美國信安金融集團 (PFG) 2015 Q1 法說會逐字稿

Good morning and welcome to the Principal Financial Group first-quarter 2015 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 Mr. 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 a reading of the Safe Harbor provision, CEO Larry Zimpleman, COO Dan Houston, 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 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 them or update them to reflect new information, subsequent events or changes in strategy. Risks and uncertainties that could cause actual results to differ materially from those expressed or implied are discussed in the Company's most recent annual report on form 10-K, filed by the Company, with the Securities and Exchange Commission.

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

Thanks, John, and welcome to everyone on the call. This morning I will comment on three areas. First, I will discuss first quarter results at a high level, followed by more detailed comments from Dan and Terry. Second, I will comment on the environment surrounding our businesses and I will close with some comments on capital management.

As slide 4 shows, the principal delivered strong results in the first quarter. First quarter operating earnings of $326 million were up 3% over the year-ago quarter and are the second highest quarterly earnings on record in what is normally a seasonally low quarter. This compares to a very strong year-ago quarter that benefited from large real estate sales and higher pre-payments, which contributed to higher variable investment income across the businesses.

Persistent macro economic factors, including low interest rates, strengthening US dollar, and low inflation, all masked excellent results in the first quarter. If you adjust for these macro economic factors, operating earnings growth would have been in the 10% to 12% range over the year-ago quarter, demonstrating the strength of our team's ability to execute.

On a trailing 12 month basis, operating earnings grew 16% over the same period a year ago. Our ability to generate above-market earnings growth speaks to the strength of the fundamentals of our business and the power of our diversified business model. The first quarter was a good demonstration of our ability to strike the right balance of growth and profitability.

Total company net cash flows of $9 billion in the quarter were double the year-ago net cash flows and contributed to record assets under management of $530 billion. Assets under management increased 7% over the year-ago quarter despite a $25 billion negative impact from foreign exchange rates. As I have said before, net cash flows and assets under management are leading indicators of future earnings growth.

Next, I will comment on the current operating environment for our businesses and some positive developments we see contributing to our growing momentum. The Principal is a leader in retirement and asset management and we are passionate about helping people save and invest to meet their long-term financial needs. Throughout my 43 year career, I have served on many industry committees that focus on insuring that we have an environment conducive to helping people prepare for retirement. I, along with other members of Principal's leadership team, have met with leaders in Washington and around the world many times to advocate a system that works to benefit those who need it most -- middle and lower income workers.

Since ERISA was passed in 1974, I have seen approximately 40 different pieces of retirement legislation and regulation. The latest is the recent Department of Labor proposal potentially redefining the fiduciary rules for operating in the retirement business. While it is too early to know the precise impact of these proposed regulations, and while I acknowledge there could be challenges, I will offer two initial observations.

First, this proposed regulation will continue to further complicate the US retirement plan industry. This increased complexity will continue the 30 year trend of market share shifting from second and third tier players to recognized leaders like the Principal. Second, it is clear that the underlying intent of the proposed regulation is to encourage more in-plan solutions for job changers and retirees. This should improve our asset retention rates over time from what is today an industry-leading percentage of 50% to 52%. I believe the net impact of the proposed regulation will shift some of the influence from the advisor and brokerage firm to the retirement services provider.

Our value proposition as a total retirement solutions provider remains a key differentiator for advisors and for plan sponsors. Our focus on helping plan participants take the appropriate actions to save for retirement and our ability to serve plans of all sizes garners high client satisfaction scores year-over-year. We have received an average overall satisfaction score of 95% over the last three years in plan sponsor surveys conducted by Chatham Partners and the Principal contributing to industry-leading retention rates.

We will not waiver in our commitment to providing industry-leading, total retirement plan solutions, including new and innovative in-plan solutions and to working with advisors who share our goal of helping people save. Our established infrastructure of locally deployed and experienced sales and service professionals and strong advisor relationships are not easily replicated by new entrants into the markets we serve.

As a global asset management leader, we continue to also provide investors around the world the outcomes based investment solutions they seek. Despite a general shift to more passive strategies among institutional investors, we are still seeing strong interest in our fund lineup that focuses on alpha-generating strategies. Continued strong investment performance and a broad platform of outcomes-based investment options drove nearly $5 billion of net cash flows in Principal Global Investors and Principal Funds in the first quarter.

As you know, Principal International has become an increasingly important part of our growth strategy. Last month many of you took the opportunity to attend our investor event in Santiago, Chile, or listened to the webcast. We hope you came away with a much greater understanding of the power and long-term growth opportunity of our Latin American operations. The Principal's long-time retirement expertise, combined with marquis distribution partners in those countries, uniquely positions us to capitalize on the tremendous opportunity created by the undeniable savings needs of the fast-growing middle class in those countries. The management teams in Brazil, Chile and Mexico are keenly focused on being a leading retirement and asset management provider in these key markets.

