Principal Financial Group, Inc. (PFG) Q1 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the Principal Financial Group First Quarter 2015 Financial Results Conference Call. There will be a question-and-answer period, after the speakers’ have completed their prepared remarks. [Operator Instructions] I would now like to turn the conference over to Mr. John Egan, Vice President of Investor Relations.

Thank you, and good morning. Welcome to the Principal Financial Group's first quarter earnings conference call. As always, our earnings release, financial supplement and slides related to today's call are available on our Web site at www.principal.com/investor. Following a reading of the Safe Harbor provision, CEO, Larry Zimpleman; COO, Dan Houston; and CFO, Terry Lillis, will deliver some prepared remarks. Then we will open up the call for questions. Others available for the Q&A are Jim McCaughan, Principal Global Investors; Luis Valdés, Principal International; and Tim Dunbar, our Chief Investment Officer. Some of the comments made during this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. The Company does not revise them or update them to reflect new information, subsequent events or changes in strategy. Risk and uncertainties that could cause actual results to differ materially from those expressed or implied are discussed in the Company's most recent Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission. Now, I'd like to turn the call over to Larry.

Thanks, John and welcome to everyone on the call. This morning, I'll comment on three areas; first, I'll discuss first quarter results at a high level followed by more detailed comments from Dan and Terry; second, I'll comment on the environments surrounding our businesses and I'll close with some comments on capital management. As Slide 4 shows the Principal delivered strong results in the first quarter. First quarter operating earnings of $326 million were up 3% over the year ago quarter and are the second highest quarterly earnings on record in what is normally a seasonally low quarter, this compares to a very strong year ago quarter that benefited from large real estate sales and higher prepayments which contributed to higher variable investment income across the businesses. Persistent macroeconomic factors including low interest rates, strengthening U.S. dollar and low inflation all massed excellent results in the first quarter. If you adjust for these macroeconomic factors, operating earnings growth would have been in the 10% to 12% range over the year ago quarter, demonstrating the strength of our team’s ability to execute. On a trailing 12 month basis, operating earnings grew 16% over the same period a year ago. Our ability to generate above market earnings growth, speaks to the strength of the fundamentals of our business and the power of our diversified business model. The first quarter was a good demonstration of our ability to strike the right balance of growth and profitability. Total company net cash flows of $9 billion in a quarter, were double the year ago net cash flows and contributed to record assets under management of $530 billion. Assets under management increased 7% over the year ago quarter, despite a $25 billion negative impact from foreign exchange rates. As I have said before net cash flows and assets under management are leading indicators of future earnings growth. Next, I'll comment on the current operating environment for our businesses and some positive developments we see contributing to our growing momentum. The Principal is the leader in retirement and asset management, and we are passionate about helping people save and invest to meet their long-term financial needs. Throughout my 43 year career, I've served on many industry committees that focused on ensuring that we have an environment conducive to helping people prepare for retirement. I along with other members of Principal’s leadership team have met with leaders in Washington and around the world, many times to advocate a system that works to benefit those who need it most, middle and lower income workers. Since, ERISA was passed in 1974 I've seen approximately 40 different pieces of retirement legislation and regulation. The latest is the recent Department of Labor proposal potentially redefining the fiduciary rules for operating in the retirement business. While it's too early to know the precise impact of these proposed regulations and while I’ll acknowledge there could be challenges I'll offer two initial observations; first, this proposed regulation will continue to further complicate the U.S. retirement plan industry. This increased complexity will continue the 30 year trend of market share shifting from second and third tier players the recognized leaders like the Principal; second, it's clear that the underlying intent of the proposed regulation is to encourage more in plan solutions for job changers and retirees. This should improve our asset retention rates overtime from what is today an industry-leading percentage of 50% to 52%. I believe the net impact of the proposed regulation will shift some of the influence