Principal Financial Group, Inc. (PFG) Q4 2009 Earnings Report, Transcript and Summary

Good morning and welcome to the Principal Financial Group fourth quarter 2009 financial results conference call. There will be a question-and-answer period after the speakers have completed their remarks. (Operator Instructions). I would now like to turn the conference over to Tom Graf, Senior Vice President of Investor Relations.

Thank you. Good morning and welcome to the Principal Financial Group's quarterly conference call. As always if you don't already have a copy, our earnings release, financial supplement and additional investment portfolio detail can be found on our website at www.principal.com/investor. Following a reading of the Safe Harbor provision, CEO, Larry Zimpleman; and CFO, Terry Lillis will deliver some prepared remarks. Then we'll open up for questions. Others available for the Q&A are, Dan Houston, U.S. Asset Accumulation and Life and Health Insurance, Jim McCaughan, Global Asset Management, Norman Sorensen, International Asset Management and Accumulation and Julia Lawler, 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. Risks and uncertainties that could cause actual results to differ materially from those expressed or implied are discussed in the company's most recent annual report on Form 10-K and quarterly report on Form 10-Q, filed by the company with the Securities and Exchange Commission. Larry?

Thanks Tom and welcome to everyone on the call. The fourth quarter was a period of modest economic recovery with continuing improvement in credit markets and a more positive tone for the equity markets though challenges remain. I'll focus my comments on fourth quarter and 2009 results with Terry providing additional detail and then close with some thoughts about 2010 and where we stand in implementing our strategy for growing our fee based global asset management and accumulation businesses. Given overall market conditions, we view fourth quarter results as solid. In a year that demonstrated the benefits of business and investment portfolio diversification and the resilience of our businesses. Strong improvement from U.S. Asset Accumulation and Principal International drove total company operating earnings up 12% from a year ago quarter. These two segments added $44 million in operating earnings reflecting higher average assets under management, strong expense management and the benefit of having vibrant businesses in emerging international markets which have not been impacted as significantly by the economic recession. Principal International delivered $870 million of positive net cash flow for the quarter. Other highlights include total company return on equity of 10.6%, a 40 basis points sequential improvement due to growth in our fee based high return businesses. Continued strong performance from the investment portfolio with net realized capital losses of $59 million, a level comparable to the second and third quarters, and continued improvement in net unrealized losses about $350 million for U.S. invested assets in the fourth quarter with credit spreads narrowing by about $1.2 billion partially offset by an increase due to higher interest rates. Because of our strong asset liability management, this increase in interest rates is not an economic issue. We view 2009 as a very solid year for the Principal. During some of the most challenging capital market and economic conditions in 75 years, we delivered $804 million of operating earnings, a decrease of only 15% and $590 million of net income and increase of 39%. GAAP book value including other comprehensive income more than tripled from a year ago to $23.05 per share as of December 31, 2009 reflecting the significant turmoil and ill liquidity in the market at that time. During the year, our assets performed in line with our expectations as did our liabilities. We saw a $6.3 billion decline in net unrealized losses in 2009 with $8.2 billion of improvement from credit spreads narrowing partially offset by a $1.9 billion increase due to higher interest rates. Assets under management improved $38 billion in 2009 to $285 billion creating the opportunity for earnings growth in 2010, and our GAAP balance sheet was strengthened by more than $2 billion in 2009 as a result of the equity and debt raises along with strong net income. In total, we entered 2010 in a stronger and more competitive position than at any time in our history as a public company. Now I'd like to spend a few minutes to discussing where we are in the process of economic recovery and how that may impact our businesses in the short term. As we have said many time before, we have always been very disciplined about the liabilities we put on to books as well as where we invest our capital in order to produce the best long-term return for shareholders. During 2009, we scaled back the investment-only business as part of our overall capital management efforts. In line with our goals for the year, the investment-only business is now just over 25% of general account liabilities without reduction in the block freeing up $165 million of capital. Our current plan is to continue to scale back this business as much tighter spreads in the market today are resulting in a return on capital that we do not believe is attractive. Now let me turn to full service accumulation and the impact of the economic recession. For the year we had net cash flow of 2.5% of beginning of year account value below our long-term target. Because of the recession, we saw a recurring deposits that is new deposits from existing clients, decline about $700 million from 2008 due to participants being laid off, matches being suspended and a slight scaling back of participant deferrals. Given that recurring deposits have increased on average by about $1.4 billion a year over the past four years, we estimate the impact of the recession on recurring deposits in 2009 to be in excess of 2.5% of beginning of year account values. The good news is that we are seeing recovery in these areas and expect that to continue as we move into 2010. Finally the