Principal Financial Group, Inc. (PFG) Q2 2012 Earnings Report, Transcript and Summary

John Egan - Vice President of Investor Relations Larry Donald Zimpleman - Chairman, Chief Executive Officer, President, Chairman of Executive Committee, Chairman of Principal Life, Chief Executive Officer of the Principal Life and President of Principal Life Terrance J. Lillis - Chief Financial Officer, Chief Accounting Officer and Senior Vice President Daniel J. Houston - President of Retirement, Insurance & Financial Services Luis Valdez - Chairman of Principal International Inc., Chief Executive Officer of Principal International Inc. and President of Principal International Inc. James Patrick McCaughan - President of Principal Global Investor Julia M. Lawler - Chief Investment Officer, Senior Vice President, Chief Investment Officer of Principal Life Insurance Company and Senior Vice President of Principal Life Insurance Company

John M. Nadel - Sterne Agee & Leach Inc., Research Division Jay Gelb - Barclays Capital, Research Division Steven D. Schwartz - Raymond James & Associates, Inc., Research Division Christopher Giovanni - Goldman Sachs Group Inc., Research Division Randy Binner - FBR Capital Markets & Co., Research Division Suneet L. Kamath - UBS Investment Bank, Research Division A. Mark Finkelstein - Evercore Partners Inc., Research Division

Good morning, and welcome to the Principal Financial Group's Second Quarter 2012 Financial Results Conference Call. [Operator Instructions] I would now like to turn the conference call over to John Egan, Vice President of Investor Relations.

Thank you and good morning. Welcome to the Principal Financial Group's second quarter earnings conference call. As always, our earnings release, financial supplement, additional investment portfolio detail and slides related to today's call are available on our website at www.principal.com/investor. Following a reading of the Safe Harbor provision, CEO Larry Zimpleman 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 Dan Houston, Retirement, Investor Services and U.S. Insurance Solutions; Jim McCaughan, Principal Global Investors; Luis Valdez, Principal International; and Julia Lawler, 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. 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. I'd like to take a quick moment to remind you of our upcoming Investor Day on September 21. We look forward to the opportunity to provide you an update on our strategy and long term growth opportunities, as well as a deep dive into our distribution strategy for each of our businesses. Now I'd like to turn the call over to Larry.

