美國信安金融集團 (PFG) 2016 Q1 法說會逐字稿

Good morning, and welcome to the Principal Financial Group first-quarter 2016 financial results conference call.

(Operator Instructions)

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

Thank you, and good morning. Welcome to the Principal Financial Group's first-quarter conference call. As always, our earnings release, financial supplement, and slides related to today's call are available on our website at principal.com/investor. Following a reading of the Safe Harbor provisions, CEO 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 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. Some of the comments made during this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. The Company does not revise or update them to reflect new information, subsequent events or changes in strategy.

Risk and uncertainties that could cause actual results to differ materially from those expressed or implied are discussed in the Company's most recent annual report on Form 10-K, filed by the Company with the US Securities and Exchange Commission. Now, I'll turn the call over to Dan.

Thanks, John, and welcome to everyone on the call. This morning, I'll provide some high level comments on the quarter. I'll also then give an update on how we continue to execute on our strategy, with a focus on long-term growth and generating value for our shareholders. I'll also provide some color on the Department of Labor's final fiduciary regulation, and the opportunities and the impact on our business. I'll then turn the call over to Terry, who will provide additional details on financial results. As John mentioned, slides related to today's call are available on our website.

The key themes are outlined on slide 4. Principal had a solid start to the year, as we continue to focus on meeting the needs of our customers. Our first-quarter results were impacted by volatile equity markets, low interest rates, and unfavorable currency exchange. Once again, our diversified business model by product offering, by geography, and by asset class helped stabilize earnings and grow assets under management.

Despite challenging operating conditions, on a trailing 12 month basis, we generated $1.2 billion of after-tax operating earnings, and increased assets under management to a record $548 billion. These results demonstrate our ability to focus on the things within our control, like delivering outcomes-based solutions to customers around the world and maintaining industry-leading margins in a competitive environment. Importantly, the fundamentals of the business remain strong.

As slide 5 shows, more than 90% of our investment options were in the top two Morningstar quartiles, on a 3 and 5 year basis. Additionally, we received several third-party recognitions for performance in the first quarter, as shown on slide 6. Barron's Magazine recognized Principal as the sixth best mutual fund manager, based on a 5 year period and as a top five municipal manager. CIB Principal won the award for the best Asia-Pacific equity fund at the 2016 Morningstar Awards, and won six 2016 Edge Lipper Fund awards, including best overall group.

Hong Kong was awarded the MPF Scheme of the Year in 2016 MPF awards, and Mexico was awarded the best balanced fund in 2015 by Morningstar. Outstanding investment performance, coupled with our broad multi-channel distribution network, enable us to generate more than $3 billion in total Company net cash flows for the quarter, and $17 billion on a trailing 12 month basis, while many in the industry experienced outflows. The retirement and income solution fee business had $3 billion of quarterly net cash flows, due to strong sales and plan level retention in the quarter. Principal Global Investors had a single large passively managed currency overlay mandate lapse in the first quarter.

Equity and fixed income net cash flows were $3 billion in total, as our distinctive active strategies and outcome-based solutions continue to resonate with investors. And Principal International had its 30th consecutive quarter of positive reported net cash flows. Next, I'll provide some examples of how we continue to strengthen our competitive position. I'll start with a comment on our global brand launch, followed by ways we're enhancing our solution set, expanding distribution, and improving customer outcomes.

One of the more notable achievements for the quarter was the rollout of our refreshed global brand. Our new brand better represents how we help people in all life stages achieve financial success. The brand underscores our commitment to the underserved markets, including small and medium size businesses in the US and emerging markets, with growing middle-class populations in Latin America and Asia. And it reflects our intensified focus on making it easier for everyone -- individuals, business owners, advisors and institutional clients -- to do business with us.

In March, we planted another important seed in Asia. We signed a memorandum of understanding with China Construction Bank, the second-largest bank in the world, to develop a new asset management and pension partnership. Principal and China Construction Bank jointly created CCB Principal Asset Management Company in 2005, and it has become a leading fund management company in China.

This new agreement enhances our existing long-term successful relationship, and is a key to creating future opportunities for Principal to participate in the significant pension and asset management opportunities in China. Also in the quarter, we purchased the remaining stake in Claritas. With a leading asset manager in Brazil, we are well positioned to capture the growing opportunity as investors seek to diversify their portfolio by geography and asset class. Claritas also provides a mutual fund distribution platform in Brazil for several funds managed by Principal Global Investors, further expanding the synergies of our business.

Despite political and economic volatility, Brazil continues to generate positive cash flows and remains a very important market for us, with excellent long-term growth opportunities. Moving to our solutions set, we further expanded our investment and distribution platform in the first quarter, launching two new ETFs, the Price Setters Index ETF and the Shareholder Yield Index ETF. Our target date collective investment trust, or CITs, are gaining significant traction in the retirement space, including the defined contribution investment only channel, due to strong investment performance.

At the end of the first quarter, 8 out of 12 of the funds in our target date CIT series were in the top decile on a 3 and 5 year basis. The demand for our target date investment options remain high among retirement plan clients, as we provide broad, diversified choices with our multi-manager options, including both active and passive strategies. In addition to expanding our investment platform, we continue to invest in innovative customer solutions to drive further growth. Following are examples of recent initiatives to help people get on the path to financial security and improve customer outcomes.