lower volume of sales activity in the marketplace and the general decline in equity values during 2008 further depressed transfer deposits that come from plans that are moved to the principal. Transfer deposits were down in 2009 by $2.7 billion or 3.4% of beginning of the year account value. Again, there is good news, we are seeing pipelines build. October and November were our two most active months of the year for court activity and on a sequential basis, fourth quarter sales more than doubled to $1 billion. So we remain confident in our ability to have full service accumulation, net cash flow get back to the 4% to 6% of beginning of year account value as more normal job market and economic conditions return. Let me close this section by citing some third party sources that put full service accumulation, net cash flow and sales into context. According to Cerulli Associates, the economic recession caused the 401k universe to be a net out flow during 2008 and 2009. They estimate $30 billion of out outflows in 2008 and $43 billion of outflows in 2009 with outflows expected to improve in 2010 as the economy continues to recover. Compared to that full service accumulation had net inflows of $5.5 billion in 2008 and $2 billion in 2009. The life insurance marketing and research association or LIMRA, regularly reports key 401k metrics. So let me mention a few key findings from their most recent survey through nine months. We were one of the only three firms adding more than 100,000 participants. We were one of only four firms adding more than $2 billion in 401k assets. And we were one of only five firms adding more than 1,000 plans. In summary, while the economic recovery will continue to cause some challenges, we remain confident in the competitiveness of our 401k and defined contribution products, and we believe more normal growth will resume for full service accumulation over the next few quarters assuming employment recovers. I'd like to conclude my comments with some thoughts about our progress in implementing our small medium business, asset accumulation, asset management strategy and how that positions us for the success over the longer term. While we want to maintain a well diversified and small medium business focused business strategy, our priority is growing our U.S. retirement business including full service accumulation, mutual funds and separately managed accounts along with our international accumulation businesses and our global asset management business. Beyond offering a stronger growth profile, these businesses are fee-based high return businesses that require minimal capital for growth. As a result of this strategy, we have seen strong assets under management growth since 2001 despite essentially flat markets. Total assets under management are up $186 billion for our compounded annual growth rate of 14%. During this period, we grew full service accumulation account values by $53 billion, an increase of nearly 125%. But what may have escaped this much attention is growth in other areas. Principal Global investors with $66 billion of higher third party assets under management, an eight-fold increase, Principal International with $31 billion of higher assets under management, also an eight-fold increase, and Principal funds with $25 billion of higher account values of four-fold increase. Going forward, our ability to continue to grow the U.S. retirement businesses will depend upon our success with independent distribution particularly our key aligned partners such as Morgan Stanley Smith Barney, UBS, Merrill Lynch and Wells Fargo. We have been working diligently to build deep and lasting relationships with these partners. Despite the market turmoil in 2009, we generated $8.5 billion of sales from independent distribution for full service accumulation, mutual funds, and separately managed accounts. This translates into a three year compounded annual growth rate in excess of 15%. So it is clear, we are making very good progress in our efforts to build lasting relationships across the full range of asset accumulation products in our most significant channel. Future success for Principal International will result from successfully exporting our U.S. retirement expertise to selected key emerging markets in Latin America and Asia. In Latin America we've achieved a compounded annual growth rate of more than 20% over the last five years where both operating earnings and assets under management. The memorandum of understanding with Banco Brasil provides for extension of our exclusive relationship for another 23 years. While the change in ownership percentage from 46% to 25% will have an impact on near term results, the increased sized and reach of Banco Brasil enhances the long-term growth potential in this key market. We're implementing the same model in high growth market in Asia that is, to combined or retirement and asset management expertise with strong local distribution partners. In China for example, we increased assets under management by $1.4 billion or 30% in 2009, and in Malaysia, our asset management expertise was recognized by Asia Asset Management with CIMB Principal Asset Management named best institutional house of the year and CIMB Principal Islamic named Islamic Fund House of the Year. Finally for Principal Global investors, our key will be a disciplined focused effort to manage assets appropriate for retirement and other long-term investments while employing our multi-boutique strategy to drive assets under management growth. Reflecting the success of our multi-boutique strategy, each of the three boutiques we've had for more than four years, Columbus Circle, Post and Spectrum has a compounded annual growth rate for assets under management in excess of 25%. In closing, we enter 2010 with a well crafted strategy focused on high growth, high return businesses with diversification to see us for challenging times. We believe that served us well in 2009 and it will allow us to achieve our longer term goal of 11% to 13% growth in earnings per share as markets continue to recover along with the economy. Terry?