Thanks, John, and welcome to everyone on the call. As usual, I'll comment on 3 areas. First, I'll briefly discuss second quarter results. Second, I'll provide an update on the continued successful execution of our strategy, then I'll close with some comments on M&A and capital deployment. As John mentioned, we've provided slides related to today's call. Slide 4 outlines the themes for the quarter. Second quarter saw a continuation of recent trends with strong momentum in sales and flows, while macroeconomic events impacted operating earnings. Despite a 6% decrease from the year ago quarter, second quarter total company operating earnings were solid at $216 million. Earnings per share were up 1% due to our share repurchases during the past year. The operating earnings result reflects persistent macroeconomic headwinds, including negative equity markets, low interest rates, strengthening of the U.S. dollar and stagnant job growth. We also had lower variable investment income in the first half of 2012 compared to the prior year period, which Terry will comment on. Despite these macroeconomic headwinds, the fundamentals of our business remain strong and we continue to see sales pipelines grow. We ended the quarter with record assets under management of $367 billion. Second quarter net cash flows were $7.3 billion, which are more than double second quarter 2011 net cash flows. And so far in 2012, we have over $15 billion in net cash flows. The sequential improvement in operating earnings demonstrates that we remained focused on execution as we strike the right balance between growth and profitability in this challenging environment. Our competitive position remains strong due to our innovative solutions, such as Total Retirement Suite for our retirement clients, voluntary benefit choices for our Specialty Benefits customers and outcome-oriented investment solutions for our mutual fund and institutional asset management clients. We also continue to deepen and strengthen our relationships with key distribution partners. Key growth metrics from the quarter include Full Service Accumulation sales of $2.3 billion, up 34% compared to second quarter 2011. Net cash flows of $1.9 billion were nearly double that of the year ago quarter and reflect not only great sales momentum but also excellent client retention and growth in recurring deposits. Principal Funds had sales of $3.4 billion, our second highest on record contributing to our second highest quarterly net cash flow on record at $1.1 billion. Principal Global Investors ended the quarter with unaffiliated assets under management of $92.3 billion, a 16% increase over the year ago quarter and unaffiliated net cash flows of $2.1 billion, a strong improvement over second quarter 2011. Reported record assets under management for Principal International were $60.3 billion, up 14% over the year ago quarter and net cash flows of $2.3 billion are up 28% over the same time last year despite foreign currency exchange rate pressures and lower inflation in the second quarter in Latin America which reduces investment income. In U.S. Insurance Solutions, Individual Life sales of $45 million were up 6% over second quarter 2011. Specialty benefits premium and fees grew 5% over the year ago quarter to $361 million. Our mix of businesses continues to shift with 65% of second quarter earnings coming from our fee-based businesses. This creates increasing amounts of deployable capital and increases financial flexibility due to the absence of long term equity or interest rate guarantees in this business. Now let me provide comments on the ongoing implementation of our strategy. Our strategy remains the same: To help businesses, individuals and institutional investors save for the long term, invest for growth and protect their assets. At our Investor Day in September, we'll provide greater detail about our investment management plus strategy and discuss how the synergies and interrelationships of our businesses provide an opportunity to be a long term value for our customers, advisers and shareholders, starting with Full Service Accumulation, our Total Retirement Suite platform, an advisor-centric model, position us as a retirement leader, and we continue to gain market share. As the baby-boomer generation continues to move towards retirement, we are focusing on all stages of retirement readiness, from hire through a retire. We are also seeing increased interest in retirement solutions, including payout annuities. Our year-to-date sales of income annuities is $160 million, nearly double the sales for all of 2011 and does not reflect a $500 million single premium annuity sold in third quarter. The growing demand and limited supply of proven providers for this business creates attractive returns for us. Principal Funds continues to drive strong sales due to demand for investment solutions designed to generate income in a near-0 interest rate world, limit volatility and hedge against inflation. We've had 10 straight quarters of positive net cash flows reflecting our success with many strategies across the platform. Investment performance, a key leading indicator for growth for our Retirement and Investment Management businesses continues to be strong overall in several key investment options, including equity income, large growth and diversified international. These strategies represent asset classes that advisers and clients focus on for retirement and retail solutions. In addition, our Principal Global Diversified Income Fund is now a MorningStar-rated 5-star fund. Principal Global Investors' multi-boutique strategy offers a nimble approach that allows us to meet the changing needs of institutional clients around the world. A recent report from CREATE-Research and Principal Global Investors identified investor appetite for a more dynamic approach to managing volatility and asset allocation. The study signaled that in prolonged periods of market turbulence, such as the current market, client demand for Principal Global Investors' multi-boutique and value-added strategies increases. Moving now to Principal International, we are strongly positioned in the emerging markets that continue to experience rapid growth in the middle-class income segment. The acquisition of Claritas, a leading Brazilian mutual fund and asset management company, was announced in the first quarter and closed in April. Entering the Brazilian mutual fund market has been a strategic priority for the Principal. This acquisition is off to a great start, including the launch of a real estate fund that raised $75 million in the second quarter. We anticipate that Claritas will expand beyond the retail mutual fund market to the institutional investor market as that develops over time. We continue to have traction in emerging markets in Asia as well. Last quarter, we announced that the Malaysian government approved a new employer-based defined contribution system and CIMB-Principal, our joint venture with CIMB was one of 8 companies approved to provide solutions in the new market, which begins later this year. Additionally, Principal won AsianInvestor Magazine's 2012 Investment Performance Award for Hong Kong Mandatory Pension Fund service providers. Providing risk protection continues to be a key strategic focus for the Principal. For our U.S. Insurance Solutions business, we continue to focus on the business market, with 54% of second quarter sales coming from our business owner and executive solutions market, along with nonqualified deferred compensation. For specialty benefits, we continue to see growing demand for voluntary solutions that plays to our employee enrollment and education capabilities. Now I'll close with some comments on capital management. We continue to actively deploy excess capital in the second quarter. In the first half of the year, we committed $475 million of excess capital for deployment. During the second quarter, we completed the February $100 million share repurchase authorization, announced the authorization of a $200 million share repurchase and paid $54 million in quarterly dividends to shareholders. We recognize the importance of a quarterly dividend to shareholders and anticipate a pattern of increasing our dividend payout ratio year-over-year as our earnings continue to shift towards fee-based earnings. We remain on track to deploy $800 million to $900 million of excess capital in 2012. We have an active M&A pipeline with opportunities that provide a strategic fit and complement our existing capabilities. However, we will continue to take a disciplined approach in evaluating these opportunities since we have a strong organic growth capability. As evidence of the significance of our fee-based earnings, we have recently done some analysis of our capital deployment for the last 4 quarters, relative to our insurance peer companies. Thanks to our growing fee-based businesses, we rank in the upper quartile of capital deployed to shareholders as a percentage of market capitalization. This is validation of our business model being shareholder friendly with increasing amounts of deployable capital. Excess capital at the end of the second quarter was $1.5 billion, a level that's been pretty consistent over the past year. We have indicated that we intend to hold a higher amount of capital and prior to the financial crisis, but we believe that we will still be reducing our excess capital levels by $300 million to $400 million over the next couple of years. In closing, the trends that have shaped our investment management strategy are now firmly in place around the world. While we expect ongoing volatility in the markets and macroeconomic headwinds from time to time, we remain optimistic about the long term growth potential of our strategy. Terry?