We recently launched Principal Pension Builder, which gives participants the opportunity to purchase an in-plan annuity, giving them easy access to guaranteed income through their retirement. We continue our efforts to aggressively promote PlanWorks, our suite of Best-in-Class plan designs that include features like automatic enrollment and automatic deferral increases. These plan designs are resulting in higher participation and higher savings rates versus traditional opt-in plan designs.

Additionally, we recently introduced My Virtual Coach, which is driving outcomes as well. This innovative virtual assisted interactive enrollment and education tool makes it easier than ever for 401(k) plan participants to save for retirement, and appeals to a new generation of investors. On the protection side, we're also using technology to improve the customer experience when buying life and disability insurance. Recently, we launched the first phase of a digital sales solution for these products on principal.com. The solution delivers tools to help potential customers assess their coverage needs, get a price quote, and obtain assistance to complete the process.

Turning to slide 7, I'll close with comments on the final fiduciary rule released by the Department of Labor on April 6. Though we're still thoroughly reviewing the nearly 1,000 page document, I have some overall comments to make. As we've said before, we remain concerned that some individuals will receive less help in the future than they do today. That said, we remain hopeful we can work with the Department of Labor towards the end goal of helping Americans adequately prepare for retirement. Implementation is clearly top of mind, and we continue to work with the industry and distribution firms to clarify this complex rule and design responsive business models to serve clients, regardless of size.

There will certainly be transition cost and higher ongoing compliance cost, but we don't expect a significant increase in our run rate expenses. Importantly, based on our review of the final rule, we'll still be able to help small businesses with their retirement plans, and our affiliated distribution channels will still be able to sell proprietary products. We'll continue to lead the industry by creating sustainable solutions that meet the needs of the market by managing assets appropriate for retirement and other long-term strategies, and by providing a diversified portfolio of in-plan offerings and systematic withdrawal solutions.

Despite the challenges, we believe we'll continue to gain market share, as distribution firms potentially limit who they work with to a smaller number of providers that can help them manage and comply with the revised rules. We'll also gain market share as we accelerate growth of our defined contribution investment-only business and experience higher retention rates of retirees. In closing, I remain optimistic about the remainder of 2016 and beyond. The fundamentals of the business are strong, and we'll continue to strengthen our competitive position despite an operating environment that remains challenging. Terry?

Thanks, Dan. This morning, I'll focus my comments on operating earnings for the quarter, net income including performance of the investment portfolio, and I'll close with an update on capital deployment. As Dan said, we viewed first-quarter results as a solid start to 2016. Despite ongoing macroeconomic volatility, we see the strength of the underlying fundamentals of our business, and signs that some headwinds experienced for some time might be weakening.

Total Company after-tax operating earnings for the first quarter were $286 million, a 12% decline versus the year-ago quarter, reflecting a continued volatile operating environment. An important proxy for our fee revenue is the S&P 500 daily average, which was down approximately 5% compared to both the first and fourth quarters of 2015. This negatively impacted the daily average revenue from our fee businesses, the primary driver of earnings. This is the first time since third quarter of 2009 that the S&P 500 daily average declined compared to the prior-year period.

Additionally, foreign currency translation negatively impacted current-quarter earnings compared to the prior-year quarter. Operating earnings are translated using the average currency exchange rates. However, for the first time since second-quarter 2014, the US dollar spot rate weakened versus all three of our Latin American currencies during the quarter. This was a benefit to assets under management, as foreign exchange for assets under management is translated on a spot rate basis. Over the long term, we continue to align revenue and expense growth to strike the right balance of growth and profitability.

Expense initiatives started in the first quarter will benefit earnings in the second half of the year and beyond. As shown on slide 8, reported earnings per share were $0.97 for first-quarter 2016, an 8% decline compared to the normalized year-ago quarter, reflecting the impact of the exchange rate and volatile equity markets. At the end of the first quarter, return on equity, excluding AOCI other than foreign currency translation adjustment, was 13.4%. The 160 basis point decline from first-quarter 2015 is predominantly due to the relative strengthening of the US dollar and lower prepayment fees.

Now I'll discuss business unit results, starting on slide 9, with retirement income solutions, or RIS-Fee businesses. First-quarter pretax operating earnings of $114 million were down 17% from the normalized year-ago quarter. Quarterly net revenue decreased 6% from the prior-year normalized quarter, driven by unfavorable equity market conditions. On a reported basis, trailing 12 month pretax return on net revenue was 30%. After normalizing for the third quarter of 2015 actuarial assumption review, pretax return on net revenue was 32%.

Given normal market conditions, we are confident our industry-leading margin will continue to be within our previously stated range of 28% to 32% throughout 2016. RIS-Fee had strong net cash flow of $3 billion in the first quarter. For full-year 2016, we still expect net cash flows to be in our stated 1% to 3% range, as we continue to strike the right balance of growth and profitability. The balance of strong sales and retention, combined with expected equity market returns and continued expense alignment, should drive a stronger finish to 2016.

Turning to slide 10, RIS-Spread quarterly pretax operating earnings were $67 million, a 10% increase over the year-ago quarter. The rise in earnings, which is in line with the 10% growth in the RIS-Spread average account values, was driven by strong sales of all Spread products. On a trailing 12 month basis, the normalized pretax return on net revenue was 55%, and within our guided range. RIS-Spread continues to perform well, as the market volatility has created opportunities as clients welcome guaranteed solutions, even in the low interest rate environment. The pipeline remains strong, and we continue to approach the pension closeout and investment only businesses opportunistically.

