the Chinese equity market that I think many of the more sophisticated investors are now actually starting to think that we're getting closer to maybe an interesting opportunity relative to Chinese equity A shares. So it will be interesting to see what happens over the next couple of years.

Yes, I would agree with that.

Okay. Thank you, guys.

You bet.

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

Thanks, everybody for joining us for our call this morning. As we said, we're very pleased with our strong start to the year and we are very pleased with the ongoing momentum of our businesses. We look forward to visiting with many of you on the road in the coming months. I hope everybody has 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, until end of day May 2, 2014. 18044564 is the access code for the replay. The number to dial for the replay is 855-859-2056 for US and Canadian callers. Or, 404-537-3406 for International callers.

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