Cuprum continues to perform exceptionally well and remains a leading pension provider in Chile. The opportunities in the voluntary market are taking hold, as well, with Cuprum in the top spot for voluntary market share among Chilean AFP providers. Voluntary sales in Chile increased 33% over the prior year quarter on a local currency basis. The success of Cuprum is further validation of the strength of our acquisition strategy. BrasilPrev market-leading trailing 12-month net cash flows in P and VGBL were 53% of the industry at the end of the first quarter.

This contributed to the company recently capturing the highest market share by total assets under management as well, according to third party sourced data. Our leadership positions in Latin America, and increasing presence in Asia, are proof the global expansion strategy we put into play more than a decade ago is absolutely the right one for long-term growth.

Finally, I will provide an update on capital management. Our fee-based business model allows us to generate free cash flow and strategically deploy it to create long-term value for shareholders. We remain well positioned to deploy capital through a variety of options in addition to supporting organic growth.

Through the first quarter, we have already announced plans to deploy more than $700 million of capital in 2015 on common stock dividend increases, a stock repurchase authorization announced in the first quarter and our planned purchase of AXA's pension business in Hong Kong, which is on track to the close in the second half of the year. Last night, we announced a $0.38 per share common stock dividend payable in the second quarter, a 6% increase over the prior quarter, which is the eighth increase in the last 12 quarters. Additionally, the merger and acquisition pipeline remains active with selective opportunities to further enhance our global retirement and investment management platform.

Before I turn the call over to Dan, I want to highlight one award the Principal received in the quarter, which in my view is one of the more important recognitions we have received. The Ethisphere Institute recognized the Principal as one of the 2015 world's most ethical companies. The designation recognized our efforts to conduct business by fostering a culture of ethics and transparency at every level of the Company, which drives quality for our customers, timely information for our shareholders and deep involvement in our communities.

In closing, I remain confident in our ability to deliver sustainable profitable growth throughout 2015 and beyond, despite the challenging macro economic environment. The Principal remains well positioned for continued growth with proven success and a unique business model that positions us to provide long-term value for our customers and our shareholders. Dan?

Thanks, Larry.

I will cover two things this morning. First, I will share some positive trends in our US insurance solutions business. Then I will talk about our truly outstanding results for our retail retirement and institutional investment platforms.

In the supplement, we provide trailing 12-month growth trends over the most recent 5 quarters. Individual life premium and fees have trended from a 2% decline to 5% growth and specialty benefits premium and fee growth has doubled from 4% to an adjusted 8%. Specific to sales, 63% of individual life sales in the quarter were from the business market as business owners continue to seek our expertise for their long-term planning needs. Specialty benefits had its second highest sales quarter with $110 million in sales as we continue to be very well positioned in our core market in diversified industries.

Further, improving employment trends for small and mid-sized companies continues to contribute to underlying growth in our US businesses. On a trailing 12-month basis, specialty benefits [in] group growth was 1.8%, its highest level since 2006.

I will now talk about our investment management platforms starting with a little more color around first quarter net cash flows. Principal Funds delivered record net cash flows of $2.6 billion, its 21st consecutive quarter of positive flows on a record $6.6 billion in sales. Mutual fund sales have grown every quarter over the last five quarters. Principal Global Investors delivered near-record unaffiliated net cash flows of $3.2 billion for the quarter on strong retention and demand from investors seeking income and yield. We continue to expand our global investment management presence with 2/3 of the unaffiliated assets under management coming from investors outside of the US and clients in more than 70 countries.

Moving to our retirement platform, full-service accumulation flows were $1.7 billion for the quarter on $2.8 billion of sales and continued strong retention. Strong growth in recurring deposits was also a contributor to flows, reflecting employment growth in the existing plans and some traction around our retirement readiness initiatives. Principal International delivered net cash flow of $2.3 billion, an increase of 41% from a year ago on a local currency basis. This drove assets under management up 23% on a local currency basis.

First quarter was also marked by notable third party recognition for our asset management franchise. First, in its annual ranking of mutual fund families, Barron's magazine named Principal Funds a top five fund family based on one year performance and number nine in the five year time frame. Second, for the third year in a row the Principal Global Real Estate Securities Fund received a Lipper award as the best global real estate fund over a 5-year period.

Third, our [CPAM] joint venture was recognized as a 2014 best international equity portfolio manager and best 3-year international equity portfolio manager for the FTSE Shariah World Developed by the employee prominent fund in Malaysia. And finally, Cuprum ranked first for investment performance among AFP providers in Chile in four out of five strategies for the one and three year time periods at quarter end. The fifth strategy ranked number two for both time periods. Helping to drive these strong flows and recognition is competitive investment performance. 79% of our rated mutual funds have a four or five star Morningstar rating.

And as slide 6 shows, at least 85% of our Principal investment options were in the top half of the Morningstar ranking on a one, three and five year basis at quarter end. As you know, target date funds are an important investment option for plan sponsors. More than 1/3 of full service accumulation assets under management are in target date funds with 100% of our target date funds in the top half of Morningstar rankings across all time periods at quarter end.

