美國信安金融集團 (PFG) 2015 Q4 法說會逐字稿

Good morning and welcome to the Principal Financial Group fourth-quarter 2015 financial results conference call.

(Operator Instructions)

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

Thank you and good morning. Welcome to the Principal Financial Group's fourth-quarter and full-year 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.

I'd like to remind you that all the results follow the new format we outlined on our November 6 investor event. Following a reading of the Safe Harbor provision, CEO, Dan Houston; CFO, Terry Lillis, will deliver some prepared remarks. Then we will open up the call for questions. Others available on the Q&A are Nora Everett, Retirement Income Solutions; Jim McCaughan, Principal Global Investors; Luis Valdes, Principal International; Deanna Strable, US Insurance Solutions; and Tim Dunbar, our Chief Investment Officer.

The Company does not revise or update them to reflect new information, subsequent events or changes in strategy. Risks and uncertainties that could cause actual results to differ materially from those express or implied are discussed in the Company's most recent annual report on form 10-K and quarterly report on form 10-Q filed by the Company with the US Securities and Exchange Commission. I'll now turn the call over to Dan.

Thanks, John, and welcome to everyone on the call. Today I'll briefly comment on our financial results and certain accomplishments that position us for continued growth in 2016 and beyond. I'll turn the call every to over to Terry, who will provide additional details on results. As John mentioned, slides related to today's call are available on our website. The key themes are outlined on slide 4.

I'd characterize 2015 as a good year. We delivered after-tax operating earnings of nearly $1.3 billion despite challenging conditions, such as the strengthening of the US dollar and under performance of US equity markets, and we returned more than $700 million to shareholders in the form of common stock dividends and share repurchases. This demonstrates the benefit of our broad diversification by business, by geography, by investment platform, and by asset class.

In 2015, Principal continue to build momentum through outstanding investment performance, and expanding of distribution and our solutions-based product set. Full-year 2015 total Company net cash flows of $23 billion were 4% of beginning-of-year assets under management as we continue to attract and retain retail, retirement and institutional investors. This helped drive assets under management to $527 billion at year end, despite a $28 billion drag from foreign exchange.

As other major growth highlights for 2015, I'd point to Principal International's 29th consecutive quarters of positive net cash flows, with $9 billion of flows for the year, plus another $21 billion of positive flows from our joint venture with China Construction Bank. On a constant currency basis, Principal International Group reported assets under management by 20% in 2015.

Double-digit earnings growth for Principal Global Investors and nearly $16 billion in positive net cash flows; record earnings for specialty benefits on record sales and 9% growth in premium and fees; continued traction delivering mutual funds, separately managed accounts and annuity-based income solutions; strong underlying growth in plans, participants and re-occurring deposits for our US retirement businesses; and strong individual life full-year results as claims return to expected levels.

As I said, outstanding investment performance continues to be a differentiator and is a foundation for future growth. For example, 44 of our rated mutual funds, or 76%, have a four- or five-star Morningstar rating. Additionally, as slide 5 shows, 88%, 89%, and 93% of our investment options were in the top-two Morningstar quartiles on a one-, three-, and five-year basis respectively.

100% of our target date funds remain in the top-two quartiles across all time periods at year end, driving sales and retention in this key asset class and enabling us to help more individuals achieve financial success. From this strong competitive position, we remain confident in our ability to drive growth in 2016 and beyond.

Next I'll provide some examples of how we continue to execute on our strategy, and further position ourselves for long-term growth. The US remains the longest retirement market in the world and Principal has maintained its leadership position for decades through exceptional service, product innovation and strong multi-channel distribution. With the retail mutual funds business now reporting through Principal Global Investors, full-service accumulation is now the majority of retirement and income solutions fee, or RIS fee.

To be clear, the underlying fundamentals of this business remain strong. We continue to grow plan count across plan sizes, adding nearly 1,300 net new plans in 2015, and we continue to be a leader in start-up plans as we focus on expanding employee coverage. The Principal's core target market of small- and medium-sized business is under served, creating an on-going opportunity for us to uniquely serve this market through our network of local offices and drive consistent growth in this segment.

Full-year re-occurring deposits grew $1.1 billion, up 7% versus 2014. These growth trends highlight the power of the payroll deduction component of this business, but more importantly, the work we're doing to advocate best-practice plan design with employers and advisors, to increase participation and savings rates, to better prepare their employees for retirement. Strong alliance firm relationships continue to be a key driver of sales for retirement income solutions, Principal Global Investors, as well as US Insurance Solutions.

In 2015 seven different advisory firms sold more than $1 billion across our offerings, with those firms averaging more than six products per platform. In 2015 we continued to do business with more advisors and get our investments added to recommended lists, platforms and model portfolios.

In 2015 we had good traction of plan sponsors adopting our retirement readiness plan design. The primary features of these plans are automatic enrollment and automatic savings rate increases. Additionally, we launched an innovative income option in the fourth quarter, which offers an in-plan guaranteed annuity to provide more income security for plan participants. While this business remains under pressure from volatile markets, we expect good growth in sales and flows in 2016, getting meaningful growth in the pipeline.

Two other points I'd like to emphasize, our US retirement business continues to be one of the highest performing businesses in the industry and continues to create tremendous value for the enterprise overall. Slide 6 provides an update on fiduciary regulations. With the Department of Labor's fiduciary regulations advancing to the Office of Management and Budget last week, final regulations could be issued as early as March or April.