Turning to slide 11, Principal Global Investors reported pretax operating earnings of $80 million in the first quarter. Compared to the prior-year quarter, earnings were negatively impacted by volatile market performance, as well as lower performance and transaction fees in first-quarter 2016. The low performance and transaction fees in the first quarter were a result of timing differences, as we see good visibility for more normal levels in the remainder of 2016.

While these performance and transaction fees fluctuate from quarter to quarter, the best measure of our ongoing development in asset management is management fees. These increased slightly from a year-ago quarter, and increased more than 6% on a trailing 12 month basis, in spite of the severe industry headwinds. On a trailing 12 month basis, the pretax return on adjusted revenue was 33%, and within our expected range. Quarterly net cash flows were a positive $700 million, despite the lapse of a $3.3 billion passively managed low fee currency overlay mandate. The new business pipeline remains strong.

Slide 12 shows quarterly pretax operating earnings for Principal International of $68 million. On a constant currency basis, and adjusting for encaje performance, Principal International continues to have mid-teens growth in operating earnings. First-quarter 2016 encaje performance was $4 million pretax lower than expected, while the year-ago quarter benefited $5 million pretax from better than expected encaje performance. We're continuing to build traction in China. Quarterly pretax operating earnings in China more than tripled over the prior-year quarter, providing further diversification within Principal International.

We continue to work with our joint venture partner, China Construction Bank, to develop a diversified product portfolio and provide investment solutions for long-term savings. Compared to the prior-year quarter, the strengthening US dollar suppressed Principal International pretax operating earnings by $16 million. Over the trailing 12 months, foreign exchange has reduced Principal International assets under management by $9 billion. However, strengthening Latin American currencies in the latter part of the first-quarter 2016 had a favorable $8 billion impact on assets under management in the quarter. If sustained, this improved exchange rate could provide a tailwind to next quarter's operating earnings.

Moving to slide 13, specialty benefits quarterly pretax operating earnings were $39 million. First-quarter 2015 was positively impacted by the recovery of reinsurance premiums, partially offset by higher expenses. After normalizing prior-year results, pretax operating earnings decreased 5%. Growth in the block of business was offset by higher individual disability claims compared to the prior period, which can be volatile in any one quarter. The overall loss ratio for the first quarter was within the targeted range.

The underlying fundamentals of the business remain strong, with record sales and retention and normalized premium and fee growth of 8%, as well as a double-digit increase in trailing 12 month pretax operating earnings. As a reminder, specialty benefits operating earnings are seasonally impacted by higher first-quarter dental and vision claims and higher first-quarter non-deferred sales-related expenses. Typically, distribution of annual earnings in this business is 20% in the first quarter, 25% in the second and third quarters, and 30% in the fourth quarter.

As shown on slide 14, individual life pretax operating earnings were $42 million for the quarter, an increase of 19% from the prior-year period. This was a strong result, leading to pretax margin of 16%, which is at the higher end of our range. Results this quarter were driven by higher interest margins, as well as favorable mortality on a growing block of business. Business market sales remained strong, at 56% of total sales in the first quarter. Corporate pretax operating losses of $53 million were lower than expected, due to timing of some of our funded initiatives. We anticipate full-year 2016 corporate pretax operating losses to be at the lower end of our previously announced range of $235 million to $265 million.

For the quarter, total Company net income was $368 million, including net realized capital gains of $82 million. Lower interest rates led to gains of $112 million in our derivative portfolio, partially offset by $30 million of credit-related losses. Our investment portfolio continues to perform in line with expectations, as credit stress was isolated to the energy and basic industry sectors. We remain confident in our diversified, high quality investment portfolio. Again, due to our disciplined asset liability management, we are not forced sellers in stressed times.

As outlined on slide 15, we continue to target $800 million to $1 billion of capital deployment in 2016. In first-quarter 2016, we paid a $0.38 common stock dividend, a strong dividend yield in the current low interest rate environment. Last night, we announced an increase in our common stock dividend to $0.39 per share, payable in the second quarter, as we continue to increase our dividend payout ratio. In addition, we repurchased $86 million worth of common stock in the first quarter, completing the remainder of our 2015 authorization. In February, our Board of Directors authorized an additional $400 million share repurchase program. $389 million of that authorization remained outstanding at the end of the first quarter.

We continue to have a balanced approach to capital deployment and consider all options, including dividends, acquisitions, share repurchase, and reducing our leverage ratio. In the current environment, we view share repurchase as an effective way to increase long-term value for shareholders. Despite the volatile operating environment, the fundamentals of our business remain strong, and we will continue to focus on things within our control to drive growth and profitability for the long term. This concludes our prepared remarks. Operator, please open the call for questions.

(Operator Instructions)

Your first question comes from the line of Erik Bass with Citigroup.

Hi. Thank you. Jim, I was wondering if you could talk about the factors that pressured PGI margins this quarter? I know there are a couple of timing items on fees and other things. And what your outlook is, going forward? And how you think about balancing margins with investing for growth, particularly if markets remain choppy?

Good morning, Erik. This is Dan. Thanks for the question. And you're right, let's get right to it and have Jim delve into some of those details.

Thank you, Erik. You'll have seen, from page 3 of the supplement, that management fee revenue on a trailing 12 month basis, we show that in this thing called other revenue. The two biggest parts of other revenue are borrower fees on commercial mortgage origination and incentive fees on various strategies, from hedge funds to real estate funds to various institutional accounts, that have an incentive fee. So those are shown in other revenues.