We recently announced changes to align Principal Global Investors and Principal Funds and created a more integrated investment management operation. I see this move as having meaningful benefits, particularly in the areas of product development and distribution. The leadership changes were effective immediately. Later this year we will provide more information about changes to financial reporting, in addition to addressing many of the other requests from stake holders regarding our financial supplement.

Our team continues to be laser focused on executing our global investment management strategy and providing innovative solutions to our customers. No doubt, our best years are ahead. And our growth in the first quarter continues to build on the strong momentum of our businesses.

Terry?

Thanks, Dan.

The teams have delivered strong results in the first quarter. While operating earnings were aided by some one-time items that I will address shortly, the strength of our business fundamentals and proven ability to execute continue to drive our Company forward. This morning, I will focus my comments on operating earnings for the quarter, net income, including performance of the investment portfolio, and I will close with an update on capital deployment.

Total Company operating earnings for the first quarter were $326 million, up 3% over a very strong year-ago quarter. At the end of the first quarter, return on equity, excluding AOCI, was 14%. This is 100 basis points improvement from a year ago. If we adjusted the average equity for exchange rate movements, as other companies with large international operations do, the return on equity would be 15%. Excluding the corporate segment, 65% of the Company's earnings were generated from our fee-based business. This diversification allows us to perform well, despite pressures from the continued low interest rate environment, flat equity market performance in the first quarter and a strengthening US dollar.

Moving to Slide 7, we normalized first quarter 2015 earnings per share of $1.09, down by $0.04. The following one-time items positively impacted the earnings per share in the quarter. Retirement and investor services accumulation earnings benefited $0.03 from a true-up of prior year dividend accrual and full-service accumulation and a payment received related to the transition of part of our trust business to a third party.

And specialty benefits offerings earnings benefited $0.01 due to the net impact of a recovery of reinsurance premiums that was partially offset by higher expenses, primarily from prior year true-ups. After normalizing both periods, earnings per share increased 5% over the year-ago quarter. The growth rate was masked by items that we don't typically normalize for, such as the strengthening US dollar and Latin American inflation.

Now I will discuss some of our business unit results starting on slide 8. The accumulation businesses within retirement investor services had adjusted operating earnings of $177 million. This is a 5% increase over adjusted first quarter 2014 results. Strong fee growth of 9% was offset by a decline in variable investment income. Trailing 12-month net revenue was up 7%, which led to 100 basis points increase in pre-tax return on net revenue to 34% compared to the year-ago quarter. Full service accumulation operating earnings were $114 million in the quarter, down 4% compared to the year-ago quarter. After adjusting for the dividend accrual benefit in both periods, operating earnings increased 4% over first quarter 2014.

Net revenues of $330 million were slightly lower than a year-ago quarter due to lower variable investment income. Principal funds first quarter operating earnings were $27 million, an 8% increase over the year-ago quarter. On a trailing 12-month basis, reported revenues were up 12%. Over that time frame, revenues net of pass-through commissions were up 17% and our return on adjusted revenue was 35%. Record sales in the quarter, along with higher sub-advisory fees, contributed to higher expenses compared to the year-ago quarter.

Strong investment performance in flows contributed to a record account values of $128 billion at quarter end for the total Principal Funds complex. Individual annuities operating earnings were $37 million for the quarter. The results were positively impacted by strong fee revenue growth of 14% in variable annuities, which helped to offset the impact of spread compression on our fixed deferred business. We expect normal quarterly volatility in this business.

Turning to slide 10, Principal Global Investors operating earnings for the quarter were $31 million. This is a 14% increase from the year-ago quarter in what is typically a seasonally low quarter due to timing of certain expenses.

First quarter 2015 benefited from performance fees that were partially offset by lower transaction fees and higher expenses. The trailing 12-month pre-tax margin continued to increase at 26.6%, from a reported 25.2% in the year-ago quarter. Slide 11 shows quarterly operating earnings for Principal International of $60 million, slightly stronger than expected in CAHI returns were offset by a negative impact from inflation. Combined net revenue grew 21% on a local currency basis.

The strengthening US dollar suppressed operating earnings by 16% and assets under management by 21% compared to first quarter 2014. Principal International continues to drive strong results with operating earnings growth in the mid teens on an adjusted local currency basis.

Turning to US Insurance Solutions, operating earnings were $55 million, a 27% increase over the year-ago quarter. As shown on slide 12, individual life operating earnings of $26 million were a 20% increase over an adjusted year-ago quarter. Adverse mortality impacted the year-ago quarter's results, while first quarter 2015 had a return-to-expected claims experience.

Turning to slide 13, special benefits adjusted operating earnings of $26 million were essentially flat compared to a strong first quarter 2014. As a reminder, first quarter is impacted by seasonality and is typically the lowest quarter of the year. Premium [ENT fees] grew 9% over the year-ago quarter on an adjusted basis and the adjusted loss ratio of 66% is within the targeted range of 64% to 70%.