Thanks, Larry. As Larry mentioned, second quarter earnings were solid and our growth metrics continued to show strong business fundamentals. This morning, I'll focus my comments on operating earnings and the impact from headwinds, net income including continued solid performance in the investment portfolio and the strength of our capital position and strong balance sheet. There are several factors that negatively impacted the year-to-date growth of our underlying businesses but I'm going to focus on 3. First, the first half of 2011 benefited from opportunistic real estate sales, which were not repeated in the second half of 2011 or in the first half of 2012. Second, the continued declining interest rate environment has resulted in increased accrued expenses in 2012 of our postretirement benefits, which we call security benefits. Third, the strengthening of the U.S. dollar against Latin American currencies has had a negative impact on Principal International's operating earnings in 2012. Adjusting for these factors, year-to-date earnings increased 3% over the prior year on a 7% growth in average assets under management. Second quarter 2012 operating earnings of $216 million were down $13 million from a year ago quarter, reflecting these same factors. While we expect volatile equity markets, low interest rates and the foreign exchange headwinds to continue to impact 2012, our business fundamentals remain strong as we focus on what we can control. For example, Retirement and Investor Service Accumulation businesses continued to deliver strong sales, client retention and growth in recurring deposits, which will lead to market share gains and future earnings growth. Principal Global Investors will benefit from back-end loaded performance fees and lower expenses. Principal International is expected to continue its strong trends and long term growth despite unfavorable macroeconomics. U.S. Insurance Solutions should benefit from claims seasonality and continued stable loss ratios. And opportunistic real estate sales and expense management will benefit the entire organization. Now I'll discuss the business unit results. Full Service Accumulation operating earnings at $73 million were down $5 million, primarily due to pressure on fee growth. Pretax return on net revenue was 29% on a trailing 12-month basis. Let me make a few comments related to Full Service Accumulation margins. Slide 5 summarizes the leading factors impacting the trends in margins. These same trends are continuing in 2012. Year-to-date 2012 Full Service Accumulation net revenue is down 2% compared to year-to-date 2011 due to pressure on asset management fees and lower variable investment income. However, we now expect full year 2012 net revenue to grow between 2% to 4% based on an average S&P 500 index level of 1370. Additionally, we expect to maintain pretax return on net revenue of 30% to 32% for the full year because of improving market performance and variable income. Full Service Accumulation is a fee-based business that is focused on growing revenues, managing expenses and maintaining profit margins making return on revenue measures a better indicator of the financial performance of the business. The bottom of Slide 6 illustrates our stable track record of driving revenues to the bottom line even as customers' preferences migrate to different asset types. Return on revenue margins are a key focus for us. The underlying fundamentals within Full Service Accumulation continue to improve. Year-to-date, recurring deposits are growing. The sales pipeline continues to build across market sizes and distribution channels and close ratios continue to improve. We are actively executing on our strategy to win more business and gain market share. Second quarter 2012 Full Service Accumulation sales of $2.3 billion were strong and year-to-date sales were up 49% over the same period a year ago, whereas in 2011, sales and flows were more back-end loaded. In 2012, they're more front-end loaded. That said, we now expect sales growth of approximately 20% to 25% over 2011, and we expect net cash flows to be between 3% to 5% of beginning of year account values. Operating earnings for our Principal Funds at $12 million for the quarter were down $1 million compared to the year ago quarter. This was due to higher compensation and sales-related expenses as we invest in growing the business. Sales of $3.4 billion and net cash flow of $1.1 billion reflect strength across multiple strategies, including global diversified income fund, preferred securities, midcap blend fund, high yield and target risk allocations. Investment performance continues to be strong across asset classes and is a leading indicator of future sales and net cash flows. The strong performance includes particular strength in asset allocation, where at quarter end, 90% of our target date and target risk funds were ranked by MorningStar in the top half on a 1-year basis, 100% on a 3-year basis and 73% on a 5-year basis. Individual annuities operating earnings in second quarter 2012 were $25 million, down $5 million from a year ago quarter due to lower spread and higher DAC amortization. Normalized operating earnings are approximately $27 million, taking into account continued spread compression. Second quarter 2012 earnings for Principal Global Investors were $18 million, down $3 million from a year ago quarter on an 8% increase in average assets under management. With a focus on growing our global investment management leadership position, we added distribution and investment professionals across select boutiques, which has increased expenses compared to a year ago. Unaffiliated net cash flows for the quarter were $2.1 billion, driven by positive flows into a variety of asset classes, including currency, stable value, fixed income and real estate. The recent opening of our office in The Netherlands has already generated $158 million of mandates awarded, with $58 million of that funding in the second quarter. Our strategy to invest for the future is working. Moving to Principal International, operating earnings at $37 million were dampened by roughly $3 million due to one time acquisition expenses from closing to Claritas deal. The underlying growth of the companies on a local basis remains strong. The strengthening dollar has created a headwind of roughly 10% to U.S. dollar reported earnings, which we expect to continue into the second half of the year. As a reminder, our financial supplement now includes foreign exchange rate information used for financial reporting to help you better analyze the impact of exchange rates on Principal International. Individual Life second quarter operating earnings were $28 million, up $4 million from a year ago quarter due to better mortality experience in the current quarter. Second quarter 2012 results were in line with expectations. Turning to specialty benefits, second quarter operating earnings were $23 million, down $3 million from a year ago quarter primarily due to stable loss ratios and stronger than normal net investment income in 2011. The increase in sequential earnings is due to normal seasonality in dental claims and sales-related expenses. With the negative impact of seasonality behind us, we would look to see consistent loss ratios, strong retention and growth in premium and fees for the remainder of 2012. The corporate segment reported an operating loss of $31 million right in line with our expected quarterly result of $30 million to $35 million. For the quarter, total company net income was $173 million. After-tax credit related losses remained steady at $27 million. Our investment-related losses continue to be in line or better than our loss projections and better than market expectations, reflecting sustainable recovery in commercial real estate. This improvement has given us additional financial flexibility. Moving to our balance sheet, our net unrealized capital gain position of $2.3 billion increased $300 million from first quarter 2012, predominantly due to lower interest rates. As a reminder, because of the strong asset liability management, changes in net unrealized gain or loss due to interest rate movement do not result in an economic impact, and in periods of stress, do not force us to sell assets. The evolution of our business model means we now have a much higher portion of earnings coming from less capital intensive, more fee-based businesses that have limited or no guarantees associated with them. As the low interest rate environment persists, our earnings will continue to grow but at a slower rate as shown on Slide 7. We view this modest headwind to earnings growth as very manageable, which speaks to the strength of our investment management plus strategy. Although we continuously monitor all assumptions, including the interest rate environment, third quarter is historically when we conduct our periodic review of assumptions and actuarial model enhancements. The persistent low interest rate environment could result in a reduction in the long term interest rate assumption used to model deferred acquisition costs and related actuarial balances. If we were to lower our long term interest rate assumption by 25 basis points for every segment across the company, it may result in an additional one time after-tax reduction of operating earnings of approximately $25 million. Looking now at capital adequacy, we estimated our second quarter risk-based capital ratio to be 440%. Relative to a 350% RBC ratio, we have approximately $1.5 billion of total excess capital, with over $500 million of the excess capital in the holding company. As outlined on Slide 8, so far in 2012 we have allocated $475 million of capital for strategic acquisitions, opportunistic share repurchase, and 2 quarterly common stock dividends. During the quarter, we completed the remaining portion of our $100 million February share buyback authorization and started our $200 million May authorization. So far, we have purchased approximately $125 million worth of the current authorization. As Larry said, we anticipate a pattern of increasing dividend payout ratio year-over-year. We remain on target to deploy $800 million to $900 million of capital in 2012, with approximately $400 million left to deploy. With our commitment to increasing long term value for shareholders, our focus continues to be on deploying excess capital through quarterly dividends, strategic acquisitions and opportunistic share repurchases. As we have demonstrated in the past, we will be prudent as we continued to look for additional opportunities to deploy excess capital. In closing, we are very pleased with the continued growth and momentum of our businesses throughout the second half of 2012 and beyond. This concludes our prepared remarks. Operator, please open the call for questions.