And you'll see, if you look back at the trailing 12 months, that's been typically, give or take, 20% to 25% of our total revenues at PGI. It's been pretty steady. What's happened during the first quarter is that borrowers on commercial mortgages delayed closing because of market instability. And it so happened -- this is partly random, actually -- that the incentive fees were actually basically zero in the first quarter. Now, the incentive fees can be on a 1 year cycle, a 3 year cycle, or be dependent on the realization of the underlying asset. Those are really the three ways they tend to operate, and most quarters, we get some.

They're, as you know, back end loaded to the fourth quarter, which is partly why we showed trailing 12 months in the supplement. But this preamble is really a buildup to a couple of numbers I can give you, if I can identify them here in my notes. If you look at the quarter, the year-ago quarter, just for example, was a typical 20% other revenue quarter. We had $264.2 [million] of management fees and $64.7 million of other revenue. The quarter just ended that we're reporting on had $265.4 [million] of management fees, so actually up slightly on the year-ago quarter, but only $44.2 million of other revenue, as all the phenomena I mentioned were slowing client activities.

We have done a pretty thorough bottom-up analysis of what other revenues will look like during the rest of the year, and we are basically anticipating that the year will be much more typical of the last two or three years, and that really what has happened is a little bit random. But more important, the client activities will pick up again. So we remain pretty perky about what the year as a whole will look like.

Thank you. That's helpful. And then -- so I guess two things. So it sounds like you're still comfortable with what your margin targets that you've laid out for the full year. And then secondly, just on the thoughts around balancing investment for growth, with maintaining margins in the short term?

Thank you, Erik. Yes, absolutely. The slight depression of margins, taking the first quarter on its own, was simply due to a relatively low, an anomalously low revenues, for the reasons I described. We're pretty confident that the 33% to 36% range that we mentioned for return on net revenue in the guidance call in December, that remains a pretty good guide to how we'll look for the year, on all current indications.

In terms of investment for growth, as you know, we're one of the few global asset managers who is actually growing revenues at the moment. There's a lot of rather vicious industry headwinds. The volumes of new business we're taking on are definitely leading to elevated costs. Both the costs of taking the business on, in terms of commission and set-up expenses, but also developing our sales force and our ability to serve clients, whether it's different -- whether it's new shares classes in mutual funds, or new offices internationally, those are all expansionary things we're doing, but they're all costing money.

And that's why 33% to 36% remains our guideline, not higher. There are asset managers with higher margins. There's a few. But they're mostly firms who are not growing, or even in some cases shrinking. I would rather have our balance, but hope that answers the question, Erik.

Your next question --

Very good. Thanks, Jim. Erik, just one other comment I'll make, relative to PGI, that gives me a lot of confidence about Jim's recovery on the revenue line there. We still have very strong investment performance; those 3 and 5 year numbers are very strong. And if you look across the asset classes, again, whether it's fixed income, alternatives, real estate or equities, very strong performance in each one of those. And very broad distribution, both proprietary distribution as well as third-party distribution. So a lot of very positive momentum behind Principal Global Investors to work with the rest of the organization. With that, we'll take the next question, operator.

Next question comes from the line of Ryan Krueger with KBW.

Hey, thanks. Good morning. I guess I have, also, an expense question, but more for the overall Company. It seemed like you held down expenses pretty well in the first quarter, in a tough revenue environment. Can you talk a little bit about expectations for the rest of the year? And if you've been doing anything specific to cut back on expenses, given the choppiness out there?

Yes, Ryan, I think what we want to do is be very smart about how we manage our expenses relative to our ability to increase revenues, do away with products and services customers are no longer willing to pay for. And then also ensure that we're making those proper investments, as Jim was describing. But with that as a backdrop, I'll have Terry add some additional detail.

Thanks, Ryan, for the question. As we've talked about in the past, we look at the relationship between our growth in our revenue and our growth in our expenses. We've always tried to have this 1% to 2% differential, i.e. the revenue growing faster than expenses. But when you look back to 2014, as part of the trailing 12 months -- and as always, we try to look at it over a longer period of time, because of some volatility that could occur in any one particular period. 2014 was a pretty tough comparison because of the strong revenue growth, as well as the expenses that we had.

So looking at it in terms of more of a sequential basis, you've seen a pretty significant reduction in our expense growth from -- fourth quarter of 2015 to the first quarter of 2016. It's down approximately 5%, or $44 million. We think that, as you go forward, we're going to continue to align our expenses and revenue. And as Jim talked about, his look into the future of PGI, we also look across all of our organizations, and we feel more comfortable about the growth rate for the entire year.

If you look at 2016 compared to 2015, we'll see that 1% differential in our revenue growth. We think that 2015 is probably a more comparable year. And if you look at expenses in the first quarter of 2016, I'd say that's probably more comparable to what you'll see the rest of the year than what we saw in the fourth quarter of this year. So again, we look at the growth rate of expenses and try to make sure that we get that good comparison with the growth rate of revenues.

In any one particular quarter, it's tough to do, as you saw in the first quarter, a significant decline in the equity markets having an impact on our revenue, on a short-term basis. Our expenses will catch up with that for the rest of the year. Hope that helps.

That's helpful. So the best way to think about it is, based on what you can control, you'll ratchet up and down the expenses, and try to be within 1% or 2% of revenue. And that's your expectation for this year, is that the right way to think about it?