For the quarter, total Company net income was a record $414 million, including realized capital gains of $13 million. Net credit-related losses of $6.5 million were the lowest quarterly loss since before the financial crisis. Our portfolio continues to perform in line with expectations and better than our pricing models. The real estate market is performing very well and we expect mortgage and structured credit risk losses to continue to trend down. Net income benefited from $75 million of other after-tax adjustments in the quarter. The adjustments included a deferred tax benefit related to the merger in Chile, which was offset by a loss due to an update on our uncertain tax positions in the first quarter.

As outlined on slide 14, we continue to target $800 million to $1 billion of capital deployment in 2015. In the first quarter 2015, we paid a $0.36 common stock dividend and we announced last night a $0.38 dividend payable in the second quarter. On a trailing 12-month basis, the common stock dividend is 27% higher than the same period a year ago. In addition, we repurchased $50 million of shares in the first quarter, which completed our previous authorization.

Our Board of Directors authorized a new $150-million share repurchase program in the first quarter that is still outstanding. We continue to first focus on anti-dilutive share repurchases and, depending on other capital deployment options, buying back shares opportunistically. Our 2015 expected capital deployment range also includes the $335 million already announced for the AXA Hong Kong pension business acquisition, which should close in the second half of 2015. Our approach to capital deployment remains balanced and focused on increasing long-term value for shareholders.

In closing, while macro economic factors such as the strengthening US dollar and low interest rates are providing near-term pressures, the strong business fundamentals and our proven ability to execute are driving continued momentum. We remain confident that our diversified business model positions us well for future growth across various macro economic environments.

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

(Operator Instructions)

Your first question comes from the line of Sean Dargan with Macquarie Capital.

Thanks and good morning. I wanted to follow up with Terry around capital deployment this year. I think you have the opportunity to call $300 million of perpetual preferred stock in June. So just doing the math, if you are still planning on deploying between $800 million and $1 billion, you've already allocated $335 million to the AXA transaction. I think are you're going to pay at least $450 million common dividends. Does -- if you were to call the preferred, would that -- is that factored into your $800 million to $1 billion estimate?

Hi, Sean. This is Larry. I will just kick that over to Terry for comment.

Thanks, Sean. As you're -- as we mentioned before, we have the ability to call the preferred shares in June. They were issued back in 2005 and they have a pretty high coupon rate. Just on a grossed up basis, they are around 10% and 8.6%. So given our move to a more longer-term investment operation that is moving to less capital intensive fee-based businesses, we are reviewing our capital structure and we are taking into consideration all the audiences that we have. And so we are evaluating our options at this point in time. But to your question, that $800 million to $1 billion does not include anything that we would do in terms of the preferred shares.

Okay. Thanks. And then I guess a question for Larry. Keeping in mind that the DOL proposal and given the fact that a low-cost provider has made its intentions known that it wants to move into the small, medium business, 401(k) plan business, do you think that -- I guess I just want to hear your thoughts on if that is going to materially impact your business, given that advisors may believe that they have increased liability in placing small, medium businesses in retirement plans.

Okay. So a couple of things there that are frankly a little bit independent. But in the earlier remarks, Sean, you heard me comment with respect to the DOL fiduciary proposal. Now again, I will say like others and other companies that have commented kind of early on in the process, it is a 1,000 page -- think about that for a second -- it is a 1,000 page proposed regulation. And -- but the -- if I step back from that for a second, if I step back from the details, what we are talking about is an even more complicated landscape for retirement plans. Not just from a potential legal perspective, but just overall more complicated. And every time this happens, and again, I have seen it for more than 30 years, it redefines what scale is in the sort of 401(k) and retirement plan business. And it will continue to push, I believe, it will continue to push market share from second and third tier, more local players that frankly just don't have a platform to compete, they don't have an investment option lineup to compete. And these increasing kind of compliance and regulatory costs are going to make it more and more difficult. And as you know, 70% of our business is takeover business. In other words, 70% of our business is business coming from second and third tier players who find it difficult to compete. So I think that pressure is going to continue to be there.

Now with respect to Vanguard, first let me say I have tremendous respect for Vanguard as an organization. I have tremendous respect for the business model that they have constructed. But I do believe, Sean, I do believe that that business model is not appropriate for every investor, every retail investor, neither is it appropriate for every small and medium employer. Because the reality is, most small and medium employers access the market through advisors and they need a lot of help in sort of hand holding through the process of, not only setting up the plan, but servicing that on an ongoing basis. And that is very difficult to do that well when are you when are you a low fee player like Vanguard is. So again, we respect them but we think that our advisor-driven model is really going to be, at the end of the day, is going to be the winning model in the small and medium space. So I hope that helps.

And your next question comes from the line of Steven Schwartz with Raymond James and Associates.

Good morning, everybody. This is going to be a long beating of beating this dead horse. But, Larry, on the DOL proposal, to follow up Sean's comment, one of the big issues that I see is that of differential compensation and that differential compensation will not receive the best interest contract exemption. I believe you pay on volume to your advisors as well as on fund choice. And I am wondering about your views of this as a sales model going forward.