The Principal remains fully engaged to help insure the final regulations work in favor of individuals trying to save for retirement. We also remain focused on scenario planning and potential changes to business models, with a particular focus on education and guidance, compliance and oversight, provision of investment information, distribution, and asset retention.

Absent clarity around the final rule, we're not providing a cost estimate at this time, but based on what we know today we do not expect a significant increase in our run-rate expenses. The Principal has a long history of successfully adapting to complex regulations. Our track record reflects the benefit of scale, products and service breath, and top-tier investments, all critical to meeting the needs of the market and diverse advisor business models. As with prior regulatory developments, we're well-positioned and confident we'll emerge among the winners.

Despite volatility emerging markets, Principal International continues to demonstrate that we are in the right target markets with marquee distribution partners. As an example, our long-term exclusive distribution partnership with Banco do Brasil, the largest bank in Latin America, provides our joint venture, Brasilprev, access to more than 61 million customers.

Customers' confidence in Banco do Brasil and our tax advantage to individual retirement products helped drive Brasilprev's full-year net cash flows to $7 billion. This growth further strengthened Brasilprev's position as the number-one private retirement provider in Brazil in terms of net cash flow and assets.

Additionally, we continue to gain traction in the voluntary savings market. For example, on a constant currency basis with Chile, volunteer assets under management increased 17%, and voluntary fee income increased 25% in 2015. We remain confident in the long-term growth opportunities of our international operations.

Principal Global Investors, which now includes retail and institutional asset management, ended 2015 with $361 billion in assets under management. Institutional sales were strong in 2015, and the pipeline is robust. To counter the broader shift in demand to more passover low cost investment options, Principal Global Investors launched solutions in areas where demand for active strategies remained strong, including multiple new real estate offerings and fixed income strategies.

We'll continue to add to our ETF suite in 2016 and beyond, as well as our portfolio of income solutions, which will include both funds and guaranteed income options. In December, The Principal earned the top spot in the category in Pension and Investments Annual Survey of best places to work in money management for the fourth consecutive year. This award highlights The Principal's strong investment management culture and teams that successfully work to meet client needs every day, and position us to attract and retain top investment talent.

Moving now to our insurance businesses, our focus on small and medium-sized business markets remain a key differentiator, and we continue to find ways to improve the customer experience. In 2015, we piloted our easy elect group benefits enrollment tool in seven markets with meaningful improvement in voluntary participation, as we continue to help individuals understand the importance of protection to broader financial security.

In closing, I'm optimistic about 2016 and our long-term future despite the continued global macroeconomic volatility. Strong business fundamentals and our ability to focus on things we can control will continue to drive momentum and generate long-term profitable growth. Terry?

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

The fourth quarter was a solid end to a good year. On a reported basis, total Company after-tax operating earnings were $303 million, a 6% decrease from the prior-year period, reflecting macroeconomic volatility.

On slide 7 you'll see that fourth-quarter 2015 earnings per share were $1.02, compared to a normalized fourth-quarter 2014 earnings per share of $1.07, down 5%. However, on a constant currency basis, earnings per share increased 1% quarter over quarter.

For full year 2015, reported total Company after-tax earnings were nearly $1.3 billion, a 4% decrease from a record 2014. The lower reported earnings in 2015, were primarily driven by lower variable investment income and the impact from currency translation. Year-end 2015 return on equity, excluding AOCI other than the foreign currency translation adjustment, was 14.2%.

The daily average change in equity markets is an important driver of the revenue for our fee businesses. In fourth quarter 2015, despite a 6.5% point-to-point increase in the S&P 500, the daily average change for the quarter was slightly higher than 1% compared to third quarter 2015. On a full-year basis, S&P 500 daily average increased approximately 7% in 2015, compared to a 17.5% increase in 2014.

As we look ahead to 2016, if the macroeconomic volatility continues as it has in January, we anticipate a slowdown in revenues in our fee-based businesses. Therefore, we'll focus on things we can control and continue to manage expenses to ensure revenue and expense are aligned. With that said, we will continue to make the necessary investments to keep our competitive edge and drive long-term shareholder value. The fundamentals of our business are strong and our teams remain focused on execution regardless of the macroeconomic environment.

Now I'll discuss business unit results, starting on slide 8 with RIS fee businesses. Fourth-quarter pre-tax operating earnings of $125 million were down 10% from the year-ago quarter. Net revenue decreased 2% from the prior-year quarter, primarily due to flat average account values and a decline in variable investment income. Full-year 2015 net revenue increased 1% over 2014.

Net investment income decreased due to lower variable investment income in 2015, compared to the higher than expected levels in 2014. On a reported basis, trailing 12-month pre-tax return on net revenue was 31%. After normalizing for the third-quarter actuarial assumption review, it was 34%.

RIS fee had net outflows of $1.6 billion in fourth quarter 2015, despite strong sales of $3.1 billion. Fourth-quarter net cash flows reflect exit of a few large cases, due to M&A activity and continued pricing discipline, as well as the timing of funding for new sales. As a result, we anticipate strong net cash flows of first quarter 2016, and full-year 2016 net cash flows to be 1% to 3% of beginning period account values, as we maintain our focus on balancing growth and profitability.