Exactly. And that's the way we've looked at it in the past, and that's the way we'll continue to look at it in the future.

Okay. Great. Thank you.

Thanks, Ryan.

Your next question comes from the line of Steven Schwartz with Raymond James.

Good morning, everybody. A couple on the DOL. First, could you discuss maybe affiliated distribution? How their payments might change under the final rule, from what currently exists?

Be happy to do that. And I've got to tell you, Steven, I just want to make a couple more comments on DOL more broadly, just to set the tone in addition to my earlier prepared comments. We just can't, as a country, lose the fact that we've amassed $15 trillion in rollover IRAs, 401(k)'s, another $7 trillion in defined benefit. There's $22 trillion in this country, which arguably would make it the most successful retirement system anywhere in the world. Secondly, the DOL, I believe their intentions are good.

When I think about the intent of the law, it's to protect the interest of the US retirement savers. It's about creating transparency around cost and benefits and value. It's also about making sure we have access to the competitive marketplace. There are some unintended consequences, and it's what Deanna will respond to in just a minute relative to working with advisors. There's a view that the robo-solution solves all problems for small account balance holders.

That's just not the case, and so we have some more work to do there. The second is, we want to make sure that we're not creating barriers that reduce the number of advisors that have in the past, and will in the future, provide important education to individuals and to savers. And then we also want to make sure that we don't limit the number of individualized solutions that we can present to plan participants. They're very dependent on that enroller, if you will.

So with that as a backdrop, I'll ask Deanna to weigh in on the implications on Principal Advisor Network, and how we might have to do things slightly differently.

Yes, thanks. Just a couple of comments. And first of all, I want to put into context the impact on our affiliated distribution. And so first, I think it's important to point out that our advisors sell and service across the entire range of product offerings, including many products within Principal that are not impacted by the DOL regulation. In fact, a majority of that system's revenue comes from transactions that aren't impacted by the proposal.

Having said that, I think there's a couple of points that I think it's important to keep in mind as we think about even those products that do fall under the regulation. First of all, as Dan mentioned in his opening remarks, the final regs did allow for a path forward on proprietary products, and that applies to both funds within a retirement plan, as well as retail products sold at the time of either retirement or when participants change jobs. I think the other thing to keep in mind is, our affiliated advisors already, today, have choice.

We have both proprietary and nonproprietary products and solutions, and our proprietary offerings will have to continue to compete on items such as investment performance and service, as they do today. So we will have some business model changes for that channel. That will come in the realm of compensation changes, like you mentioned, compliance. But I think we're very confident that our business model can adjust, and feel good about our ability to comply, as well as continue to stay focused on meeting the needs of those customers that we serve.

Okay. Deanna, if I remember correctly, the affiliated distribution does get paid more on proprietary. My understanding is that you could still do proprietary, but if you're going to use the BICE, that has to go away? Is that right?

Yes, and those are things that we are looking at. In some of the places, we already have some fee -- some comp leveling already in place. In other places, we will have to adjust. But I think it comes back to, our advisors already try to do what's in the best interest of those clients. And ultimately, we have great investment performance, we have great product features and good solutions that we continue to feel that we'll have the ability to service our customers. And sell both our products and the nonproprietary products within the platform, going forward.

Yes, levelized commissions have been in place, Steven, for a long time. This is Dan. Levelized commissions have been in place for a long time. And I think it's only on the margin that we've had any additional sort of compensation, and that's going to be rationalized across the entire industry. And so again, I don't see that as an impediment to the Principal advisor networks to continue going about doing what they do today, which is taking care of the customers and the participants.

Okay. And on the independent side of distribution, do you have distribution in which you will be considered the financial institution?

I think that is on a very limited basis. And the way I would describe that is already, within our call centers, we are providing information, we're providing some education, and we're not dispensing advice. As you know, our wholesalers work with independent third-party administrators. They work with wire houses, and all of our alliance partners, to distribute our products.

We don't sell these plans on a direct basis. It's the advisor who would be acting in the capacity of the fiduciary, in order to help them pick and choose the investments in these plans. So the only -- go ahead.

Dan, that's what I'm asking. What I'm asking is, you have a situation over in west Des Moines here, where the insurance company deals with independent agents, and would be considered a financial institution under the BIC. And the question is, how can they be the financial institution, have the liability, and still be able to manage independent people who are going to do what they're going to do?

Yes, good question. Let me -- Nora is going to weigh in here, and provide some additional color for you on that specific question.

Yes, that's not -- Steven, that's not our model. They've got a different model than we have. And if you're talking about the retirement business that Dan was addressing, our model, as Dan said, is we are going to -- we'll have a wholesaler who is working with that independent advisor. But to that point, that independent advisor and their firm would take on the obligations under the new DOL rule.

Okay. All right. Thank you. That's what I wanted to know, Nora. Thanks.

All right. Thank you. Appreciate it, Steven.

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

Thanks. Good morning. I was wondering if, Dan, you had any update on the Board's thoughts of the CFO search?

Sure. Sean, thanks for the question this morning. Terry's a tough guy to replace. We all know that. And we do have a search going on for both internal and external candidates. There's a -- what I would consider to be a really good pool of candidates out there.

We'll have a Board meeting later in May, at which I'll provide an update to the Board on progress that we're making toward that end. But Terry's committed to staying on board as long as it takes, in order to get the new person appropriately aligned and on board here at Principal. So again, we feel very good about where we're at today in that search process.