Hi, Steven. Well, again, I want to just start by saying I think it would be premature for any of us to necessarily draw conclusions at this point with respect to what may or may not be allowed. I guess with respect to compensation, generally what I would say is that we believe that transparency is the best way to sort of deal with overall -- to deal with compensation issues. And I think that the Department of Labor would agree with that. And I can tell you that going all the way back to ERISA in 1974, we have been among the leaders, frankly, well out in front of many competitors in terms of making sure, both at the time of sale and on an ongoing basis, that our retirement plan customers have a full and complete understanding of compensation -- both direct compensation, plus any other volume-related compensation that may be attached to that.

If for some reason volume-related compensation were to go away for some fashion and, frankly, I don't know why it would because it is not necessarily any sort of amount that is taken from plan participants, but if that were to go away, we are still on a very level playing field. We are still dealing equally with the other retirement service providers. And to squeeze, of course, as you would recognize, Steven, the squeeze is actually going to come on the financial advisors and the brokerage firms. The squeeze is not necessarily going to come on the retirement service providers.

Believe me, at Raymond James we are well aware of that. What I'm interested in here though is fund choice as well. Do you see fund choice changing? Maybe being forced by advisors to move away from your proprietary offerings?

Well that's another interesting question. So let me make a few comments on that. First of all, again, we have never had a business model where we are trying to put proprietary funds on a platform in some less-than-clear fashion as a way to sort of try to stuff proprietary product inside a retirement plan. So for example, if you look at our target date fund, Steven, I would say we are today still one of the few that has outside managers as a part of our target date fund lineup. Because while we think PGI is one of the top global asset management companies in the world, the reality is they can't do everything perfectly. And so there are going to be situations where it is appropriate to bring in outside managers.

I think the real test here, and the real issue, is going to be do your proprietary funds compete? Do they compete in terms of investment performance? Do they compete in terms of fees? And if they compete in terms of investment performance and fees, then I can't see any reason why the Department of Labor would just per se wall off your ability to put those investment options, which are value add for the participant, why they would not allow those to be on the platform.

The final point I will make is, as Dan commented, when you are sitting here today with 85% or more of your investment options in the top half of their Morningstar peer group, it would be -- our investment performance stands on its own, not only inside our retirement platform but, frankly, through the DC investment-only space, which has been one of the fastest growing parts of our business. So you can kind of see the strength of our investment platform and the interest that it has, not only to Principal's retirement customers but retirement customers of other service providers as well.

And your next question comes from the line of Eric Bass with Citigroup.

Hi. Thank you. One question on 401(k) and sort of profitability. I guess as we think holistically for Principal over time, is it more important -- is the more important driver the basis points kind of fee that is charged or is it the level of assets managed? And when I say -- level of assets managed in sort of proprietary offerings.

So this is Larry and I will have Dan who will probably want to comment as well. But what I would say is that there isn't meaningful -- there really is -- would be no meaningful difference with respect to proprietary versus its none proprietary. And we have tried hard over the years to have a business model that doesn't necessarily result in largely different returns by plan size. So for example, your small plans are two or three times as profitable as your large plan. Now I'm not saying there aren't some differences by size. Nor are there some differences if all of a sudden proprietary assets were 5% of a single plan. But we think it is really important that our financials aren't subject to the investment decisions that are made by plan sponsors and advisers.

So I think, again, I just want to -- I know some have commented on sort of a decline in margins from first quarter 2014. And what I want to suggest is that margins in those periods of time were actually above what we would consider to be normal industry trends. So we are very pleased, very pleased with where we are today with respect to the return on net revenue for our full service accumulation. So let Dan add a comment.

That's right, Larry. You know the variable investment income a year ago was quite strong relatively to the current quarter. And certainly we saw traditional fee revenue arise during that period of time. The other comment I guess I would make about the profitability profile of these plans has a lot to do with TRS. And so the extent that we have more than just a 401(k) relationship, there is defined benefit. There is ESOP or there is deferred compensation that clearly becomes a variable in terms of the earnings that can be generated from that plan. The second component, of course, is our ability to retain assets. So those are -- a number of those plans we have the ability to retain assets in a principal rollover IRA or somehow the assets stay within the plan.

And then the last part I would say is remember that we are paying market pricing, or near market pricing, for the majority of the plan assets managed by PGI. And of course PGI is capturing a component of profitability as well. So I think you do have to look at this from a much more macro comprehensive way than just simply getting it down to either what the investment option is or whether or not it is a small plan or a large plan.

Got it. And that's why I was asking holistically to principal, combining kind of the revenue for both FSA as well as PGI. But I guess am I interpreting your comments correctly that based on your pricing, you're targeting the same return whether you're assuming a plan, say, has 25% of the assets managed in principal funds or it has 75%? You would factor that expectation into your pricing and target a similar return for both cases?