Turning to slide 9, RIS spread quarterly pretax operating earnings were $62 million, a 4% increase over the year-ago quarter, primarily due to growth in account values. On a trailing 12-month basis, pre-tax return on net revenue was 56%. The pension closeout business had record full-year sales of $1.8 billion, which are double 2014 sales. The pipeline remains strong and opportunities in 2016 look promising.

Slide 10 shows Principal Global Investors fourth-quarter pretax operating earnings of $102 million, a 2% increase over the prior-year quarter. On a trailing 12-month basis, adjusted revenue increased 7% to $1.2 billion and pre-tax operating earnings grew 11% compared to the prior-year period. Pre-tax return on adjusted revenue increased to 34%.

Despite the industry's bias towards passive investment strategies, Principal Global Investors generated full-year net cash flows of nearly $16 billion, with $8 billion coming from institutional clients. This is a result of outstanding investment performance and outcome orientated solutions that are in demand. Additionally, full-year management fees increased 9% over 2014, above the 6% growth in average assets under management, demonstrating client preference for higher fee capabilities that, combined with increased scale, led to margin improvement.

Slide 11 shows quarterly pretax operating earnings for Principal International of $67 million. On a constant currency basis, Principal International continues to drive mid-teen earnings growth. On a trailing 12-month basis, Principal International's pretax return on net revenue was 38%, after normalizing for the third-quarter 2015 impairment of intangible assets in Claritas.

Moving to slide 12, specialty benefits quarterly pretax operating earnings were $57 million, a 29% increase over the year-ago quarter. Fourth-quarter premium and fees grew 8% compared to the prior-year quarter, and the overall loss ratio remained favorable at 62%. These are very strong results, even in a seasonally high fourth quarter, due to our focus on the small- and medium-sized business market and disciplined profitable growth.

As shown in slide 13, Individual Life pretax operating earnings were $30 million for the quarter. Despite the claims experience that was in line with expectation, this is at the low end of our expected range for the quarter, partially due to lower variable revenue. However, full-year pretax operating earnings growth was strong year over year.

For the quarter, total Company net income was $254 million, which includes realized capital losses of $48 million. After-tax net credit related losses of $5 million were slightly better than expected. The losses related to the hedging activities were predominantly due to interest rate and equity market changes.

Full-year credit related losses were $20 million, a 65% improvement over 2014 results. Unrealized gains were $1.9 billion, and the portfolio ended the year with a net gain of $1.1 billion. Our investment portfolio is high quality and diversified by industry, geography, property type, and individual credit exposures. In addition, we have always had a disciplined approach to asset liability management, and therefore we are not forced sellers during stressed times.

At year end 2015, our energy portfolio carrying value was 95% of par value. Our overall exposure to the energy sector represents 5.7% of our total fixed material portfolio, and 4.2% of our total US invested assets as of December 31st, 2015. Our market value exposure and high yield energy companies as of year end 2015 was $280 million, or less than 0.5% of total US-invested assets.

Despite the continued market volatility in the beginning of 2016, we remain confident about the strength of our investment portfolio. As outlined on slide 14, our capital management strategy remains balanced and is focused on building long-term value for shareholders. Our fee-based businesses drove nearly 70% of 2015 normalized earnings, which generates higher levels of deployable capital and provides greater financial flexibility.

In 2015, we deployed $1.1 billion of capital, which represented nearly 90% of net income. Our balanced capital deployments includes $441 million in common stock dividends, $355 million in strategic acquisitions, and $275 million in share repurchases.

The full-year common stock dividend was $1.50 per share. This is a 17% increase over full-year 2014 as we continue to increase our payout ratio. Additionally, last night we announced a $0.38 per share common stock dividend payable in first quarter 2016.

While we continue to explore strategic acquisition opportunities, the current equity market volatility is also providing an opportunity to enhance shareholder value through execution of the remainder of our share buyback authorization. In 2016 we expect to deploy $800 million to $1 billion of capital in a strategic and balanced manner to enhance long-term value for shareholders.

In closing, despite ongoing macroeconomic volatility, we remain confident that our diversified business model positions us well for future growth. This concludes our prepared remarks. Operator, please open the call for questions.

(Operator Instructions)

The first question will come from Steven Schwartz with Raymond James and Associates.

Hey, good morning everybody. I wanted to follow up -- actually tell you on your last statement with regards to acquisitions and maybe you can give us a sense of what the tone is out there. Obviously your stock is cheaper. That's more attractive. On the other hand, public valuations are down, but then I wonder if private sellers look at those valuations and say no way and you're finding that they're pulling back?

Yes, Steven, this is Dan. Thanks for the question this morning, and of course this has a lot to do with how we're going to deploy our capital for the best interest of our long-term shareholders and with that, maybe I'll ask Terry to speak specifically to valuations on potential acquisitions.

Thanks for the question, Steven. As we've talked about this before, we always look at a balanced approach to our capital deployment strategy to enhance long-term shareholder value. As we've stated before, we have more fee-based businesses. Predominantly pretty close to 70% of our earnings are coming from fee-based businesses, which is less capital intensive. As a result of that, we have an opportunity to deploy more capital, and if you look at what we talked about historically, only about 35% of our capital is needed on an organic basis, that leaving close to 65% available for other deployment opportunities.