Sean, this is Terry. Thanks for the question. Appreciate it. (laughter)

You're a hard man to replace, Terry. Given the $400 million authorization you got during the quarter, and where your shares were trading, I'm just wondering why -- or if you can share with us your thoughts on why you didn't put the -- I guess the pedal to the floor and buy more stock when it was down at those levels?

The first thing I would say is, you never know what level the stock is ever going to trade at. And so again, we're very disciplined on how we go about executing on the share repurchase. Remember that we had an older share authorization that had been in place, which we completed. And so that was roughly $86 million.

$75 million.

$75 million. And so good progress was made in closing out the previous authorization. We still have a lot of dry powder from here. But with that, I'll he throw it over to Terry to add some additional color.

Yes, Sean, as we looked at -- and as we have looked at -- capital deployment, we have always looked at it in terms of a very balanced long-term view. We're looking for that -- what will enhance the shareholders' value. Now, buying back shares is one of the options. But we look all kinds of different things, in terms of to enhance shareholder value, as well as distribute that value as it's created. If you look at over the last several years, you'd see we've done a pretty good job of balancing it between organic growth and acquisitions, in order to create shareholder value. And then increasing our dividend payout ratio, as we've just increased the dividend, again, as we march towards that 40% of net income.

And then buybacks is just another part of the program here. And so we've talked about, in 2016, $800 million to $1 billion, and we're on track to do that. And we think that -- as you mentioned, though, that the share buyback program is a very important part of that so far. So through the first quarter, we had $86 million. As of yesterday, we added another $26 million in the program. So we're over $100 million now. We're looking at it over the long term.

We do have a program that gets accelerated as the share price goes lower. Hopefully, we won't have to worry about that in the near future. But as we look into the second half of the year, we've got options. We've got opportunities to continue to pay out our dividend and increase it towards that 40% payout ratio. We're also looking at acquisition activity for the remainder of the years. And as we've talked about in the past, we've looked at increasing our share of some PGI boutiques, and so we'll look at that as well. We'll also think about the share buyback.

So as I mentioned, we continue to build that out, and so we've got over $360 million yet in our authorization. So that is a very integral part of the share buyback -- excuse me, of the capital deployment strategy in this environment. And then we're also going to continue to look at opportunities to change our capital structure and reduce our debt, reduce our debt leverage. Because we do have some high coupon debt out there that we could, if the opportunity presents itself, use that for that. So we're going to continue a very balanced, disciplined, long-term approach to our capital deployment strategy. And I think we're well on our way to distributing that $800 million to $1 billion. Hope that helps.

Yes. Thanks, Terry.

Thanks, Sean.

Your next question comes from the line of Suneet Kamath with UBS.

Thanks. Good morning. Just wanted to go to the FSA business. You talked about hitting the 1% to 3% beginning of period, in terms of sales or [blows in]. I think in that commentary, there was some talk about balancing growth and discipline. So can you just give some color on what you're seeing in the pricing market in the 401(k) business?

Yes, thanks for the question, Suneet. Appreciate that. I'll make a couple comments, and throw it over to Nora. Clearly, there's a lot of questions being asked today in the qualified retirement plan market, with all the DOL overhang. That's starting to consume, I think, a lot of peoples' time as they advise their clients on what's transpiring. Because this, as you know, has hit mainstream media, in terms of the issues.

We did an outstanding job they the current quarter retaining clients. We did a nice job acquiring clients. A strong investment performance certainly helped -- contributes to that success. Having said that, again, net cash flow was healthy for us. But these are things that are a little bit lumpy, and I'll have Nora weigh in now, and talk about some of that lumpiness and her views, broadly, on the FSA line.

Sure. Thanks, Suneet. Good question. We certainly believe we're striking the right balance, and we think we have the proof points for it with the kind of plan retention we're seeing, with the kind of sales we're seeing. We're always looking at -- obviously, we've got a competitive market we're dealing in. But one of the things that we're seeing is, in particular in that small to medium -- that core segment of our market, we're seeing just a tremendous opportunity for us, as we move in that space.

And what we've seen is, as we look at that growth both in our sales and retention, that's the piece of it that is really outperforming for us. The lumpiness that we talk about, or the volatility we talk about, comes when one or two larger cases -- so you think in terms of $500 million or north of $500 million. Now oftentimes, when we talk about the discipline between growth and profitability, it's with those larger cases, and making a decision that we're not willing to race to the bottom on pricing.

So that's the kind of lumpiness you'll see. And that's why we'll have quarters like we had this quarter, with a $3 billion really outstanding net cash flow. But we don't want to get over our skis extrapolating that, because we will have one or two large plan decisions over the year that will move that number. Which is why we continue to reaffirm the guidance that if we look at a full year -- rather than quarter to quarter --if we look at a full year, we're confident, given what we see today, that we're going to be well within that 1% to 3% of beginning of year account value.

But the caveat that we always throw out is because our core business is small and medium businesses, when you have one or two of those larger cases moving in or out, that can swing the numbers, which is why we tend to look full year rather than quarter to quarter.

That makes sense. But just to come back to the large account side, can you just give some quantum, in terms of how much pricing has changed, maybe year over year, in that large case market? Acknowledging that's opportunistic for you?