Thanks Larry. This morning I am going to focus on four areas. I'll cover operating earnings, and how the results are emerging as the economic recovery builds, our covered net income including performance on the investment portfolio. I'll provide an update on expense management and I'll wrap up with some comments on the strength of our position as we enter 2010. Starting with fourth quarter 2009 results, total company operating earnings improved $22 million or 12% compared to the year ago quarter. This reflects 6% higher average assets under management and strong expense management. Two segments drove the improvement. U.S. asset accumulation earnings improved $23 million or 22% on $7 billion or 4% higher average at comp values. Growth for the segment was even more impressive, up $47 million or 70% excluding results for the investment-only business which as you know, we are scaling back. The accumulation businesses added about 2% net cash flow and the guaranteed businesses generated negative net cash flow reflecting our scale back of investment only. Principal International's earnings improved $21 million more than doubling from a year ago quarter. Roughly half of the improvement reflects strong performance on a local basis with the increase also reflecting recovery and macro economic conditions as well as a $3 million after tax from realized capital gains in Brazil. Principal International added $11.5 billion of assets under management during the year to reach a record $34.6 billion at year-end. The gain was driven not only by market performance and favorable currency movements, but importantly by record net cash flows; $3.2 billion or 14% of beginning of the year assets under management. Global Asset Management earnings were down on a reported basis, but up 35% excluding earnings and certain post advisory contracts which were sold in first quarter of 2009 and performance fees in the prior year quarter of about $16 million after tax on a contract where performance fees are determined every five years. On a sequential basis, total company earnings were down $38 million or 16%. The variance reflects a number of items, the largest being seasonality of health division claims and benefits in third quarter 2009 from early redemption of MTNs and lower back amortization expense. Excluding items impacting comparability between periods, earnings improved 9% sequentially on 5% higher average AUM demonstrating that we are continuing to see positive operating leverage as our assets under management build. Fourth quarter was also another solid quarter for net income at $142 million. Net realized capital losses in fourth quarter 2009 were $59 million compared to $189 million of losses in fourth quarter 2008. Compared to a year ago quarter, fixed maturity credit related impairments and sales were down $43 million, an improvement of 42%. Losses on commercial mortgage home loans were up only $1 million or 7% and had been fairly stable over the past five quarters. We expect total credit related realized capital losses to decline in 2010 with improvement in corporate credit losses more than offsetting higher losses from commercial mortgages and CNBS. I'd also reiterate our expectation that over the course of this cycle, losses on our commercial mortgage home loan portfolio would come in around 2% pre tax. These results demonstrate the organization's discipline and investment expertise. Our strong asset liability management process, discipline around the liabilities we take on and the assets we match against them enable us to avoid selling in an ill liquid market. In our expertise and corporate credit and real estate coupled with adherence to internal credit exposure guidelines, has helped us keep losses to a manageable level. We are very confident in our investment portfolio and the strength of our capital and liquidity. We are now positioned to take advantage of opportunities to improve return on invested assets, but as always, will do so with discipline particularly given the ongoing uncertainty in the environment. Moving to expense management. We reduced the fixed component of compensation and other by approximately $290 million or 16% compared to 2008. This translates into a reduction from our original 2009 budget of more than $400 million. Let me close with a few thoughts on the strength of our position as we enter 2010. Principal Global Investors starts with $205 billion is assets under management, an increase of 8%. Combined, account values for full service accumulation and mutual funds total $127 billion, both businesses up 20% from a year ago. Finally, Principal International starts the year with a record $35 billion of assets under management, 50% higher than when we started 2009. As a quick reminder, several items will impact comparability between 2009 and 2010, continued scale back of investment only, the change in our economic interest in Brazil (inaudible), our investment in the health division and an increase in weighted average shares outstanding. That said the increase in assets under management and account values from a year ago positions are fee based businesses, businesses that are not capital-intensive and do not rely on general account guarantees for strong revenue growth in 2010. Let me also comment on our risk-based capital ratio and capital position going into 2010. As of year-end, we estimate our risk-based capital ratio to be in the range of 415% to 425%. We also have substantial cash at the holding company providing additional flexibility. Relative to 350% RBC ratio; we had $1.5 billion of total excess capital at year-end, about half at the life company and half at the holding company. Clearly, we have continued to effectively balance our focus on operating earnings growth with disciplined and managing our capital. This concludes our prepared remarks. Operator, please open the call to questions.

(Operator Instructions). Your first question comes from the line of Jimmy Buhler of JPMorgan.

I have a question on your FSA business. On the sales, just what the pipeline looks like, you've been positive on the pipeline for a while, but the absolute level of sales have been somewhat weak, and I think last quarter, you had mentioned that you expected a billion in the fourth quarter, that's what you saw. Any sort of outlook for what you expect in the first quarter. It would be helpful if you're willing to share that, and then related to that, the withdrawal rate seems to be picking up even if you look at it as a percentage of average accounts value and just wanted to see what the drivers are behind that?