from the advisor and brokerage firm to the retirement services provider. Our value proposition as a total retirement solutions provider remains a key differentiator for advisors and for plan sponsors. Our focus on helping plan participants take the appropriate actions to save for retirement and our ability to serve plans of all sizes garners high client satisfaction scores year-over-year. We've received an average overall satisfaction score of 95% over the last three years in plan sponsor surveys conducted by Chatham Partners and the Principal, contributing to industry-leading retention rates. We will not waiver in our commitment to provide a industry-leading total retirement plan solutions, including new and innovative in plan solutions and to working with advisors who share our goal of helping people save. Our established infrastructure of locally deployed and experienced sales and service professionals and strong advisor relationships are not easily replicated by new entrants into the markets we serve. As a global asset management leader we continue to also provide investors around the world the outcomes-based investment solutions they seek. Despite a general shift to more passive strategies among institutional investors we’re still seeing strong interest in our fund line up that focuses on alpha generating strategies, continued strong investment performance and a broad platform of outcomes-based investment options drove nearly $5 billion of net cash flows in Principal Global Investors and Principal Funds in the first quarter. As you know Principal International has become an increasingly important part of our growth strategy. Last month many of you took the opportunity to attend our investor event in San Diego Chile or listened to the Web cast. We hoped you came away with a much greater understanding of the power and long-term growth opportunity of our Latin American operations. The Principal's long time retirement expertise combined with marquee distribution partners in those countries uniquely positions us to capitalize on the tremendous opportunity created by the undeniable savings needs of the fast growing middle class in those countries. The management teams in Brazil, Chile and Mexico are keenly focused on being a leading retirement and asset management provider in these key markets. Cuprum continues to perform exceptionally well and remains a leading pension provider in Chile. The opportunities in the voluntary market are taking hold as well with Cuprum in the top spot for voluntary market share among Chile and AFP providers. Voluntary sales in Chile increased 33% over the prior year quarter on a local currency basis. The success of Cuprum is further validation of the strength of our acquisition strategy Brazil perhaps was market-leading. Trailing 12 month net cash flows in PGBL and VGBL were 53% of the industry at the end of the first quarter. This contributed to the Company recently capturing the highest market share by total assets under management as well, according to third-party sourced data. Our leadership positions in Latin America and increasing presence in Asia are proofs that global expansion strategy we put into play more than a decade ago is absolutely the right one for long-term growth. Finally I will provide an update on capital management. Our fee based business model allows us to generate free cash flow and strategically deploy it to create long-term value for shareholders. We've remained well-positioned to deploy capital through a variety of options in addition to supporting organic growth. Through the first quarter we've already announced plans to deploy more than $700 million of capital in 2015 on common stock dividend increases, a stock repurchase authorization announced in the first quarter and our planned purchase of AXA's pension business in Hong Kong which is on-track to close in the second half of the year. Last night we announced a $0.38 per share common stock dividend payable in the second quarter. A 6% increase over the prior quarter which is the eighth increase in the last 12 quarters. Additionally, the merger and acquisition pipeline remains active with selective opportunities to further enhance our global retirement and investment management platform. Before I turn the call over to Dan I want to highlight one award that Principal received in the quarter which in my view is one of the more important recognitions we've received. The Ethisphere Institute recognized the Principal as one of the 2015 world's most ethical companies. The designation recognized our efforts to conduct business by fostering a culture of ethics and transparency at every level of the Company which drives quality for our customers, timely information for our shareholders and deep involvement in our communities. In closing I remain confident in our ability to deliver sustainable profitable growth throughout 2015 and beyond despite the challenging macroeconomic environment. The Principal remains well-positioned for continued growth with proven success and a unique business model that positions us to provide long-term value for our customers and our shareholders. Dan?