Now that said, we think that we need to have a balanced approach. We have -- are on track to increase our dividend as a percent of that total net income percentage, closer to 40% over the longer period here. But as you look at share buybacks, and you look at M&A opportunities, the M&A opportunities are still very important to us. We want to have an active pipeline. We want to continue to look at that, but as you say, with the valuations as low as they currently are, it makes sense for us to actually deploy capital in terms of buying back our shares because we do believe that they're undervalued at this point in time.

It's a very volatile market so we have to have that disciplined approach. But again, we're going to continue to look at capital deployment strategies and we said $800 million to $1 billion this year. We expect to have a very balanced approach as we've done in the past. But as you said, the opportunities right now are very enticing for the buyback program, and we actually have $75 million of our authorization that's outstanding at this point in time.

Steven, was that helpful?

Yes, it was, thank you. Little nuance there. And then just one more quick one, Terry. Do you know what the unrealized losses on the [energy BIG] portfolio?

Maybe we'll have Tim Dunbar go ahead and take that. He's on the call as well, our Chief Investment Officer.

Terry I think mentioned that we had about $280 million of exposure, GAAP exposure in high yield energy sector and that's about $0.70 on the dollar so our book carrying value would be around $400 million.

Okay. Thanks, guys.

Thank you. Appreciate it.

The next question will come from Eric Berg with Royal Bank of Canada.

Hi, this is Kenneth Leon for Eric Berg. Just had a quick question in terms of the PGI institutional flows. Looks like there was a bit of a slowdown in the fourth quarter. Just want to get a better sense of what you're seeing in terms of the various [boutique managers] in terms of the flow, whether they (multiple speakers) emerging market debt or whatnot. Thanks.

Yes, Kenneth thanks for the question. The one area that we look at that really had really strong results for the quarter clearly was around Principal Global Investors. I think about that in the context of Jim coalescing the mutual fund team along with the institutional team. When you look at the broader industry, we've seen actually a lot of declines, significant declines, negative net cash flow, so frankly when we evaluate Principal Global Investors and Jim's leadership in this area we think we've got a very strong result for the quarter and certainly to the year. Jim, certainly you can add some color to that.

Yes, I'd add a couple of things to that. The first is that the decline in net flows in the second half of the year was really around some of the large cap equity strategies, particularly at Columbus Circle and Principal Global Equities, where our clients have been looking at the passive alternative and going for lower fee capabilities. As you saw from our flows though, we more than replaced that with the higher added value strategies that we really specialize in, which range through high yield real estate, small cap, areas that are less efficient markets.

Net-net, it was a slightly down but still positive fourth quarter, and I'd emphasize that because many of our peer group are seeing negative flows. One area where the peer groups seeing negative flows is sovereigns, particular already at central banks and sovereign wealth funds in Asia and the Middle East, which are obviously under severe financial pressure. We have some business in those areas and we have not seen those outflows yet because we are seeing much stronger investment performance and we've tended to be among the managers that got retained. We are hopeful that will continue, but obviously there are no guarantees.

If I look at the pipeline, which I think was partly where you were going, we have had a very active last two months, including over the holidays and in January, and that is unusual. Usually the institutional market globally quietens down during that period around the end and beginning of the year. We've seen core activity and indeed fundings looking really quite positive, and I have to say we're feeling pretty optimistic about the flow potential, and it's related to the investment performance that Dan and Terry both mentioned.

Okay. Great. And just a quick follow-up. Just to clarify, it sounds as if because of the outflows and relatively low fee rate products and in flows in high fee rate products, that means on a revenue adjusted basis it sounds like it's probably a lot more positive than flows would suggest. Would that be a fair statement?

Yes, no, I think that's right. Terry identified some of the numbers that point to that. We're seeing -- it's not universally so, but we're seeing moves towards some of our more high added value strategies and the it is a very tough environment in terms of fee negotiation. We do not cut fees heavily because we are going to be eventually capacity constrained a long way out and we need to get the business at attracted revenue rather than necessarily at all costs. We're much more driven by revenues than we are by AUM.

Understood.

Kenneth, thanks for the question. Please give Eric our regards.

Will do.

The next question will come from Yaron Kinar with Deutsche Bank.

I have -- I'm a little confused and was hoping to get some clarification. Terry, you had talked about the point-to-point increase in the S&P this quarter really averaging, I think, less than 1%, but the way I thought I understood it last quarter was that you had compared the point-to-point decrease in the S&P as opposed to the daily average change relative to expectations. Was I not thinking about this correctly last quarter, or how should I think about it going forward in terms of the impact of the S&P to normalized earnings?

Yaron, thanks for the question, and clearly the daily average is what ultimately drives the revenue, but I'll have Terry go ahead and add to that.

Yes, you're absolutely right, Yaron. As you look at the impact on the fees that occur, it's really more the daily average and we use that as a proxy. We use that as a proxy for what the movements and the impact to our account values, so you really look at the average account value from one period to the next period. Now, actual performance of those assets also come into play versus the proxy that we use. Last quarter we talked about a significant drop point to point in the S&P 500. That was down 6.7% third quarter, over third quarter. That has an impact on the deferred acquisition costs, and that's what we were referencing last quarter.