That is certainly our intention. That is certainly in what I would call our core base pricing strategy. Correct.

Got it. And would that pricing be sort of variable over time if you saw the kind of allocation to proprietary funds shift in one direction or another?

If there is any one thing I've seen in the last 30 years is that constant resetting of pricing. And of course, we have the benefit of having one of the most efficient record keeping administrative platforms out there. And so, again, we keep on working on the expense side so that we can continue to be market-priced and still, in the meantime, maintain reasonable margins. And if you look at that margin range of 30 to 32 for full-service accumulation, that certainly would be in the top quartile in the industry. So again, I think we hit it on both sides. We hit it through effectively managing our expenses and driving out efficiencies. And we get it by having top tier investment performance, which certainly helps drive revenue and assets under management.

And your next question comes from the line of Yaron Kinar with Deutsche Bank.

Good morning, everybody, and thanks for taking my question. I wanted to turn back to the Vanguard -- to Vanguard as a competitor. And if I look at market data, if I understand correctly, they partnered with Ascensus and the two basically have a top five market share in the under 1,000 employee market. So when I think about Principal going out and try to win a new account or -- and I think you mentioned in the past that you believe the market is underserved. What gives you the confidence that a new account that doesn't have a retirement plan today would choose the high service, higher fee proposition over a low service, low fee proposition when they had nothing in the past?

Sure, Yaron. So it is a very good question. So let me just make a few comments. And obviously Dan has a lot of perspective having actually been in the field and done this in real world. So I am sure he will want to comment as well. But I cannot emphasize enough, I cannot emphasize enough having, again, spent a very long period of time in this business, that retirement plans have to be sold. They have to be sold in the small employer marketplace. So say in the under 100 life, even under the 250 life market they have to be sold. There isn't -- there are very few small business owners that would wake up this morning and say okay, today is the day. I've been thinking about it and today is the day I'm going to go out there and get bids for my 401(k) plan. It just doesn't work that way in the real world. And this is why the financial advisor's role, we believe, is so critical in order to extend the coverage inside the under100 life marketplace. It is the advisor who is really the one who, if you will, creates the opportunity through conversation with the business owner, brings in several proposals, because the business owner themselves are not that knowledgeable in these issues and, ultimately, helps them make a good decision for themselves and their employees.

Now there is probably 10% -- I make that number up -- I don't know what it is, but there is a 10% to 15% of the market that the owner would consider themselves very financially sophisticated. They might feel like they don't need a financial advisor. But I will tell you, Yaron, my experience is that is a very -- that's a relatively small percentage of the universe. And even that portion probably doesn't really, again, have the capability to go out on their own and sort through record-keeping systems, compliance issues, plan design issues, on their own. There was a day when we had a 401(k) plan in a box. You could buy a 401(k) plan from Principal and many others in the early days of the internet on a self-serve basis. And quite frankly, we folded that particular product after about three years because there wasn't enough demand on it. So anyway, I hope that helps. Dan want to comment.

Yes. Just a couple of comments. And again, thanks for the question. The first place I would start is compounding on what Larry said. It is more than just plan level services. It is participant services. It is local service, relationship management. It is things like retire secure and plan works. When you sit down with an employer of less than 50 or 100 employees, let's say, they don't want an unsuccessful plan. What is an unsuccessful plan? It is low salary deferral, low participation and confusion among the employees on what it is that is available to them. It is the financial advisors, it's representatives from Principal that make these plans come alive to the average small to medium size business employee. And that has everything to do with driving participation, increasing salary deferrals, staying in the plan, making sure they've got good investment diversity.

And then also just a reminder, there is really two parts, two halves, two expenses related to the plan. One is related to the asset management fee. One is related to the record-keeping administrative costs. When it comes to record keeping administrative costs, whether it is a Ascensus or Vanguard partnership or Principal, those are going to be very, very comparable. When you look at the fees associated with asset management, then it gets down into an active passive debate. I went back and took a look at our existing block of business. This is our existing 401(k) plan block. And our emerging plans of less than $5 million, 96% of those plans today make available a low cost index option. 99% of all of our clients over $5 million already have a low cost -- at least one index investment option.

So again, it is really not low fee, low service, high fee, high service. It is how do you want to stack your investment lineup? Do you want to have it heavily more biased on lower cost investment options? If so, you can use our collective investment trust. You can use our index suite. Or you can -- and you can supplement that with more actively managed funds. But then you have the separate conversation around record keeping and administrative-related expenses. And believe me, you do lose some of those economies of scale on the small case market. So again, if you already have a lot, like Principal does, over 35,000 plans, we know how to service a small client that chooses passive or CITs as their investment option. Hopefully that helps.

Very much. I appreciate the answer. One follow-up. Larry, when you talk about the DOL proposal, it sounds like it is actually you view it as more of an opportunity than a potential threat. But I am curious to hear your thoughts as to where you may see, where you believe in these early days, there could be more pressure on your business, whether it is from a compliance spending side or other.