I'll turn it over to Dan for a little bit more color, but as we've said in our comments over the last couple of quarters Jimmy, we are generally seeing an increase in pipeline quarter-over-quarter and you are seeing that now start to translate into sales. One another things that needs to be factored into this is that the time it takes from sort of when things enter pipeline into when it turns into solved cases, can often be somewhere between two and three quarters, but as I said in my comments we are seeing that build in terms of which we are all, again one other things I would say here is a general comment before I ask Dan to comment further is that we have always described withdrawals Jimmy as being somewhere in the range of about 16% to 18% on an annualized basis and that usually comes from about 10% to 12% member withdrawal and about 6% to 7% sort of employer base withdrawal. And that's generally the area within which the withdrawal are staying. The comparison to 2008 as we have said before is always a difficult one because 2008 was far and away our best year for retention both at the member level and the contract level. With that let me have Dan, give you a little bit more color.

Yes. And again thanks Larry. Couple of comments it relates to withdrawals for 2009. In the first half of the year reflecting layoff we saw about $700 million up higher than normal member level withdrawals and the second half member level withdrawal actually kind of return to what we would call a normal level, third quarter of '09 member level withdrawals were about 2.5% points of beginning of quarter account balances in fourth quarter was 2.4%, so about to push during that period of time. If we shift our attention in the contract level withdrawals they were better in the normal in 2008 talked about that in the past. In the later half of 2009 they actually picked up and there is number of reasons for that or addressing them in a number of ways, the first way in which we are addressing is adjusting our service model which enable us to be more competitive while maintaining pricing discipline on that block of business. The second is to aggressively push for enhancements to our Principal TPA Edge program offering third-party administration more choice and flexibility of servicing these clients. If we try to just normalize the fourth quarter results as we've discussed earlier the difference in large part between our historical loss and withdrawals for employers versus the fourth quarter is the difference of about 0.6% which equates to about $500 million during that period of time. We did lose one large client nearly $300 million and we lost a stable value contract that would have been about [7] and so again when you start normalizing these results you can see that again we focus our attention back to our track new business and get recurring deposit going back and in the right direction.

And any comments on whether the $1 billion in sales should get better form here for the next few quarters or not.

Certainly right now we are anticipating a relatively strong first quarter that number right now is estimated between $1.5 and $1.7 billion from what we know today perhaps a better way to start looking at pipeline. If we look at pipeline created in the month of January of 2009 that was $2.7 billion, if we look at that second timeframe for 2010 that number is now $3.6 billion. So nice improvement and created pipeline for just the month of January so it does feel like there is a few things loosening up that the advisors are getting the attention of plans sponsors to start having discussions around the plans.

Your next question comes from the line of Andrew Kligerman of UBS.

A few quick technical questions, first how much did MBS re-rating help the RBC ratio? And then with regards to RBC improving to 415 to 425, excess capital remained flat at $1.5 billion, why was that the case and then lastly on DAC, FSA and annuities, the DAC figure looked a little light. I wanted to make sure they weren't any unusual items going forward.

I guess I'll just have Terry take all three of those Andrew.

Andrew, this is Terry. The RBC improvement due to the, there were two adjustments that were made this quarter. Realpoint, as well as the Pemco solution for RMBS and the Realpoint was for CMBS, and that had an impact of about 20 points on RBC factor. We also as you mentioned earlier that the excess capital didn't change from the last quarter to this quarter. But we did move $300 million down from the holding company down to the life company, which also helped, improved the capital ratio. As far as DAC for the fourth quarter, which you saw was an increase in the DAC amortization this quarter over last, predominantly due to the lack of favorable DAC on locking in the fourth quarter compared to the third quarter. As far as unusual items, I don't think there is any thing unusual in that, but DAC also will increase as the earnings increases because that's just the way the DAC calculation works, that factor apply to the expected gross profits. You would expect to see that DAC in some place in the $25 million range and so it was around $21 million this quarter. So it's creeping up into that more normalized range.

Your next comes from the line of Randy Binner of FBR Capital Markets.

Hi, thanks. Couple of policy related questions. First is on DRD, the administration put on as budget of all that the DRD benefit maybe narrowed and I just wanted to get a sense if you could quantify the potential impact of that in 2011 based on what you understand to their proposal?

Okay, we have made few comments on that, this again as you know Randy DRD has been mentioned in administration budgets for a number of years though it's certainly something that has been under discussion but I'll also say that you have seen no real efforts to this point on the part of congress to do anything. The impact of DRD as a practical mater on principal continues to sort of come down year-by-year and a lot of that is a result of more and more of the assets going into international equity which doesn't get the benefit of DRD and more and more assets going into the mutual fund chassis which also doesn't get DRD. So the impact of DRD continues to come down, its in the range of about $70 million on annualized basis which again is probably somewhere in the range of $0.20 or so. We continually are told that if there were to be any change then I again would emphasize, if there were to be any change it would be very much of a graded in prospective change phased in over a recently long period of time like 5 or 7 years. So, I think in terms of impact on the organization we have plenty of opportunity to decide what would be the appropriate actions to take to mitigate any actions that congress might take in that area.