Now we have an expectation, we have an expectation that you'll have anywhere from a 2% to 3% positive impact in that point-to-point time, so if you look at that 2% to 3% versus, say, down nearly 7%, you're talking a 9% to 10% drop that impacts the deferred acquisition model. Now you go forward to this quarter, now the point-to-point was up 6.5%, as you pointed out. Now that has an impact on the expenses, but it's the differential between what the expectation and what the actual point to point was, was much smaller this quarter and didn't have as significant of an impact. Again, that S&P 500 is a proxy for the movement in our actual assets. The actual asset movement was also impacted by the domestic markets were strong in the fourth quarter. However, international markets and maybe some of the fixed income investments weren't quite as strong.

I hope that helps. It's really two different things, an average account value and the average S&P go hand in hand, and that typically ties to the fee base whereas the expenses associated with the acquisition are more of a point to point. Now if you look at the deferred acquisition costs for this quarter, they were right in line with what our expectations would be for every one of our businesses. I hope that helps.

Very much so, thank you. And then I had one follow-up, and I apologize if I missed it in your prepared comments. The G&A expenses in RIS fees were a bit high. Was that a timing issue? Are you investing more significantly in the platform? Can you maybe give us a little more color on that?

I think there is just a little bit of noise there, and again, we make ongoing investments in the platform to make sure that we're viable. You may have seen that we've introduced a new in-plan annuity which we're excited about. That's one example of that sort of investment. With that as a backdrop do you have anything specific data as it relates to the spike in --

No, if you look at quarter over quarter, comp and other, if you see that line item, actually up only $5 million, 2.5%, so that's the line I'd focus on and certainly to Dan's point, we're going to continue to make investments in technology but that's going to be an ongoing investment, not a point in time.

Got it. Okay. So there is just maybe a degree of seasonality there?

Yes, I think that's correct.

Yes.

Nothing to call out certainly. Yaron, thanks for the question.

Thank you.

The next question will come from John Nadel with Piper Jaffray.

Hey, good morning, everybody. I've got one question on a data point, and then a couple of bigger picture questions for you if I could. The question that I have on data point is variable investment income. On a consolidated basis, Terry, how much did that contribute to the fourth-quarter results, and how would that compare with a more typical quarter?

Yes, John, thanks for the question. As you talk about variable investment income, there's a lot of components that go into that. What I would talk about in terms of variable investment income is probably prepayment activity that occurs on our mortgages and fixed income investments as well as some real estate sales that we have that also impact it. Typically, I'd look at on a quarter-by-quarter basis that we'd benefit from pre-- this variable investment income activity by $0.03 to $0.07 a quarter. In 2014 it was well above average because as you're well aware, everyone was anticipating higher interest rates and so the prepayment activity was really, really high, but we try to call out -- we try to call out the variable investment income when it distorts the run rate that is actually in any particular quarter.

Now, if you look at this particular quarter, this particular quarter the expectations were right in line with what we would have expected. We saw probably a benefit of variable investment income around $0.04, a little over $0.04. It's right in line with our expectations so there was no reason to call it out. Now a year ago, it was slightly higher, and if you actually look out on a run-rate basis, we called out probably close to, oh, $0.08. Probably $0.06 to $0.08 a year ago, which was well above our expectations for the year. Hopefully that helps, but I would expect it to be right in line with expectations this quarter.

Okay. That is helpful. Thank you. And then I have a question on Brazil. Net flows remain -- in Principal International net flows remain very strong, but they have slowed quite a bit if you look at it versus the last, maybe even just a year ago. Net flows were about half the level they were a year ago. I'm just so curious about what your view of the economy is, what your outlook is for ongoing growth there and whether we should expect that, that continues to grow but at a much slower pace.

Yes, John thanks for that question because if you think about Brazil and India and China, and southeast Asia, those are really our big growth engines for Luis and his team. As you noted from the script and other conversations, we think we have an excellent partner in Banco do Brasil. Brasilprev, as you know, has some very favorable tax treatment of the savings vehicle and there is this flight to quality right now, and so that's playing to our benefit. Having said that, you're correct. Some of those flows are lower than they have been historically. W that maybe I'll have Luis provide some additional color on the specificity around those flows in Brazil. Luis?

Thanks a lot.

Talking about net customer cash flows for PI, during this year we put $9.3 billion in comparison with $13 billion last year. If you're putting this comparison in constant currency basis, it's a minus-5%, and we're comparing with our record, record year in 2014. I would say that the most important part of the difference is the currency. We had -- we were facing a 30% (inaudible) on average. Talking about Brazil, I mean, Brazil continues performing very well. We put a $6.9 billion in net customer cash flows. As Dan mentioned, our JV with Banco is going very well. We're going to continue facing some volatility and some headwinds but all in all, all our companies and the fundamentals of our business out there continues very strong.

Hopefully that helps. Maybe I'll ask Jim to opine a bit on the Brazilian economy maybe more broadly and its recovery and maybe where we stand. I think that was the latter half of your question, John.

And if I could, my last question was actually going to be for Jim and that's what probability are you putting at this point, Jim, on a broader turn in the credit cycle beyond just energy. I'm just curious in your outlook.

Very good. Thanks.

Okay, thank you. On the first -- on the last point, I would say that this is one of the very important questions on the US and the global economy, and at the moment we're seeing the problems in credit really associated with the energy companies, the miners, and to an extent companies with very large leverage businesses in emerging markets. So it's quite a tight little part of the credit market. The way that, that would become contagion would be if banks have been foolish enough to get over-committed in those markets. If that happens, you're going to see a broader credit contagion and indeed a lower flow of credit in even the US economy.