[Operator Instructions] The first question comes from John Nadel with Sterne Agee. John M. Nadel - Sterne Agee & Leach Inc., Research Division: So it -- you covered in prepared remarks a lot of the pressures that we're seeing, but I was hoping we could talk a little bit more about your guidance and perhaps some of the changes in the environment and maybe specifically, quantifying some of them, how that impacts your outlook relative to what you were originally baking into your guidance a few quarters ago. I mean, for instance, your guidance now is assuming the S&P averages I think 1370, that's actually 100 points or about 7% higher than your original guidance assumed, so that -- I would think that's a tailwind. I would think your organic growth is probably better than you were assuming, but obviously some serious headwinds, rates, et cetera. so maybe you could tie that all together for us?

John, this is Larry. I'll make a few comments and then I'll see if Terry wants to add anything. I'll start by saying, of course, we don't really update guidance. We've provided based on conditions back in December. We gave you our best forward-looking estimate of what we thought 2012 earnings would be. But to try to be responsive to your question, let me just walk through a number of the factors that you mentioned and hopefully, this will provide some help for you. If you take the first 2 quarters, what we know is we've got $1.42 of EPS so far in the first 2 quarters. To your point, we also know we've had a fair number of headwinds that I think we could all sit and speculate for the rest of this call about whether they're going to turn around to become tailwinds, but let me just hit a few of the business fundamentals and how they may act in second quarter as compared to first quarter. For example, we know, generally speaking, in the second half of the year, SPD, Specialty Benefits has positive claims seasonalities. You can sort of look at past practice and see if you can quantify that. We also know, in the past, historically, there have been some performance fees in Principal Global Investors. Again, you can get a sense of what the magnitude of that might be. Relative to Principal International, I would say, again, that's been the one that has been most impacted by macroeconomic conditions. And so I think in the second half, the performance in the local markets is very strong. The question will be, will we see stabilization or maybe even turnaround in FX rates and will we see the return of higher inflation, particularly in Latin America, which would have a positive impact on net investment income. Then, of course, we could talk about whether we're going to see any equity market growth. Again, typically, in our guidance, which we gave last December, we would have assumed 2% per quarter. So we would assume in the second half of the year something like 4% equity market growth. And then finally, what I would say is, the one thing we do know relative to having a tailwind is we should see about a sort of 5% roughly increase in EPS just based on the change in the share repurchase for the share counts that have happened between the start of the year and the end of the year. So you put all that together, you take the $1.42, again, you have to apply your own assumptions, John, as to what you think equity market FX is going to do. But clearly and particularly relative to the second half of 2011, you would think we would see some increase. Again, just for the record, in 2011, in the second half of the year, EPS was $1.27. And again, we're running at about $1.40 right now. So I hope that gives some help. John M. Nadel - Sterne Agee & Leach Inc., Research Division: That's really quite helpful. And then, Larry, I've got one more for you and maybe a little bit tougher sort of topic, but I can't recall a 2 quarter or a 1/2 of the year period where Principal has generated the kind of organic growth that you guys did in the first half of this year. But I look at -- in the face of that, your stock is flat, and the S&P is up 9%, broader financials are up 12%. I'm just curious what you and the management team take away from that relative underperformance at least in your stock price, and whether it causes you and management to think differently about how you deliver value.

Sure. Well, again, those are all great questions and they are questions that we spend a lot of time on as a management team, and we spend a lot of time on them in discussions with the board. That's why, John, we have been trying to communicate. But first of all, let me just speak to sort of relative share price performance. I would say, first of all, while we haven't necessarily significantly outperformed peer companies, if you define them more from the standpoint of your peer set, insurance companies, and we might differ on it a little bit, but if we just take that peer set for a second, what I would say is our performance has been in line or slightly better than sort of has been the average of that peer performance. So the point is, is that all financials, all sort of peer insurance companies continue to be heavily impacted primarily by what is perceived to be the impact of very low interest rates. We have tried to make the point again and again and again and I think it's a point of opportunity for buy-side investors. We have tried to make the point that we are less impacted by low interest rates than many of our peers because 65% of our earnings come from fee-based earnings. In addition to that, you've seen the board, our board be very responsive to the situation by deploying significant amounts of capital primarily through common share dividends. And as I said in my comments, if you actually look at capital deployed, capital deployed adjusted for market capsize, we're in the top quartile and there really are very few companies that have been more active in deploying capital either through increased dividend, share repurchase or M&A than we've been. So I think we're doing all the right things. I think the reason that the share prices had sort of modest relative outperformance is because of interest rates. And probably until the macroeconomic conditions turn around, you're not going to see substantial change. But these sets of conditions aren't going to be around forever. The world is going to go on. These economies are going to grow and our earnings are going to continue to grow. If you take our $2.66, which was our EPS for last year, and again, you take our $1.42 and you can do whatever you want, but I think you can see that we're certainly still on track for some sort of 7% to 10% growth in EPS in a year, John, that quite frankly is very, very challenging. So we're going to be very much in line with our long term belief in EPS and hopefully, investors will see that over time and they'll reward us.

Your next question comes from Jay Gelb with Barclays.

I just want to hone in a bit on the FSA growth potential there. Can you walk us through how the changes in that market is affecting you broadly and then how that's filtering down to the results?