Yes, Yaron. Well you answered the question. And first of all, in my accounts, what I'm trying to do is just have people understand that when there is a 1,000 page proposed regulation like this, there is both challenge and opportunity. And so we well understand the challenge side. And many others do as well. And my only point was to suggest that there is opportunity as well. So the things that are challenges, it is simply the kind of increased complexity. And at least by my view, and, again, this is based on many, many years of experience, when you have a 1,000 page proposed regulation that is kind of sitting there and it is not yet final and nobody really knows what the rules are, I can assure you that's an environment where it is going to be very difficult to see many new plans be formed. Right? Because if you were thinking about putting in a 401(k) plan, this sort of thing at the margin is going to cause you to say, you know what, I think I am going to wait a year. I'm going to try to figure out what that regulation looks like.

So sort of at the margin, I think, as far as new plans are concerned, I think it is going to be a bit of a dampener. But on the other hand, I think for us and for other retirement service providers that really have the scale and the technical expertise to compete, again, more importantly, what is going to happen is there is still about 1,000 players in the 401(k) industry today. 1,000 players. There shouldn't be 1,000 players in the 401(k) industry. And so there is going to be 500 of those that are going to be going through an analysis of whether they really want to stay in the business once all of those regulations are finalized and we understand what the new rules of the game are going to be.

Your next question comes from the line of Eric Berg with RBC Capital Markets.

Thanks very much. And my question is directed to either Larry or Dan, whoever feels best to answer my question. Here it is. It is my sense that distributors think of conflict of interest, not only in terms of actual but also perceived. So my question is, why isn't the conversation between the customer and the broker or the advisor going to go something like the following: customer walks into the Smith Barney office, Merrill Lynch office, the broker there recommends the Principal product as well as a majority of it -- [not] 100% of Principal funds; broker points out outstanding track record and -- but in the end, in order to avoid even the perception of a conflict of interest, the broker decides then, in order to avoid liability, it is just too risky to have all of these Principal funds -- he is thinking to himself -- and he ends up recommending a different mix of funds with fewer Principal products than would otherwise have been the case. Why isn't that going to be the discussion and the ultimate outcome here?

Good morning, Eric. So I will make a few comments and ask Dan to weigh in as well. So with respect to the first part of your hypothetical. So the customer walks in to the Smith Barney or Morgan Stanley or whatever -- of course it works the other way -- of course it is the Smith Barney worker who walks into the small employer's office because that's, again, the way these plans get sold. And the first thing I would say is that of course that broker is not going to present singularly a Principal proposal. I mean I don't know the average, but my guess is that in the initial stages, any broker is going to present -- after -- first of all, after they go through a discovery process with the small employer -- what are you looking for -- they could present as many as five to seven different retirement services providers. And it is through subsequent conversation and involvement with our sales team, which, again, is among the best in the industry and locally deployed, that the financial advisor and the small employer then ultimately decide, okay, out of these five to seven quotes, which one am I going to select. Who is going to be the retirement services provider?

Now you are correct that more and more today the choice of the provider, the retirement services provider, is somewhat separated from the choice of who is going to manage the assets. So it is kind of a second step decision. Again, go back to what I said before. First of all, when Principal's investment options are high-performing options, in the top half of the Morningstar peer group or the top 25% or the top decile, and investment fees are competitive, there isn't any reason in the world, there isn't any reason in the world that a rational advisor and a small employer wouldn't see fit to put that on the platform. I mean the reverse situation could be equally true.

So again, when I think when it comes to investment platform, what you need to sort of think about is it is a very level playing field. And what PGI and some of our other chosen sub-advisors bring to us is product that is manufactured specifically for retirement plan clients. Many of the competitors that are out there are using kind of share class versions of the retail funds that aren't necessarily manufactured for the retirement space. So it is one of the unique differentiators of principal. And I think it is going to continue to serve us well. Albeit, we are going to have to negotiate kind of a new set of forces and factors. But again, I remain very confident, having seen us go through 40 years of these changes in legislation and regulation, I'm highly confident that we're going to figure out the right way to compete whatever the new business model is going to be.

To that point, Eric, and good morning. This splitting of the decision between the plan services and the investment lineup, that has been in place for the better part of 5 to 10 years. We've got people today whose sole job is to make the call on those alliance partners and the various investor management firms to educate them and inform them on the particulars of the Principal investment lineup. You see part of that showing up in the results for DCIO. So again, it is a split decision today. Larry commented earlier on the earlier question relative to our very, very market competitive target date funds, which find themselves in about 40% of the lineup. That's already multi-manager. And that is in recognition of plan sponsors and advisor's desire to have best-in-class in the investment lineup. So although there may be a bit more disclosure, a bit more debate and discussion, I got to believe that the reasonable fiduciary, the trustee in making these decisions, looks at the fees, looks at the performance, looks at the lineup and is going to, in a very similar way that they do today, get the appropriate lineup. And no doubt, it is going to be multi manager.