Your question really was what probability do I see attached to that? We've discussed this at some length within our organization. We have people with a lot of different skills on this. If I can distill it, I would say in the next 12 months it's probably a 20% probability. It's still a negative tail risk. It is most likely that the US and global economy continue growing, albeit at a slower pace than it was before, but we need to be ready to defend if contagion happens and you end up with a worse economy.

In particular on Brazil, I think what's gone wrong in Brazil, apart from the obvious political process in commodity prices, is like China, they capped growth going for quite a long time by expansion of credit, particularly to state-owned enterprises for infrastructure investment and so on. That expansion of credit has probably got to about the limit. So you're into a bit of a deflation situation. The IMF, I think it was, just brought down their growth estimate or their recession estimate this year to in excess of 3% from 1%. I think that was quite possible. I think you're going to see another year of pretty severe recession in Brazil, come what may.

This is part of a deleveraging process and we've seen this with economies that slow a lot. Because people are not spending, there's quite a lot of cash available. Principal International is taking maximum advantage of that right now. This will pass. It's a phase. It could take a while, but it's one where our business can do, frankly, okay.

Very good, thanks, Jim. Hopefully that helps, John.

The next question will come from Ryan Krueger with KBW.

Hey, thanks, good morning. Can you give a little bit more underlying color on RISP, both deposits and withdrawals and specifically, recurring deposits, I guess, were down about 5% year over year. I'm sure part of that was impacted by lower asset values. I appreciate more color on underlying activity.

My take on that, Ryan, is that FSA is in really good shape. When I think about full service accumulation and the underlying drivers of that business, and when I think about it in the context of sales and net cash flow and ability just to grow that block of business, so we really, really feel strongly that it is a strong contributor to success. Having said that, Nora's our resident expert and can speak specifically on some of these drivers. Nora?

Sure, good morning, Ryan. Total, so again, total recurring deposits were up 7% year over year. That's the $1 billion number that I think Dan mentioned in the script ahead of time. What you may be focused on is the quarter over quarter, which was up only about 3.2%. There's some noise there. We have some DB planned deposit noise there. If we strip that noise away and we don't expect that to recur, and we look at those core deferrals, so look at the core deferrals in match, that's actually up really strong quarter over quarter, closer to 11%, little bit north of 11%.

So both with regard to quarter over quarter and trailing 12 months, we're seeing very strong growth in those recurring deposits. We're also seeing very strong growth with regard to the number of participants that are deferring. That percentage is up over 8%. So when you look at the fundamentals of this business, whether you're looking at plan count, again, we saw that increase across all of the segments, whether you're looking at startup plans in the industry, we're now seeing startup plans 17% above pre-crisis levels. A huge opportunity in that part of the market that is completely underserved because 50% or so of those smaller employers do not today have work site access to retirement. We plan that space extremely well and one of the leaders in that start-up plan market.

The underlying fundamentals here are really, really strong. If you look at the fourth-quarter lapses, handful of large cases. Again, we're going to win and lose on an M&A basis. We happened to lose a couple where acquirer -- the plan went to the acquirer. The good news there is the momentum we're seeing.

I might add one other thing in Q4 that we saw is one plan that came in as a sale in a very large plan, north of $500, million is not going to fund until 1Q. Once in a while, as we mentioned before, we're going to get those timing issues. But if you strip out those timing issues and you look into Q1, we're seeing very significant momentum there both with regard to our sales pipeline, good momentum in the pipeline, and we're also seeing good momentum with regard to retention. So as we look into 2016, certainly we don't want to get into the prediction business, but we would anticipate a pretty strong positive net cash flow in Q1, and we would look, as if Terry said, to be back in that range of 1% to 3% beginning-of-year account values with regard to net cash flow full year.

Ryan, just a couple additional comments. When I think about just the America marching back, whether you look at group benefits or you look at our small-to-medium sized retirement business, low unemployment rates are causing -- we'll start seeing an increase in wages. We start seeing an increase in matching contributions. We see employers competing for workers, which means they may strengthen adding a dental benefit, adding a 40-k match. All of those contribute to growing long-term revenues for the organization, but again, I'd highlight one of the statistics that Nora threw out. We are now seeing new plan formation at a higher level than we saw it last in that 2007, 2008 time frame. So a really good time for small business in the US.

Very helpful. Thank you. And then just a separate question, I think, Dan, you mentioned this at one point. Just wanted to get an update. Do you still see a potential opportunity to free up some capital in your closed box within individual life?

We absolutely do see that as an opportunity. That's a lever that we could pull, and while I'll ask -- Deanna Strable is here, and I'll ask her to opine on what the nature of that might look like.

Just a couple of comments on individual life. Obviously we've been very focused on making sure we're meeting our profitability targets, both on a return basis and an earnings perspective. And even though earnings were a little bit soft in the fourth quarter, I think very strong growth when you look year over year.

Specific to capital, obviously there's a number of things that we continue to look at to make sure that we're pulling those levers when and if they make sense, and the closed block is one that is currently does provide an opportunity and we're just working together with Terry and Tim to determine when the right time might be to do that. Obviously, we want to have a place to deploy that. The rating agencies are more concerned on making sure we keep that within our life insurance company perspective, and so again, I think it's probably more a matter of when rather than if, but we do think it's an opportunity that we could pull at some point in time.

Can you help us -- any sort of metric to help us size how big that could be?