Yes, Jay, this is Larry. I'll have Dan talk to you a little bit about the competitive environment. I just want to make one, hopefully, helpful comment on the latter part of your question, Jay. And that is that walk through, how all this translates into earnings. I just want to make a quick comment and then have Dan talk about the competitive environment, which, of course, shows that we're performing very well. But if you look at second quarter as an example and you look at the change in the Full Service Accumulation account value during second quarter, that essentially was all done through net cash flow generation and most of that was done through new sales. So essentially, the increase in account value is all coming through new sales. And when you think about, which sources of account value are more lucrative relative to revenue and earnings, the best way to get account value revenue earnings growth is when the market gives it to you. The toughest way to get earnings growth is when you have to go out and sell new plans where you take on acquisition expenses and administration expenses to bring on those new dollars. So frankly, when we look at the performance of Full Service Accumulation, given where the increase in account value came from in second quarter, I think the performance of the business was actually decent. Again, when we get back to a mode where we're seeing more 2% per quarter equity market growth, then you're going to see the revenue increase at a faster rate. You're going to see earnings increase at a faster rate. So with that, let me ask Dan to talk about the competitive environment.

So from a competitive environment, we still have some of those headwinds that we've talked about in the past and there's a handout in your online, in the Investor section talking about the business mix. We still see migration away from general account. We still see healthy sales and ESOP. There is a movement from proprietary to nonproprietary options that generally increases when you sell larger cases that certainly gives us the window of opportunity to go in and resell those plans on additional investment options provided by Principal Global Investors. The second component from a competitive perspective is there's still -- we're not recovered on the recurring deposits. Those are still weak, relative to historical past although they're improving. It's still one of our main contributors to success. And then as it relates specifically to the competitive environment, we're continuing to win business in the same manner we have in the past. We've done it with Total Retirement Suite, the TPA strategy is working, the alliance strategies are working, the one area that we continue to see pressure on, obviously, is around just the competitive pricing from the competition. And when we look at that, we think back to the pre-crisis mode. There is occasionally some outliers that were aggressive in their pricing. During the crisis, there weren't a lot of movement. I think small and medium-sized employers frankly were more focused on their -- running their businesses and then you had advisors trying to just retain business. In the post-economic crisis environment, the fee disclosure environment and the excess capacity in the industry, there is more pressure on getting revenue growth and that certainly impacts not only new case, but it also impacts your ability to -- on your enforced block and so retaining of that business. So one of the things we did during the crisis was to give our customers choices on pricing, choice pricing as we called it, dialing up and down their services. Today, in the marketplace, with excess capacity, there are competitors that are selling bundled Full Service solutions at discounted prices. We don't know if that's a short term or a long term problem that we'll have to confront. Obviously, we'll take the necessary steps as we historically have to align our expenses with what the revenues are that customers are willing to pay us. But this thing is clearly a mixed bag of a lot of variables, clearly our ability to retain business. Clearly, our ability to attract new business is a sign that they certainly value the local service that we provide, Total Retirement Suite, and again, about 60% of all new sales are tied to a bundled to Total Retirement Suite approach. Hopefully, that helps, Jay.

Your next question comes from Steven Schwartz of Raymond James. Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: Just a couple, if I may. The Chilean peso -- not the Chilean peso, but Chilean inflation obviously left a bit of a mark. You've referenced that a couple of times, Terry. Could you possibly put a number on that?

Yes, Steven. This is Terry. As you look at the Chilean inflation this quarter, it had about a $2 million impact on the operating earnings. Now, that was this quarter. Last quarter, we actually received a favorable $2 million. So year-to-date, it does -- is volatile and fluctuates quite a bit. So on a year-to-date basis, there's probably no impact, but this quarter, it was about a $2 million reduction. Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: Okay. And then, Larry, I think you referenced a very big SPIA deal, $500 million in the third quarter. Could you talk about maybe what that is?

Well, these are, Steven, these are kind of the traditional single premium, both immediate and deferred annuities that we've been active in this market for 70 years. Our -- we've been one of the top sort of 3, 4, 5 players in the plan termination market. These are essentially defined-benefit type obligations that, for whatever reason, are needing to be wound up. So this particular one was again similar to a couple of the one's that you've seen in the marketplace, a $500 million placement. Credit quality matters here, so your financial strength ratings matter. And so there is, as I said in my comments, Steven, there's kind of a limited supply of proven providers in this marketplace and we feel fortunate that we're one of the ones that's there. So that -- as I said, we have $160 million of sales in the income annuity space in the first 2 quarters, another $500 million sale in the third quarter, so we are seeing more interest there. We'll certainly stay disciplined as we price those particular deals, but we would expect that we'll see more opportunity there and if and when interest rates would ever rise, I think you would see even substantially more growth in that part of the business. Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: I was interested, if it was a termination deal, what kind of return are you pricing for in that?

Well, I mean, normally, what we're looking for is something that's clearly well in the double-digit range and, of course, the thing with a deferred and immediate annuity like that, Steven, is you're not going to really know what you'll get for another 30, 40 or 50 years as far as the return. But certainly our pricing is sort of based on, if you will, a fairly conservative set of future interest rate assumptions. And so we calculate our IRR's against that fairly conservative set of assumptions, so again, you're well into the double-digit range here. Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: Okay, good. And then Dan, if I may, one more. So we've been in the new disclosure regime now for all of the month, but I am wondering if any surprises have come out of it.

Steven, it really hasn't. The call center volume has been muted. Remember that we've gone out with notification to our clients back in November 2011. Requirement was by July 1 it had to be out. And of course, the next step is the participant disclosure and we have no reasonably that that's going to create a huge volume of work for us as we near year end, fourth quarter when those requirements will be in place.

Your next question comes from Christopher Giovanni with Goldman Sachs.

I wanted to see if you could talk a little bit about how you're thinking about your bank status and if there are any plans to potentially change.