That's excellent. And just another one, again not necessarily something that will happen but this anti-trust exemption there is talk of that trying to be lifted in Congress, just curious how that would hypothetically affect the health business.

Yeah I mean in theory it would affect all of our insurance businesses and again as I talked to our people and I read the commentary from others the legal counsel and others Randy again what I find consistently and what I hear consistently is it would have a very, very minor impact. And really I think at the end of the day this is something that is more about if you will a political sort of may be feel good situation in regard to insurance reform but as a practical matter I don't know that it would really do anything to unnecessarily introduce competition if you think about for example the health insurance business, you are going to go across state lines to buy health insurance from somebody else who quite likely doesn't have a network that's of any value to you because they operate in different states. So again its one of those things that sort of sounds good, feels good but as a practical matter really isn't a factor today in terms of competition in the health business.

Your next question comes from the line of Suneet Kamath of Sanford Bernstein.

Few questions on the FSA business if I could. First just the follow up to I think Jimmy's question on the pipeline I think last quarter you quantified that pipeline at $42 billion and I think you said it is higher now just wondering what sort of the nominal level of that is and then may be a more detailed question for Larry or for Dan, you had mentioned some of the struggles that the 401k industry has had in terms of generating net flows and growth and I think we all understand the reasons why but what that also might suggest to me is that some point the opportunity for plan sponsors to kind of put the screws on the industry and try to squeeze out some pricing especially as they are struggling with the impact of the weak economy. So just wondering if you could give any thoughts on that and whether or not you're seeing that in some of the quote activity that you've talked about recently? Thanks.

Again I'll have Dan provide some more detailed comments, but again pipeline in general pipeline is about 30% from where it was a year ago, and we're continuing to see that sort of lift month-by-month. I would say in terms of pricing as I've said many, many times and this has always been a price competitive industry and I think that to the extent frankly, that there is price competition. It works to the benefit of the leaders in the industry of which I consider us to be among the top, so things like operational efficiency really matter, things like straight through processing really matter. And I think again we've demonstrated that and Terry commented on the positive operational leverage has been going on and I think it's going to continue to go on as hopefully the markets recover and assets rebuild. So again, I feel very confident about our ability to operate successfully even recognizing, it's going to be a price competitive market, but Dan you want to comment further?

Yeah, maybe just a couple more items, total retirement suite still for us represents about 65% of our sales still value have been dry from our clients. They are looking for coordinated approach for ESOP, non-qualified deferred comp and define contribution. Most of the questions coming around define benefit have to do with helping them either freeze those plans or terminate those plans if and when interest rates movement to direction. It will allow them to do that. The other one I would tell you is that it highlighted the importance of this retired secure, the ability to go out, provide guidance and education to plan participants helping these plans to become more productive for plan participants and then maybe a closing comments, it relates to price, there is price sensitivity as you point out which is why we have made a decision to start bifurcating our business model. It would allow for lower price in those instances where the customer is asking for fewer services and what we provided in the past where is before as more than one size gets all bundled between our emerging dynamic and institutional we now have some flexibility that allow them to dial in that inside the services more into their interest, hopefully that helps.

That does. Maybe just one quick follow up. In the quotes activity that you are seeing, are you seeing any aggressive pricing from some of your competitors I know you are saying it's always been competitive but perhaps more sale than in the past?

I think so, you saw a couple of players in the insurance sector taking out some very jumbo cases, very large in excess of $1 billion and we have every reason to believe based upon the information we were able to ascertain through the consultant community, that was in large part of driving more net cash flow and it was profitability covering some foxed overhead expenses. But I would say there is a modest uptick in overall relative competiveness and we are certainly making all the changes we have done are expenses run rates to ensure that we should stay in pattern and still at the same time provide our customers what they are looking for and many of them still are looking for a full service bundled solution.

Got it and your comment was just brief of that, those were insurance companies, not asset management companies?

I say its specifically one particular competitor in insurance sector that comes to my mind that has been very aggressive.

I'd say the reality Suneet is that there is much less business moving so there tends to be more focus particularly on the large plans, again if you look at our FSA sales in 2009 we only had four plans over $100 million, they just weren't out there to be had, we had 14 of those in 2008. So if and when a large plan, a jumbo plan comes to market, you in today's world you can bet its going to get a lot of attention. So again I wouldn't try to form too much of a conclusion of a handful of single cases, there's always going to be competitive situations out there.

Our next question comes from the line of Ed Spehar of Banc of America/Merrill Lynch. Ed Spehar - Banc of America/Merrill Lynch: A couple of questions first on the statutory I guess Terry if we look at the combination of the capital contribution in the rerating you had like may be say 40 to 45 RBC points of benefit is that about right?