Yes, it's -- there hasn't been in -- from what we see, it's not a year-over-year comparison. That large case market has been extremely competitive for many, many years. And where we compete in that large case market is, one, investment performance. And Dan and Jim have talked about that, especially in that key asset class of target date. We have a tremendous amount of choice there. We've got extremely strong investment performance.

So we compete in that space very well, with regard to that suite, those key asset classes. In addition, on the service side, because of our scale, we're able to move up and down, whether it's a small business, a medium business or a large business. And we've scaled our service platform to the point where that is seamless for us. So we compete very well in that space, both on the investment side and the service side. But again, we're going to always be disciplined around this growth and profitability axis.

Suneet, this is Dan. Just a couple of comments. The TRS, the total retirement suite, still is a very, very powerful tool for the Principal that can differentiate value from pure 401(k) players. And so that, again, is a differentiator, frozen defined benefits, deferred compensation. ESOP had a nice quarter here, so that is a nice differentiator.

The other point I'd make is, because it was this generalization of large case pricing, there are so many components that go into the pricing of a large plan. How many payroll centers, what is the current penetration rate, relative to participant involvement, what's the customized communications package? All of those variables go into it. So when we lose a plan or win a plan, it's because we've done the homework behind the scenes to understand exactly what kind of resources are going to have to be deployed against that plan.

So that's why, at any given time, you could lose a plan or win a plan. But again, we like the model that we have. We think it resonates in the marketplace, and our retention rates would imply that those large plans appreciate it. Hopefully that helps.

No, it definitely does. One last quick one -- or maybe not so quick. But as we think about the DOL, I think we all know there's been some fee pressure in the 401(k) business just for years. But do we think, or should we think, that the DOL rule could accelerate some of that pressure?

I think, as you pointed out very appropriately -- and frankly, it's not limited to just this industry. It's all industries where there's constant pressure. It's one of the advantages for being a leader in an industry, having critical mass and scale and capability, and having great partners out there. I would not anticipate there to be any pressure coming off fee structures because of DOL.

Could it cause some additional discussion? It should, because it's really around transparency, and making sure that people understand what they're paying and what they're getting for their money. So again, I think on a marginal basis, I think we'll continue to have a lot of dialogue around cost and pricing. And Nora wanted to make one more comment here.

Yes, Suneet, I think the one phenomenon that we expect is that when you look at the complexity of this reg, when you look at compliance cost, you really need to be a player that's at scale. And you need to be a player that can come to the market, not just at scale, but with the kind of expertise to deal with this ERISA fiduciary duty. And when you think about that, the logical conclusion is, you're going to have sub-scale players, or folks that don't have this as their core business, having a moment in time here where they may be moving out of the market.

So we see it as an opportunity around consolidation, and I think that goes back to your question about pricing. I think the irony here is that those of us who are at scale, that have the expertise, are going to stay in the market. And I think there will be a number of players who will take this as their opportunity to exit the market.

Got it. Thank you very much.

Thanks, Suneet.

Your next comes from the line of John Nadel with Piper Jaffray.

Good morning, everybody. I guess Dan, one maybe bigger picture question, as it relates to DOL. Do you think it has any impact on the pace of the rollover market?

Good question. So good morning again, John, to you.

Good morning.

I think what it's going to cause is, at the inflection point of a job changer or retiree, they're going to call into a call center, like they always have, because that's the typical process. And they're going to be having a conversation with a person providing education and guidance. And they're going to disclose what the pricing is in the current plan structure, in a qualified retirement plan, and it could be a larger plan. And there's going to be a certain price. And there also is a -- always have, in the past, disclosed to them that there are other options for them to consider.

They could move that money to a rollover IRA with the Principal, or they could roll over that money to a third party. And the names are common; you would know all of those. And the burden that now falls on the advisor is that the participant has a very clear understanding that they're moving from one product to another. And they have to look at it on a couple of different dimensions. One dimension, of course, is the investment lineup. Is it the same or is it different? Another dimension is, what's the underlying performance of those investment options?

The third dimension is on the price. What am I paying, and what am I getting in exchange for that? And it doesn't have to be the same price, but there has to be a thorough understanding and an explanation on why there is a difference for the price being paid. That action, unto itself, is going to take a longer conversation for fully vetting that opportunity. It ties back to my earlier statements that small account balance holders could find that there are fewer advisors willing to invest the time and the energy to vet every one of those situations.

So I think there is a likelihood that 401(k) service providers could end up, almost by default, retaining maybe more of those smaller account balances after they've had that discussion with that phone counselor. I think on the larger account balances, there are advisors that are going to be spending the time to help vet the opportunity. And the last comment I would make is, remember that we are a significant player in the rollover business for defined contribution investment only. Where Jim McCaughan's PGI investment products not only find themselves on the platform of many 401(k) chassis, but also they find themselves on rollover IRA chassis.

And again, with strong performance and investment options that solve needs for long-term savers, I think that's a net plus. So hopefully, that's not too long-winded of an answer, John. Do you have a follow-up?

No, that's very helpful. I do have a follow-up, just on a separate topic. I appreciate, for sure, that Principal International is -- continues to generate positive net flows now for 30 straight quarters. But in the last several quarters, those net flows have certainly declined. And I'm just curious, as you think about the outlook and some of the economic issues, particularly in a few of the Latin American countries, whether you think there's a chance that we could see that string of positive net flows actually come to an end here soon?