Chris, this is Larry. I'll make a few comments. The comments I would have today would be I think entirely consistent with the comments that we've said in the past. Again, as I think most of you know, we're a savings and loan holding company, so we are -- after July 1, 2011, we have the Fed now regulating the savings and loan holding company. We continue to have what I would consider to be extremely positive discussions. They are coming up to speed on how to think about a company like Principal Financial Group with primarily fee-based businesses, although many still think about us as an insurance company, but our businesses are mostly fee-based businesses. I think they're -- they've been, in my view, Chris, they've been very thoughtful in our interactions. We consult with them very regularly. I said in my comments that if you look at the last 4 quarters, so those would be exactly the 4 quarters that we've been regulated by the Fed. If you look at the capital that we have deployed, either for common share dividend or share repurchase or for M&A, if you aggregate that and adjust for market cap, we would be within the top 2 or 3 or 4 of our entire competitive peer set in terms of how much capital we've deployed, so that would say, I think, the conclusion there would be that we've not found anything there that is necessarily concerning. I think going forward, the question will be -- that there is a notice of proposed rule-making that is out there relative to it non-bank financials and so that process will go on and we will provide our comments, as well as everyone else and then we'll see where we end up. So this one is near the top of the agenda of things that we're watching and we're investing a lot of time and energy and having them understand our business. But ultimately, the board will make the right decision for shareholders over the long term. So I'd say, again, so far, so good. Great interaction. I think they have great respect for how we've run our businesses, certainly have not been disruptive at all and we'll just have to see where we go going forward.

Okay. And then on inflation that you guys have been talking about in terms of Latin America, and I understand potentially some of the near term earnings headwinds from lower investment income. But doesn't lower inflation really help accelerate your retirement and asset management strategy in that region, so curious how you're thinking about the balancing of these 2 areas?

Well, I'll maybe ask Luis to comment in just a minute, but just for the sake of clarity, Chris, maybe I'll just try to set the stage on sort of what we mean when we talk about inflation. Latin America, as a region, is a region that has been sort of plagued, if you will, with inflation for many, many decades. So unlike the way fixed income markets work here in the U.S., in Latin America, at least particularly Brazil and Chile, not quite so much Mexico, but certainly in Brazil and Chile, it is very common to have inflation-linked securities. So the fixed income return is directly linked to, and in many cases, the product, the crediting rate for products is directly linked to certain inflation indexes. So when inflation is higher than -- investment income is higher and the crediting to the customers is higher. When we talk about the impact of inflation, essentially what we're talking about is the net investment income we're receiving on the, if you will, the surplus that we have invested in those companies, in Latin America. So I hope that's helpful in terms of understanding how inflation impacts and maybe ask Luis if he has any thoughts on what the inflation outlook might be for the second half.

Yes, interesting to repeat what Terry said. If you're look at the entire year, first quarter and second quarter, essentially we had a kind of positive environment in the first quarter and a kind of negative one in the second quarter. The whole year 2012 looks kind of washed. But anyway, it's fair to mention also that the second quarter 2012 was the kind of unusual. We had a depreciation of the local currency, normally, when you're having that kind of depreciation of the local currency are coming with higher inflation. This particular quarter, we had the 2 unusual things, the depreciation of the local currency and also this kind of lower inflation. So we think that going forward, those 2 things have to come much more in a kind of by-the-book process going forward. And anyway, we don't have any particular assumption about inflation in Latin America different than in the neighborhood of the 3% and still, those countries are, particularly Mexico and Chile, they are still on track in order to get that kind of inflation for the whole year, 3.0%.

And maybe Jim McCaughan wants to make a comment here as well.

Yes, Chris, I think one of the things that's really going to make longer term difference here is when those Latin countries converge towards a capital market structure that is more like we have seen in the developed world. What I have in mind here is take our very big business in Brazil. The investors there, both by regulation and by preference, have concentrated on Brazilian assets, short term Brazilian government debt and you really can't blame them when the yield on it was 11%. It's hard for international investments to compete. If you look at much lower rates that we're now seeing with the financial and currency recession that Luis described, you were getting to something of a tipping point here where investors based in those countries are likely to see much more attraction in equity investment capabilities and international capabilities. That is going to be a huge opportunity for the next 2 or 3 years for Principal Financial Group. So I think there is good and bad in the lower interest rates and maybe it doesn't affect the quarter-to-quarter but there's a longer term optionality here in terms of providing international services to those investors.

Your next question comes from Randy Binner with FBR. Randy Binner - FBR Capital Markets & Co., Research Division: I just wanted to clarify the comment on the $25 million reduction relative to 25 basis point kind of decrease in the overall earned rate. I guess that seems like it will be part of the third quarter DAC review and in that 25 basis points reduction, I mean, that's really just the typical portfolio bleed you'd see as you turn over the portfolio in a low rate environment. Are those correct takeaways?

This is Larry, Randy. I mean, I would say that's generally correct. Let me see if Terry wants to add any additional to that.

Yes, Randy, this is Terry. What we talked about in terms of the long term interest rate assumption and the reduction of 25 basis points in that would be the impact that it would have on a reduction on our DAC and actuarial balances. So it would be more of a one time hit to earnings. As you mentioned, in the third quarter, it's typically when we review our assumptions and interest rate will be one of them, as well as look at enhancements to our actuarial models. Now we also look throughout the year, but the third quarter is when we really focus on that and that's what I'm referring to, in the $25 million hit or a 25 basis point reduction in the long term interest rate assumption. Randy Binner - FBR Capital Markets & Co., Research Division: Okay. And that would be -- that's 25 after tax?

Yes.

That would be -- yes. Randy Binner - FBR Capital Markets & Co., Research Division: Okay. Just one other quick cleanup item. I just want to clarify this kind of -- in the context of the guidance discussion. So if there's a variable income kind of catch-up or a tailwind, if you will, in the back half of '12, would that mostly be from potential CRE sales?

That's right. It would be mostly from CRE sales. That's, generally speaking, what we're talking about when we talk about variable investment income and I don't -- Julia, would you like to make any further comments?

No, that's exactly right, Randy. It's coming from our opportunistic portfolio where we purchase value-added -- real estate, and when the market is right, we sell it. Randy Binner - FBR Capital Markets & Co., Research Division: Is the market right for that right now? Is it a good market for that?

Yes.

And this is Larry, Randy. Just to give you again a sense, in the first half of 2011 and again I think this is a pretax number, but we had about $22 million in gains on this sort of activity in the first half of 2011. So that just sort of shows you, that was the reason Terry went through the differences and sort of talked about even though reported earnings are down, if you actually kind of strip out the one timers and things, actually there's earnings growth first half 2012 or first half 2011 because we had these front-loaded real estate sales last year.