Yes, that's about right. Ed Spehar - Banc of America/Merrill Lynch: And if we look at can you just give us some sense as to statutory operating gain in 2009 and any reason to think that change is for next year.

Statutory gain from operations was a little over $600 million in 2009 do we expect to decrease next year, no.

Be about the same.

About the same Ed Spehar - Banc of America/Merrill Lynch: Okay and then Larry for you the comments you made about the net flows in full service accumulation and the expectation of some I think I can't remember exactly what you said but sort of a return to more normal levels as the economy and jobs data improve, should we be looking for given what our view is, your view is on the economic backdrop and the pipeline should we be thinking about net cash flows that are positive for full year or should we be thinking about a quarterly turn in cash flows.

Well I think again you look at 2009 net cash flows were 2.5% of account value positive that was against an industry. It was about 1.6% of beginning account value negative, so again there was, I think it continues to demonstrate the strength and the competitiveness of our offering. So [Rule A] is projecting the net outflows for the industry for 2010. I think it depends again at on your forecast of job unemployment, and your forecast of whether the pipelines continue to come back because I said in my comments every element of it that I'm saying, as it relates to employment picture, as it relates to the investment markets, as it relates to the economy, things continue to get more positive. So I certainly do expect that we're going to continue on an annual basis to be net cash flow positive for the business whether that returns in first quarter, second quarter, third quarter, it's a little bit hard to say, just have to remember again, we're against outflow for the industry, but we've had very positive trends, we're in very difficult times, and I'm confident about our ability to that going forward. Ed Spehar - Banc of America/Merrill Lynch: So just to be clear Larry, where we sit today, obviously there is uncertainty, but where we sit today, you would expect for the year to have positive cash flows for FSA for 2010?

That's correct.

Your next question comes from the line of Eric Berg of Barclays Capital.

I'm hoping we can just sort of revisit, I know we've talked about this in the past, but I just want to really sharp it and perfect my understanding of this concept of quote activity and pipeline, and my specific question is how good or not so good should we feel about these? Obviously, it's a better thing, I mean it certainly sounds like it's a better thing to have more quote activity and a bigger pipeline, but I want to refine the idea a little bit. What exactly has to happen? What is there something could be in the pipeline, what is the definition of a deal in the pipeline and to what extent is the pipeline translate necessarily into assets or is it just sort of an indicator that may or ay not (inaudible) in terms of assets.

Eric, its actually really, really good question and I think one other things that I feel very good about is that our ability to be much more scientific if you were around that pipeline is much more the case today then what have been 5 or 7 years ago. So your question really is a good one and you do have to be somewhat careful in thinking about it but there is a lot of science that goes into this so I'm going to ask Dan to comment on it, we could probably go on to rest of the call, here which we are not going to do but we'll give you a little bit of high level understanding of that.

I read that quote Larry to keep it somewhat short and sweet. Eric if we look at the end of 2009, the gross pipeline that we have is $46.8 billion, that's was the gross number and from that you start pairing it back down for what we view as that portion which is actionable and when we do that we get to an active pipeline at the end of the fourth quarter of roughly $29.5 or call it $30 billion. The number I shared with you earlier was the created pipeline, the created is what comes in new during that period and in the month of January what I said was we had created a new pipeline of $3.6 billion which was up from a year ago January 2009 of $2.7 billion. So, the reality is it's a nice increase in terms of the number of advisors taking plans out a bit seeking quote etcetera. Now it gets down to close rate and a close rate of course is our success in being able to convince both plan sponsors and those advisors that our value proposition is as good or better than the competition and of course it will be focusing a lot of time on throughout 2010.

That's helpful. My second question Dan is actually to you, in an answer to an earlier question, I believe you were pointing out that, I think you were saying that the loss in assets at the plan level in the December quarter could be tracing good measure to one plan or was affected by the way by one plan with assets of about $300 million, leaving you and this was the result of price competition, but you are responding and I know you've touched on this but I am hoping you can even build on your earlier responses. What sort of price cutting in terms of magnitude are we seeing and are you where you need to be right now to respond to whatever discounting is out there or can we expect to lose more of this business? What's the magnitude of the price cutting and where you need to be, are you where you need to be to be competitive? Thank you.

Yeah, to that very specific question I didn't mean to overly imply that that specific case of $300 million left just because of price. It has only been with us for a few years, a consultant had brought it to us originally. It was a single case and had no prior business. It was a relationship that we had with the employer and ultimately the advisor chose to move this piece of business. I think it had as much to do with style differences and who he really wants to work with as opposed to our inability to compete on price. So again I didn't want to overly imply that that $300 million was based just on price. Did that help?