Yes, again -- and I'll have Luis clean this up. We're benefited because we operate not only in Latin America, but we also operate in Asia. And we're leveraging much of what Tim -- or Jim brings, relative to institutional asset management, to those PI countries. I'm also encouraged by some of the recovery that's happening in some of the countries, like Brazil, where you see their equity markets in the first quarter recovering by almost 12% -- or up 15%, and the currency has recovered by approximately 12%.

So I think there's some signs that these emerging countries are going through the process. They're -- although they still show negative GDP in some cases, there is some sign that there's new capital being infused in those countries, and things are bouncing back. But to your specific question on net cash flows, I'll defer to Luis to answer that.

Okay. Thanks, Dan. John, this is a very good question. Let me tell you what is our you view about this. It seems to me that we were able to solid rock bottom cycle of the emerging markets very much more around January. If you're looking at the equities index, FX confidence indexes and commodity prices, even interest rates are showing a much better picture for emerging markets today.

Oil price is about $46, $48 today. Copper price is in $2.28. FX going in the right direction. So what happened with our net customer cash flows? You could see our financial supplement, trailing 12 months, we are [flying at a] $9.3 billion in trailing 12 months. We put in $900 million net customer cash flows in the first quarter.

If you're looking at the trend that we have had during 2015 first quarter, second quarter, third quarter, fourth quarter, in the first part of the year average per quarter, $2.5 billion, $3 billion in net customer cash flows. Average in the second part of the year, $1.5 billion, $1.8 billion. And then we had $1 billion. But if you're going into the first quarter, I would say that January, February, March, they had a very positive, I would say, behavior.

February was pretty much more flat, better February and much better March. So I would say that the $900 million that we do have in first quarter is not an indication of what is our real run rate that we are looking forward during 2016.

Okay. So -- and I get that some of these markets have rebounded, and some of the commodity data points and a few other data points have certainly improved. And so I would absolutely expect that we would see investment performance pick up. I was more concerned about GDP and employment levels, as it relates to some of the net flows. But it sounds like you expect improvement there, too.

That is correct, John. We have a -- and again, we have a much better idea about what is going to happen. And certainly if you're looking, even unemployment levels, even in a country like Brazil, certainly, the unemployment is going a little bit bad. Surely, Brazil, in particular, continues being very solid. The net customer cash flows out of Brazil was $1 billion in the first quarter, and trailing 12 months is $6 billion. And we certainly, for the second quarter [as I've been saying], we have a better -- much better idea about those net customer cash flows that are going to be very much more aligned about what has been our run rate in the past.

Appreciate it.

John, one thing that gives me a little bit of comfort about the net cash flows in emerging markets is, they are still that. In US, some of this negative cash flow pressure comes from paying out benefits. It's why we're in the business. And if you look at Latin America and Asia, they just don't have the same level of payouts occurring, as it relates to generating a retirement income. So we've got a lot of emerging markets, with a lot of upside for middle class growth, in the accumulation phase here in the next decade or so. With that, we'll take the next question.

That point is well taken. Thanks, Dan.

Thank you, John.

Your next question comes from the line of Michael Kovac with Goldman Sachs.

Thanks for squeezing me in. One more on international here, actually. Looking at China, which was actually very strong growth in the quarter, on a flows basis and an operating income basis. How sustainable do you think that is, both in terms of, obviously, very rapid growth, but also in terms of the persistency of the assets that are coming in?

Yes, that's a great question. And frankly, Mike, we're really enthusiastic about China. You heard our earlier comments around reaching an agreement with the memorandum of understanding with China Construction Bank for now 11 years. It's just been a terrific partner for Principal.

We were over there recently, and celebrated our 10 year anniversary. It's important to recognize those sorts of milestones. And as you point out, the flows and the earnings are now starting to be generated after a long incubation period. But with that, I'll ask Luis to make some additional comments.

Yes, Mike, this is a pretty interesting question, as well. Net customer cash flows, as you could see in our supplement, we're reporting $17 billion just for China in the first quarter, trailing 12 months, about $20 billion. So there has been a very impressive performance. I would say that we think that China is going to be very much more -- its path, and -- it's going to very much more in line about what you can see in our trailing 12 months expectation, and what really happened in the first quarter of 2016.

Having said that, we have been very focused on certain things like asset retention, about the products that we're [pulling] ahead. And the thing that is important to keep in mind is that our joint venture has been perceived as a Safe Harbor in China. And also, we have been perceived as a much more conservative asset manager and mutual fund company. So we have been benefit for the noise in China, but certainly we think that our run rate is going to be very much more in line about the numbers that you could see in the trailing 12 months, and what really happened in the very last quarter in China.

Great. Thanks.

Is that helpful, Mike?

Yes, it is.

Okay. Thank you for the call.

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

Thank you. I'd just like to say thank you to everyone for joining the call today. Our growth opportunities remain strong, and our strategies firmly in place. We'll continue to focus on managing our capital. We'll focus on the DOL implementation. We'll focus on running the businesses for the benefit of our customers and our shareholders, and certainly appreciate your commitment to continue to have confidence in the Principal Financial Group -- or I should say the Principal. So again, thank you for joining the call. We'll see you on the road.

Thank you for participating in today's conference call. This call will be available for replay beginning at approximately 1:00 PM Eastern standard time, until the end of the day May 6, 2016. The ID number to access the code for the replay is 83129743. The number to dial is 855-859-2056 for US and Canadian callers, or 404-537-3406 for international callers. Thank you. You may now disconnect.