Thanks Larry, I will cover two things this morning. First I will share some positive trends in our U.S. Insurance Solutions business then I will talk about our truly outstanding results for our retail retirement and institutional investment platforms. In the supplement we provide trailing 12 month growth trends over the most recent five quarters. Individual life premium and fees have trended from a 2% decline to 5% growth and Specialty Benefits premium and fee growth has doubled from 4% to an adjusted 8%. Specific to sales 63% of individual life sales in the quarter were from the business market, as business owners continue to seek our expertise for their long-term planning needs, Specialty Benefits had its second highest sales quarter with 110 million in sales as we continue to be very well-positioned in our core market in diversified industries. Further, improving employment trends for small and midsized companies continues to contribute to underlying growth in our U.S. businesses. On a trailing 12 month basis Specialty Benefits in-group growth was 1.8%, its highest level since 2006. I will now talk about our investment management platforms starting with a little more color around first quarter net cash flows. Principal Funds delivered record net cash flows of 2.6 billion, its 21st consecutive quarter of positive flows on a record 6.6 billion in sales. Mutual fund sales have grown every quarter over the last five quarters. Principal Global Investors delivered near record unaffiliated net cash flows of 3.2 billion for the quarter, on strong retention and demand from investors seeking income and yield. We continue to expand our global investment management presence with two-thirds of the unaffiliated assets under management coming from investors outside of the U.S. and clients in more than 70 countries. Moving to our retirement platform, Full Service Accumulation flows were 1.7 billion for the quarter on 2.8 billion of sales and continued strong retention. Strong growth in reoccurring deposits was also contributor to flows reflecting employment growth in the existing plans and some traction around our retirement readiness initiatives. Principal International delivered net cash flow of $2.3 billion, an increase of 41% from a year ago on a local currency basis, this drove assets under management up 23% on a local currency basis. First quarter was also marked by notable third-party recognition for our asset management franchise. First, and at the annual ranking of mutual fund families Barron's Magazine named Principal Funds a top five fund family based on one year performance and number nine in the five year timeframe. Second, for the third year in a row the Principal Global Real Estate Securities Fund received a Lipper Award as the best global real estate fund over a five year period. Third, our CPAM joint-venture was recognized as a 2014 best international equity portfolio manager and best three year international equity portfolio manager for the FTSE Shariah World Developed by the employee provident fund in Malaysia. And finally Cuprum ranked first for investment performance among AFP providers in Chile and four out of five strategies for the one and three year time periods at quarter-end. The fifth strategy ranked number two for both time periods. Helping to drive these strong flows and recognition is competitive investment performance. 79% of our rated mutual funds have a four or five star Morningstar rating. And as the Slide 6 shows at least 85% of our Principal investment options were in the top half of the Morningstar ranking on a one, three, and five year basis at quarter-end. As you know targeted funds are an important investment option for plan sponsors, more than one-third of full service accumulation assets under management are in target date funds with 100% of our target date funds in the top half of Morningstar rankings across all time periods at quarter-end. We recently announced changes to align Principal Global Investors and Principal Funds and created a more integrated investment management operation. I see this move is having meaningful benefits particularly in the areas of product development and distribution. The leadership changes were effective immediately later this year we will provide more information about changes to financial reporting in addition to addressing many of the other requests from stakeholders regarding our financial supplement. Our team continues to be laser focused on executing our global investment management strategy and providing innovative solutions to our customers. No doubt our best years are ahead and our growth in the first quarter continues to build on the strong momentum of our businesses. Terry?

Thanks, Dan. The teams have delivered strong results in the first quarter while operating earnings were aided by some one-time items that I'll address shortly the strength of our business fundamentals and proven ability to execute continue to drive our company forward. This morning I’ll focus my comments on operating earnings for the quarter, net income including performance of the investment portfolio and I will close with an update on capital deployment. Total company operating earnings for the first quarter was $326 million up 3% over a very strong year ago quarter. And at the end of the first quarter return on equity excluding AOCI was 14% this is 100 basis points improvement from a year ago. If we adjusted the average equity for exchange rate movements as other companies with large international operations do, the return on equity would be 15%. Excluding the corporate segment 65% of the Company's earnings were generated from our fee-based business. This diversification allows us to perform well despite pressures from the continued low interest rate environment, flat equity market performance in the first quarter and a strengthening U.S. dollar. Moving to Slide 7, we normalized first quarter 2015 earnings per share of $1.09 down by $0.04. The following one-time items positively impacted the earnings per share in the quarter. retirement and investor services accumulation earnings benefitted $0.03 from the true up of prior year dividend accrual in full service accumulation and a payment received related to the transition of part of our trust business to a third-party and Specialty Benefits operating, earnings benefitted $0.01 due to the net impact of a recovery of