Yeah it does, but still I have the sense from this call that not the sense, I think you folks have said explicitly that price competition is greater that it used to be and what I am trying to get to sense for is what sort of price cutting are we seeing, 20% of full service rates, 30% and can you match that at that current service levels at the current economics of your business and earned target rates of return?

Yes, and so my response to that Eric was that we are looking at service models for those employers that are not wanting all of the services that we provide, that's the modular pricing discussion which we've had before. I don't feel that there is in across the board, price discounting going on. This still is very much a case-by-case scenario. Any new client, any existing client principal with more than $5 million in assets were going to actually be able to look at the profitability on that piece of business. And where you get the socialized pricing is less than $5 million and again, I would say we're very competitive in that market place. There is far more discussion about price, but that doesn't necessarily translate into or going to simply lower our price to provide the same level of services.

Eric, let me just add one other, let me step back and add one another piece of context around this, and certainly I think we all understand in terms of full service accumulation and its meaning, its importance to the company, but I think we would also be remiss if we didn't again, as we tried in our earlier comments to point out that outside of full service accumulation, whether its mutual funds, whether its separately managed accounts, and particularly as it relates to Principal International, we are building a whole set of other asset accumulation businesses with incredibly strong performance and incredibly strong cash flow that quite frankly makes full service accumulation still a very important part of the business, but let's not lose sight as to what that represents as a percentage of Principal's total asset gathering capability. So again I think we just need to put this in context against as I said earlier what the track record has been regard to both PI and PGI. So I certainly think we need to consider that as well.

Your next question comes from the line of Colin Devine of Citi.

I have a couple of questions, first on FSA and Larry I appreciate you and Dan and Terry going through why transfer deposits are down so much in fact 38.5% for the year I think. But nobody has talked about, okay is what's happening with transfer withdrawals and as far as I can tell based on speaking with Tom, recurring deposits in were down about 5.3 have pretty much kept pace with their current deposits out. So why our transfer, what is going on with transfer withdrawals? Right, because that to me seems to get the heart of the answer as to what's going on with FSA (inaudible). That's question one. Question two, the health business, set a record loss for the quarter, as far as I can tell. In all of your comments when you talk about retirement and Principal's strategy and I think we are familiar with it, clearly this business doesn't fit. I'm not sure your group business fits. Why are you still in these businesses and why are you not been taking the action that you are doing with investment only business moving on from its frames and capital and focusing at what the Principal is really good at and then lastly, you didn't comment a lot on the President's budget and particularly one that I thought would have you pretty excited whereas the marching orders given the treasure rate try they try to figure out I guess the (inaudible) so we can get retirement income options more directly in the [401k] plans.

Okay, let me comment on those now, I'm sure I'll have others perhaps a along the way Colin. First of all again in terms of withdrawals, as we said before, 2008 is going to be, by definition, it's going to be a tough comp because retention was at an all time high. Having said that, I can tell you for example Colin, in 2009 the number of employer contracts, the number of employer contracts that withdrew for a variety of reasons typically moving to another platform, whatever it is, is down by about 500 contracts, is down in 2009 versus 2008. So 2009 again you are seeing the withdrawals higher than 2008 but very, very much in line with historical trends. In terms of the health business, as I said before, health business remains the first benefit that a small medium owner puts in, it remains the most active part for many, many employee benefit advisors and so it is an [entrée] for us and it gives us great opportunity to sell our other products primarily for the advisor. I certainly have mentioned in the past there isn't a lot of cross so between health and pension, but what that forgets is there is a lot of cross sell at the advisor level. The advisor who sells health insurance often sells other employee benefit products. Now we would be the first to agree that in order to be in the business you have to have to run it profitably and if you look at the ROEs in the health business, the ROE in the health business was 15% in 2008 and it was at 11% in 2009. So I view that as acceptable performance albeit with the ROE that we have in 2009 we've got to strengthen the platform, we've got to do what we need to do to make sure we are doing the things around managing care so that we get a proper return in those businesses and I think you've seen ROEs take similar sort of trends for other competitive companies. So I think again, this is a trend that you see across the industry. In terms of the President's budget again, I appreciate your pointing that out, I think for the first time we are seeing serious intent on the part of the administration in terms of the Department of Labor & Treasury to think about what we now need to do as a nation given that we've accumulated three point some trillion dollars of [401k] asset. What are we going to do to now ensure that that money be use for the retirement security of the baby boom generation, and we're very excited about that. As you know, we have a full range of payout solutions, and so I think again we're well positioned to be a net winner if and when Congress decides they want to do something in regards to income solutions. So let me stop there.