A lot of it depends on the timing of it, but I would say it's multiple hundreds of millions of dollars that are really trapped up in that perspective.

Okay. Great. Thank you.

Thanks for the question, Ryan.

The next question will come from Michael Kovac with Goldman Sachs.

Hi, thanks. As you discussed within the retirement fee-based business, expenses were really up only 2% year over year. The top-line brusher obviously drove margin pressure. Can you talk about some of the specific drivers that you see going forward in 2016 in order to sort of slow that margin compression, specifically thinking about the expense side?

That's a good question. Frankly, I wouldn't limit that to just a conversation about full service accumulation or RIS. That's a Company-wide item for us. We're trying to constantly strive the right differential between our growth in revenue and our growth in expenses. We review that on a constant basis. A lot of Company-wide initiatives to go right at that specific point, so again, not limited to RIS but I know that's where your question was. I'll ask Nora to maybe fill in some of the blanks in your question. Nora?

Sure, and this is not going to surprise you, but one of our priorities is to make sure we actually do continue to invest for long-term growth so we're going to continue to balance the need for efficiencies, which we are gaining. We're going to continue to focus on operational efficiencies but we've got an equal focus on making sure that we're investing for that long-term growth. So what you're going to see is -- and we've given guidance on margin, and that guidance on margin gives us the ability to what we believe strike the right balance between those two things because the last thing we want to do is shrink to greatness. We've got a very sharp focus on a lot of -- when you think about digital, when you think about self serve, when you think about the opportunities in the small-to-medium business market, that's our sweet spot, so we're going to play there, and we're going to play there in a way that balances growth and profitability.

It's a really good question. The other area I think about the investment we're making in technology well beyond cyber security controls but it gets into having a digital strategy that better enables our customers to do business with us, better support our advisor community, better support our participants. That's an investment we can't afford not to make. The good news, is we can take that same investment and leverage it throughout the organization, so something that works in retirement is something that we'll likely deploy internationally with Luis and his team and we've also demonstrated we can leverage that across Deanna Strable US Insurance Solutions.

A good question. We appreciate that Michael. Did you have a follow-up?

Yes, if I could follow up here on the Department of Labor. I know you're not giving any sort of large updates of the compliance costs in terms of sizing, but have you begun spending some of that today? I'm wondering further beyond compliance costs if you're preparing anything in terms of product shifts for conversations you're having with your distribution partners in terms of preparing for it in the coming months.

Yes, it's a question that I'm surprised it took this long today to get into this question. We know it's top of mind for investors and we fully appreciate that. I guess where I start on this question is, we've been very active with the trades. We're active with DOL and congress and better understanding the implications it has as it relates to this fiduciary definition. From our perspective, job one is to protect the interest of American savers without taking away very valuable education and guidance which, frankly most workers are very dependent on.

We've looked at it basically three different inflection points. One is that initial selection of the investments. We think that we've got that appropriately identified and the steps that we'll have to take in order to work with advisors and so, again, we think that, that's very manageable.

The second is the routine inquiries that we have among our plan participants. They're inquiring about a hardship loan or a standard loan or trying to get some investor education and understand perhaps better the target date investment options. Again, we think that within the definition there's a way to work with that. We think there's viable solutions.

The third is around those job changers and job changers and retirees. Again, we all know they have three options. One is to leave it in the plan. Our reading of the understanding of the rule today would cause perhaps more people to leave it in the plan. There are some benefits from that to the participant, perhaps fewer investment options but at the same time, they may very well find that the expenses are lower because it's been aggregated with a large pool of dollars. The second is the rollover IRA, either with Principal or another third-party and lastly is a cash out, which we think is a bad idea for all the obvious reasons.

Again, we come back to mapping what that scenario looks like as people are faced with those decisions, and we think there are going to be necessary disclosure and additional steps that will have to be taken but we've got that fairly well triangulated in terms of the impact. We know there's more guidance. There's more education. There's more disclosure. We have a large team of people that are hammering away on this issue.

We don't think it's a material change to our run rate related to expenses, and like you, we're very anxious about the next 60 to 90 days to see what OMB produces and back to the deal well and what that might start looking like. I kept that at a fairly high strategic level, but with that as a backdrop, I'll throw it over to Nora to see if she's got any additional color.

Just a quick comment. You asked about third-party distribution and as you well know, our model is hugely diverse. We go across all the channels, all the firms, so we're out there. We actually have a very large group, a team that's been working on this for a number of months doing scenario planning and engaging with our third-party distribution partners. The one result of those discussions is, it's pretty clear to us, and again, we're speculating on a preliminary reg here, but it's pretty clear to us there's going to be an array of advisor models coming out of this change if and when this reg becomes final.

Between [arrisa] and this new reg, what you see is a huge amount of optionality, many exceptions, many exemptions and so various firms and various advisors and various broker dealers are going to take different routes from our perspective, whether they go the fiduciary route with a third-party advisory service or the non-fiduciary route with a third-party advisory service, whether they use the best interest contract, there's a lot of optionality. What we're doing is working with them and making sure that we're putting the systems in place to be able to service those diverse operating models across our various channels, firms and advisors. And we feel pretty optimistic that at the end of the day, somebody like us who's got the skill and the expertise and the discipline to really work channel by channel, firm by firm is going to have a really elegant solution to a unbelievably complex set of regulations.