And I might just add that since Larry gave the dollar amount last year, that's going to be hard to replace, that size of a sale that was a very large opportunity we sold at a gain that was -- really exceeded our expectations, so I wouldn't expect that kind of opportunistic sale, but we still have opportunities out there, so... Randy Binner - FBR Capital Markets & Co., Research Division: Is there something more like maybe $0.03 or $0.04, but not as big as first half [ph]2011?

Probably something lower than that?

Your next question comes from Suneet Kamath with UBS.

I want to start with a follow-up to the comments that Larry was making in response to Jay's question about it mattering where the growth comes from in FSA, meaning if it comes from the markets, you don't have the acquisition cost and I thought that was a great point. But that leads me to Page 6 of your conference call deck, where I look at the margins, and I'm not talking about ROA, I'm just talking about the pretaxed return and net revenue and the pretax margin. And if I look at 2011 and I compare that to 2015, there's not a whole lot of upside. Meaning, you're kind of right in the range already and I would imagine that this illustration that's sort of based on an assumption that there is sort of normal market growth between now and 2015. So I guess my question is, why aren't we seeing sort of upside in those margins as we move sort of forward in time?

Sure. Let me just make a couple of comments and I'll see -- kind of looking at Dan and Terry. Let me make a couple of comments relative to pretax return on net revenue. As I said before, if you look at a quarter like second quarter and again, we should all be careful to take a quarter and somehow annualize that or assume that, that now reflects a new dynamic going forward because as I said, particularly in second quarter, because of the strong sales, strong net cash flow, I would say it's highly unusual when all of your -- actually, more than the increase in account value all came from net cash flows, meaning the market was negative and it was a net cash flows that grew your account value. In that scenario, again, there's going to be pressure not only on ROA, there's going to be pressure on return on net revenue. That's why you've seen a slight diminution in return on net revenue in this quarter. If you go out to this, 2015 and you say, "Well, why aren't you going to see more sort of lift in that pretax return on revenue?" What I would say to that, Suneet, is we'd like to sit here and tell you that there's tremendous operational leverage, but the reality is, think about it, if the reality is, if a $25 million plan becomes a $50 million plan by 2015, they're not going to allow you to charge the same fees when their $50 million plan in 2015 that you charged in their $25 million plan in 2012. So what happens in this business is what would happen in any sort of competitively efficient business, in that you're going to see sort of a paralleling, if you will, between the fees. The fees are going to go down as the plan gets bigger and you're going to have to just kind of reprice that periodically and that's just the new dynamic of the environment we're in. So that's why you hear our comments, talking about aligning expenses, aligning expenses with revenues. And so that's the reality of the business. But we should not be negative about that because again, you talked about a pretax return on net revenue of 30%, that would be one of the highest returns in all of financial services. And if you talk about an ROA, return on assets of 24 to 26 basis points, that's an ROE that's again, in that 25%, 30% range. So these are very, very healthy margins. And again, to assume that we could increase them further I think would be a little bit naïve. So hopefully that helps.

No, it does. It does. I don't know if Dan wanted to comment.

Yes, just -- maybe just a couple of quick comments in terms of where you get additional lift as there continues to be pressure on the margins. Obviously, the investment preference, we think it will swing back towards equity. We think there's good upside in some of the emerging market. Again, our investment performance proprietary is very strong. The whole notion of retirement readiness, getting these group of baby boomers ready for retirement, that's going to involve a lot of taking advantage of our work site deployment strategies. The roll-ins come there and we, in essence, will have an excess of $1 billion of roll-ins this year. And the other point I'd make relative to just the pressure we have on Full Service Accum, remember that, with our DCIO strategy, and we have doubled the sales of our mutual fund defined contribution only strategy just here from a year ago, that's getting our investment product on our competitors' 401(k) platforms and their IRA platforms. So again, good growth for overall PFG, although it may not show up in the FSA line. And then as we come out of this very sluggish economy, it's the increase in salary deferrals, it's the increase in participation, that also will contribute to a net growth in these plans in terms of earnings. Hopefully that helps.

It does. I have a quick follow-up in terms of the quarter. I think in the commentary around FSA flows, I mean, I think there was some discussion about the strong client retention, which is obviously a good thing. Just wondering, when we think about the plans that you're retaining, it's particularly the ones that are perhaps up for bid and you keep them, what are the pricing dynamics there? I mean, if you can compare what you're getting on those routine plans today versus perhaps what you got when you originally put them on the books. Is it meaningfully different? And any order of magnitude would be helpful.

Yes. So the reality is they are different. Of course, it all depends on the size of the plan. You don't see as much pressure on our core small to medium-size. I'll put that as -- in plans of less than say, $10 million. There's always points of discussion, but again, they're looking for very comprehensive services. They value the proposition that we bring. On the larger plans, a lot of registered investment advisors are involved. A lot of the reduction in revenue may very well come from that RIA recommending other investment options for a range of reasons, diversity and to the extent that, that's money that moves away from our general account and moves away from our proprietary separate accounts or mutual funds, that does have a negative impact on the plan. And I would say, the order of magnitude, they all vary. But to retain a large piece of business today might involve reducing pricing and that may be 10% to 12% range, but again it all depends on which investments options they've chosen and what services that they're looking for.

And Steve, this is Larry. I'd like to just add one comment, which is, that -- one of the reasons that you -- the best way to sort of mitigate the issue that you talked about is really our Total Retirement Suite platform, and that's really why we put so much emphasis on what percentage of our sales are in TRS and we're now again at the point where well over half of the account value inside the Full Service Accumulation, over half the account value is actually tied to some other program. It's tied to a nonqualified plan, it's tied to a DV plan, it's tied to an ESOP or some combination of those and that's really the way because the reality is, it's much harder in the competitive environment. You can't just move -- I mean, the easiest to move is the 401(k) only. It's really difficult to move one if you got a 401(k), a DV and an ESOP, for example. So the whole key to retention here and the key to being able to provide value-added services really is the TRS strategy and that remains our sort of best-in-class platform today.