Okay, Larry just two quick questions coming back though; I'm still not sure or it's certainly not clear to me why transfer deposits have fallen so much. I get that there is no cases moving around, but transfer withdrawals appear not to have fallen at all, and maybe you can put hard dollars on to that, and that would help to clarify the situation, and then secondly, with respect to the health business, should I infer from your comments that you do not believe you could take the capital, that is the very capital in terms of the business that is supporting that business, and redeploy into your pension businesses to achieve an even superior return?

Right now on the second one, Collin, right now they are about a push, in terms of those businesses. And again, we're going to have to do the things over the long-term, and is in fact it's proven that we're not able to earn an acceptable rate of return. This is a management team that is demonstrated in the past that we know what it means in terms of running businesses for the long-term interest to shareholders. So, that's really all I think I want to say on that. I'll ask Dan to see if he can do a better job on the withdrawal question.

I'll give a shot, Alan. FSA net cash well, if just look at these contract level withdrawals as a percentage of the average account value themselves. You go back and look at that timeframe from 2005 to 2007 and it would have been a negative 6.4%. If you jump to 2009 that number was 6.7% and that's a percentage of average account of value. Our comparison here in 2008 was the best we ever experienced which was minus 5.3%. So again, yes the contract level withdrawals are higher but at the same time I would argue that it is a very unusual time. If you want to look specifically at contracts, the difference in contracts from '08 to '09, we wrote 988 fewer actual contracts. We also had 260 increase and the number of plans that terminated, these were vaporized, these are gone, no longer a plan, they didn't transfer anybody else. We actually saw an improvement of 537 fewer contract lapses between 2008 and 2009. So again we attribute a lot of this to just how this disrupt this economy has been throughout 2008 and end of 2009. We're hopeful that 2009 start's bringing reoccurring deposits back, bringing back transfer assets and a slowdown to some of these plan terminations.

So you are saying its plan termination that's the culprit?

Well there is 260 more this year in 2009 than there were in 2008.

But again, I would emphasize at the overall level the sort of 6% level than Dan's talking about, Colin that very much inline with historical trends. That's really not that much different than what it's been over the last 10 years. So, we need to move on.

Your next question comes from the line of Jeff Schuman of KBW.

Wanted to talk just a little bit more about health insurance. You cleared a lot of ground with Colin but can you give me a little refresher on the background about network, its my vague recollection that at one point you're hedging your own networks and then you needed better networks so you rented them and now you are building your own networks. Am I remembering the history right or is that not right?

Jeff this is Larry, I would say that in general up until about three four years ago, we've used the strategy that was more likely dependent on rental networks and it became clear to us that you needed to have if you are in control, not only in order to negotiate directly but quite frankly in order to negotiate better terms under those network agreements without getting too much into the detail and so we've begun the process of creating our own networks primarily in those areas where we know we can get competitive discounts and so what that does is it puts us in more of a regional capacity and frankly it puts us in more of the geographic areas that would be, I would say sort of second tier markets. So that would include things like down through Mid West, Iowa, Missouri, Oklahoma perhaps over to Tennessee, into Georgia and that particular area so you don't see us for example, in heavy industrial areas. We don't do a whole lot on the West Coast. So that's kind of the focus and as a result of that I think in the past couple of years, we have gained much, much more control of price competitiveness as well as reimbursement mechanisms and we just have to continue to work at that and hopefully then as the economy rebuilds, you will see sort of the membership begin to stabilize and then turn around.

Can you give us a sense of what are the other markets, I mean if just hypothetically you wanted to transfer your membership to another party, I mean would you be able to monetize that for some value at this point and I guess what is the risk if the political climate for health insurance continues to get worse? What is the risk that value to monetize the membership actually goes down and so goes up over the next couple of years?

You can build a scenario anyway you want I think Jeff, as it relates to where the value may go from here. What I would say in regards to how others in the market look at it. What I would say is, what I'm told is they tend to look at it based on local markets. So you'd really don't have necessarily single players that would look at our entire portfolio and say yes, that's exactly what I want. You might have one player that's interested in a couple of states, and another player is interested in a couple of states, and so again, this isn't quite as easy as one would necessarily just assume it is from the start. So those are just things you need to keep in mind. At the end of the day, our challenge is to run it well, run it in the best long-term interest to shareholders and generate appropriate returns and that's where we're focused on doing.

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

Thanks to all of you for joining us for the call today. As we head into 2010, this management team is going to remain focused on executing our small medium business, (inaudible) centric strategy while adhering to the fundamentals to see us through the challenging times. I look forward to seeing many of you out on the road in the next few months. Thanks very much.

Thank you for participating in today's conference call. This call will be available for replay beginning at approximately 8:00 pm Eastern Time until end of day February 16, 2010. 48727511 is the access code for the replay. The number to dial for the replay is 800-642-1687. U.S. and Canadian callers 4706-645-9291 international callers. Once again, thank you for participating. You may now disconnect.