And can I just add something? It's Jim here, Jim McCaughan. Can I add that with our investment performance and our multi-asset capabilities, if in the market generally, platforms find it harder to offer proprietary products, we have some very strong substitutes there is that we can sell into other platforms. We would see this as an opportunity, depending on how it all develops, to expand our defined contribution investment only business.

Very good. Michael, hopefully that helps.

Thank you.

Very good.

The next question will comes from Sean Dargan with Macquarie.

One housekeeping item. Terry, forgive me if you said this already but did you say if you bought any stock year to date and if so, how much?

Sean, this is -- we did not state that. I just said that we had an authorization still outstanding at $75 million, but I did also say that the valuations are pretty attractive at this point in time, unfortunately, but it's -- it does look like there's an outstanding authorization. We do have an outstanding authorization of $75 million and we'll also talked with the Board of Directors about any future authorizations that may occur.

Okay. Thanks. And then going back to the DOL but away from fiduciary duty, there's a proposal, I believe it's from the DOL, to allow small employers to pull together to offer 401-k plans to their employees. Is that a net benefit to PFG or is that a challenge for you guys because the size of the plans would then be bigger than the SMB kind of niche that you have?

Thanks for the question Sean. We're actually on the record. We would support that multiple-employer plan model. We have plans in order to support that.

The other part that came out of the White House was to provide some additional tax credits and some additional incentives for small- to medium-sized employers to adopt a plan so I think clearly that's an example where the administration is recognizing that an employer-based retirement approach is the right approach and that delivered through the private sector. Again, we like seeing those. Having said that, I'll have Nora add any additional comments.

No, well said. We've been part of the movement to get those two very things on the agenda, and we were really pleased to see that come out of the White House a couple weeks ago.

Thanks Sean.

Thank you.

The next question will come from Jimmy Bhullar with JPMorgan.

Hi. The first question is just on the operating environment in the 401-k business and just your outlook for flows. Obviously, your commentary seemed pretty positive but withdrawals picked up a lot in the fourth quarter and you mentioned M&A, but how much of this was because of competition and just competitor behavior on fees and other things?

Sure, Jimmy. Thanks for the question. Nora had commented on those earlier. I'll have her repeat her comments relative to the operating environment and flows and withdrawals and some of the color around that. The M&A environment is always there, but equally as important to M&A, I think about half of those withdrawals actually were attributable to planned terminations and that means they just no longer have a plan. That's going to happen in the small- to medium-sized employer space and you can't be as vibrant as we are in that marketplace and not have a few plans terminate after year two, three, four or maybe five. With that, maybe I'll have Nora go and add additional color.

No doubt it's competitive. It's always been competitive. What we're seeing in that small- to-medium business space, the core S&B space for us is that if we actually peel that back on a net cash flow basis for 2015, we were actually well within our beginning of year 1% to 3% net cash flow, so within that space that we've been talking stripping out some of the larger plans, we are -- from a net cash flow perspective, we are proving up that we're extremely competitive, and there are two things going on there.

One is we've got tremendous investment performance in that target date suite, and we've got a huge lineup with regard to target date whether you want primarily passive, whether you want primarily active. Whether you want it in a funds form or in a CIT form. So between the choice in the investment performance, we are highly competitive in that space. And then you add to that the fact that we're priced competitive, and that's why we're seeing those kind of positive net cash flows year over year in that core small-to-medium business segment of the industry.

And then on group benefits, in the group benefits the margins are pretty good. To what extent do you think that will sustain? I think your margins, especially in group life and disability, were just very strong this quarter.

Yes, what did I tell you? It doesn't happen by accident. Deanna and her team have done a superb job managing that group benefits business. Deanna, some additional comments?

I think I'd make a comment. I think you can't just look at the fourth quarter. Obviously, we have some seasonality that makes the margin in the fourth quarter a little bit higher because of dental results and you're right, our group life loss ratio was probably at an unsustainable level. I'd say probably if you just look at the fourth-quarter margins probably not sustainable but I think if you look at the full-year margins, we feel good about those results and ultimately can see that there's fundamentals that can carry that into 2016.

I think as Dan says I think the team's done a really, really good job with this business. We had record sales in both group benefits and individual disability, record retention, record premium, record evenings, and I think when you look at that relative to some of our peers in this business, I think we really do have the fundamentals to drive not just growth but profitable growth, which is really important in this business. Hopefully that helps give you a little bit of color on the margin, but I think full-year margin, we feel good about that sustaining.

Thank you.

Thanks, Jimmy.

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

First I'd like to just thank everyone for joining the call today. As I said in the beginning, we felt like we had a very solid quarter. We think we had overall a good year. We frankly are very optimistic about the future. We found 2015 to be challenging in a number of different areas, including the headwinds created by the equity markets sustaining low interest rates and certainly FX was not playing to our strength in 2015.

2016, as we evaluate it, we think the fundamentals are very strong. We think the strategy is still spot on. We'll continue to rigorously analyze our capital deployment in interest of our long-term shareholders and again, appreciate your continued support and look forward to seeing you on the road here in the next few weeks. Thank you.

Thank you for participating in today's conference call. This call will be available for replay beginning at approximately 1 PM eastern time until end of day February 9th, 2016. 12710878 is the access code for the replay. The number to dial for the replay is 855-859-2056 US and Canadian callers, or 404-537-3406 international callers.