And, Eric, Jim McCaughan wanted to add just one quick comment as well.

Sure.

Eric, it's Jim here.

Good morning, Jim.

I just want to add to Dan's point about the split decision that we welcome transparency and that should give us opportunities in the DCIO space. The reason plan sponsors and plan participants choose us is as been described. It is investment performance. It is the multi-asset, multi-manager product, target date, target risk, increasingly global diversified income, diversified real assets. Those are all extremely attractive, carefully constructed products, as Dan described, specifically for the retirement market. With those products, transparency should help us, not hinder us, looking to the future. And we see that great growth opportunity in the DCIO space. If, as one hopes, the move continues to be toward greater transparency.

Thank you. I look forward to staying in touch on what is clearly a really important topic. And best of luck with all of it. Thank you very much.

You bet. Appreciate your question. Thank you.

And your next question comes from the line of Ryan Krueger with KBW.

Thanks. Good morning. I will mix it up a bit. Jim, could you give some additional color on the drivers of PGI's strong flows in the quarter and then also commentary on the current pipeline?

Thanks, Ryan. On the institutional side, we have been nicely building up flows and, as Dan described, with a strong international component, a lot of different countries, different parts of the world, we have been nicely building up sales over the last two to three years. And what happened in the first quarter is we continued the momentum of sales. It was growth but not massive growth. This is not an unusual quarter in terms of institutional sales. But we tightened up our act in retention. And that was really the issue that led to the very, very -- the positive that led to the very strong institutional cash flow in the first quarter.

In terms of where it is coming from, it is true that it is very diversified in terms of investment category. The bias, I would say there is if I look through our list of sales, is towards different kinds of income biased products, whether it is [high] assets underlying diversified income funds, investment grade credit, high yield, preferreds, emerging debt. And then income equities has been a very strong capability for us, real estate and REITs. So it is very diversified across countries and across investment capabilities. And really the difference this quarter to each quarter last year that made us stronger was greater retention.

Now looking forward, I do see the continued development of the pipeline of new business as being very encouraging. We also, as a senior management team, get to see all our substantial clients on a very regular basis. And I would say the tone of those meetings is currently extremely solid. We feel very confident that the improved retention can be continued. Now clearly that depends on future events. But the current tone is extremely good.

Thank you. And then one on the DOL proposal, if I could. There is a carve-out for brokers providing advice to plan sponsors on plans that is over 100 participants or over $100 million in assets. In terms of the lack of the carve-out for the smaller plans, is that something you think is appropriate? Or would that be something that Principal would be lobbying to get changed in the final rule?

Ryan, yes, this is Larry. I mean, again, I can't emphasize enough, this is 1,000 pages. This is proposed regulation. I am not going to sort of claim to be an expert on carve-out versus noncarve-out. What I would say is that what seems logical and reasonable to me is that we have kind of a single set of rules with respect to the investment lineups. We have a sort of single set of rules that we operate by, whether it is a Fortune 100 plan or whether it is a 15 life tool and die maker in Rockford, Illinois. So what we will lobby for -- once we sort of understand what the overall proposed rules are -- what we will lobby for is that we have a consistent standard, really, across all plan sizes. We will argue for a level of transparency that is appropriate. And the reason I say that is we are not -- I don't think there is advantages in saying distributing prospectuses, for example, as an example of overkill. But we really do believe in transparency. We really do believe in an informed customer. We really do believe in working with well-informed brokers who have great expertise to bring to the table in terms of advising the small plan sponsors.

So those are the things that we will be focused on. And I am confident at the end of the day, Ryan, you know the Department of Labor wants to do the right thing here. We have had many, many meetings with them. These are very experienced people who know this landscape very well. And at the end of the day, we share with them a responsibility to see retirement plan coverage grow in this country. At the end of the day, success in terms of retirement outcomes is going to depend on 401(k) plans. We are not going to go back to defined benefit plans. And so we are going to continue to press the case to the Department of Labor that we need to have fair rules, transparent rules, consistent rules, so that we can see retirement plan coverage continue to be extended among employers of all size. So, Dan, any comments you want to make?

No. I think that really wraps it up nice, Larry.

Okay. I hope that helps, Ryan.

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

I just want to say thanks to everybody for joining us on the call today. We continue to be very pleased by our results in our results in the first quarter and the ongoing momentum of our business. We think that the credit for the recent results and the strong momentum really goes to our experienced teams that are all over the globe executing on behalf of our customers every day. We do believe the macro economic conditions are going to remain challenging. But we -- as we look forward, we think the diversified nature of our business is going to allow us to continue the positive momentum. So with that, thanks very much. And I look forward to seeing many of you on the road in the near future.

Thank you for participating in today's conference call. This call will be available for replay beginning at approximately 1:00 p.m. Eastern time until the end of day May 1, 2015. 218-90-644 is the access code. The number to dial for the replay is 855-859-2056 for all US and Canadian callers. Or 404-537-3406 for all international callers. Thank you. This concludes today's call. You may now disconnect.