And your final question comes from Mark Finkelstein with Evercore Partners.

I had a question back to FSA, on revenues. If I look at kind of net revenue growth year-over-year, it's kind of down 1% to 2%. AUM is up about 6%. I guess my first question is, can you just help explain the delta there is a little surprising to me just the extent of it. I understand the fee pressures, but I guess the delta is a little surprising to me, so help explain that. And then secondly, what gives you the confidence that, that -- what is negative 1% to 2% can shift to 2% to 4% through the year if my numbers are right?

Yes. Mark, this is Larry. I'll have Dan comment. But this is -- this delta that you're describing again is very much to the point of, is the new account value coming from brand new sales where again, the least profitable part of your life cycle of a 401(k) plan is when you set it up, so -- and most of the new account value comes from new sales. The return on revenue and the delta between account value growth in revenue growth is going to be at its widest. The delta between account value growth and revenue growth is going to be at its narrowest when you see large lift coming from the equity market. So that's really the sort of dynamic that's in play, but I'm sure Dan can add some more to that.

Yes. The 1% to 2% negative revenue relative to account value growth of 6% is not new information. This has been going on now for the last couple of years and it gets back to it and I won't reiterate all of my previous comments. But certainly, mix of business is contributing to that, investment preference. All of those drivers were still dealing with 8% unemployment out there in the marketplace, so the recurring deposits have not come back. Again, I might -- I'm confident that long term, we'll get back into this 2% to 3%, 4% growth in net revenues, although I suspect we'll be fighting this headwind for the near future. And again, we'll align our expenses ultimately with what it is our customers are willing to pay for. We actually have a -- our institutional client conference coming up here in September. It'll be our 100-plus large institutional clients. We'll have a 2-day discussion with them and that's where we get into a lot of our discussions around retirement readiness, fees, disclosure and understand the mood. And in addition to having record retention, I would tell you, our customers scores, our customer service feedback scores are some of the highest that we've had. So I think we're going to fight through this pressure that we have on getting revenue growth, but it is not as good as it was say 5 and 6 years ago when you pick up 8% from the market, 5% from net cash flow and then operational efficiencies. And so we'll continue to take steps to manage expenses accordingly.

Mark, this is Terry. Just to add on to what those 2 have said. We did have some of the variable income that went through the Full Service Accumulation line last year and that had a benefit too and that caused some of the delta.

Okay. I mean, I guess -- but I mean, you have an assumption of 2% to 4% net revenue growth, which I assume is for the full year. In the first half of the year is -- I think by my number, it's negative 1.6%, 1.7%. I guess the question is, is there something specific that you're seeing in the book that is going to have what is actually a fairly sizable shift or is it purely just the assumption around markets improving?

Yes, it's primarily the assumption, Mark, around -- again, our guidance is always based on about 2% per quarter. So we're assuming the second half is going to have some equity market lift, which is going to be the most helpful contributor to sort of getting back to a closer delta between account value growth and revenue growth. They're never going to be equal. That's not possible. That's saying that you could charge a plan at a $100 million, the same you charge at when it was $50 million. That's not realistic, that's not going to happen. But you don't necessarily see that delta be maybe as wide as it was in second quarter just because of where the account value changes came from. So we think we're going to, by the end of the year, we would assume we're going to get back to a more normal Delta between account value growth and revenue growth.

Okay. And then maybe just one final question for Jim McCaughan is -- I understand that there were some expenses in the first half of the year in PGI that are largely nonrecurring in the second half of the year. Can you just frame out how large those expenses were so we can model appropriately?

Yes, sure, Mark. The only piece that's really company nonrecurring and I'll talk about this in terms of second quarter just reported versus the year ago second quarter. The only piece that's strictly nonrecurring is employee termination costs of about $1 million. We do not anticipate that recurring in the second half of the year. The second piece of increased expense is sales commission, which was about $1 million higher in the second quarter 2012 than it was in 2011. In a way, because that shows your organic growth in the business, I want that number to get bigger. That's one expense category where you don't mind spending a bit. What that implies actually though is that for these pieces of new business we're putting on, the profitability in the first 2 years, when you're paying sales commission, is less than it would -- or quite a lot less than it will be in year 3. So there's a lagged impact of the new business on earnings. And then the third category of the incremental cost is what we categorized as investment for growth. That's spending on increasing our workforce, for example, in China, the Dubai and Amsterdam offices, increasing U.S. sales and getting investment people increased numbers in some of the growth areas of capital markets. Now, from all that, the incremental cost second quarter 2012 over second quarter 2011 was $2 million in the quarter. We actually have got to a point where there are no further plans to increase that investment for growth. So what I'm really saying here is that has been a drag on the earnings in the first half. From now on, that should sequentially cease to be a drag on earnings because we reckon that with the big opportunities we've got, following investment performance, following the development of our investment capabilities, that we have really invested in that growth, the run rate won't increase further. So we should be seeing less of a drag on earnings from that, albeit with the continued, hopefully, increase in flows.

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

Well, thanks everybody for joining us. We do appreciate your continuing interest. As we said during our comments, despite the macroeconomic conditions, we do believe our businesses continue to have strong momentum and that we do have the right strategy and the right management team to grow our businesses over the long term. We hope to see many of you at our Investor Day on September 21 in New York, as John mentioned. And other than that, we hope everybody has a great day. Thank you very much.

Thank you for participating in today's conference call. This call will be available for replay beginning at approximately 8:00 P.M. Eastern Time until end of day August 3, 2012. 20811 is the access code for the replay. The number to dial for the replay is (855) 859-2056 and that's U.S. and Canadian callers, or (404) 537-3406 for international callers.