reinsurance premiums that was partially offset by higher expenses primarily from prior year true ups. After normalizing both periods, earnings per share increased 5% over the year ago quarter the growth rate was massed by items that we don't typically normalize for such as the strengthening U.S. dollar and Latin American inflation. Now I'll discuss some of our business unit results staring on Slide 8. The accumulation businesses within retirement and investor services had adjusted operating earnings of $177 million. This is a 5% increase over adjusted first quarter 2014 results. Strong fee growth of 9% was offset by decline in variable investment income. Trailing 12 month net revenue was up 7% which lead to 100 basis points increase in pre-tax return on net revenue to 34% compared to the year ago quarter. Full service accumulation operating earnings were 114 million in the quarter down 4% compared to the year ago quarter after adjusting for the dividend accrual benefitted both periods, operating earnings increased 4% over the first quarter 2014. Net revenues of $330 million were slightly lower than a year ago quarter due to lower variable investment income. Principal Funds first quarter operating earnings were $27 million, an 8% increase over the year ago quarter. On a trailing 12 month basis reported revenues were up 12%. Over that timeframe revenues net of pass through commissions were up 17% and our return on adjusted revenue was 35%. Record sales in the quarter along with higher sub-advisory fees contributed to higher expenses compared to the year ago quarter. Strong investment performance and flows contributing to a record account values of 128 billion at quarter end for the total Principal Funds complex. Individual annuities operating earnings were $37 million for the quarter. The results were positively impacted by strong fee revenue growth of 14% in variable annuities which helped to offset the impact of spread compression on our fixed deferred business. We expect normal quarterly volatility in this business. Turning to Slide 10, Principal Global Investors operating earnings for the quarter were 31 million this is a 14% increase from the year ago quarter in what is typically a seasonally low quarter due to timing of certain expenses. First quarter 2015 benefitted from performance fees that were partially offset by lower transaction fees and higher expenses. The trailing 12 month pre-tax margin continued to increase at 26.6% from a reported 25.2% in the year ago quarter. Slide 11 shows quarterly operating earnings for Principal International of $60 million. Slightly stronger than expected encaje returns were offset by a negative impact from inflation. Combined that revenue grew 21% on a local currency basis, the strengthening U.S. dollar suppressed operating earnings by 16% and assets under management by 21% compared to first quarter of 2014. Principal International continues to drive strong results with operating earnings growth in the mid-teens on an adjusted local currency basis. Turning to U.S. insurance solutions operating earnings were 55 million a 27% increase over the year ago quarter. As shown on Slide 12. Individual Life operating earnings of $26 million were a 20% over the adjusted year ago quarter. Adverse mortality impacted the year ago quarter’s results while first quarter 2015 had a return to expected claims experience. Turning to Slide 13, Specialty Benefits adjusted operating earnings of $26 million were essentially flat compared to a strong first quarter of 2014. As a reminder, first quarter is impacted by seasonality and is typically the lowest quarter of the year. Premium and fees grew 9% over the year ago quarter on an adjusted basis and the adjusted loss ratio of 66% is within the targeted range of 64% to 70%. For the quarter, total company net income was a record $440 million including realized capital gains of $13 million. Net credit related losses of $6.5 million were the lowest quarterly loss since before the financial crisis. Our portfolio continues to perform in line with expectations and better than our pricing models. The real estate market is performing very well and we expect mortgage and structured credit risk losses to continue to trend down. Net income benefited from $75 million of other after tax adjustments in the quarter. The adjustments included the deferred tax benefit related to the merger in Chile which was offset by a loss due to an update on our uncertain tax positions in the first quarter. As outlined on Slide 14, we continue to target $800 million to $1 billion of capital deployment in 2015. In the first quarter 2015 we paid a $0.36 common stock dividend and we announced last night a $0.38 dividend payable in the second quarter. On the trailing 12 month basis the common stock dividend is 27% higher than the same period a year ago. In addition we repurchased $50 million of shares in the first quarter, which completed our previous authorization. Our Board of Directors authorized a new $150 million share repurchase program in the first quarter that’s still outstanding. We continue to first focus on anti-dilutive share repurchases and depending on other capital deployment options buying back shares opportunistically. Our 2015 expected capital deployment range also includes the $335 million already announced for the AXA Hong Kong pension business acquisition, which should close in the second half of 2015. Our approach to capital deployment remains balanced and focused on increasing long-term value for shareholders. In closing while macroeconomics factors such as the strengthening U.S. dollar and low interest rates are providing near-term pressures, the strong business fundamentals and our proven ability to execute are driving continued momentum. We remain confident that our diversified business model positions us well for future growth across various macroeconomic environments. This concludes our prepared remarks. Operator, please open the call for questions.

[Operator Instructions] And our first question comes from the line of Sean Dargan with Macquarie.

I wanted to follow-up with Terry around capital deployment this year. I think you have the opportunity to call a 300 million of perpetual preferred stock in June. So just doing the math if you are still planning on deploying between 800 million and 1 billion you have already allocated 335 million to the asset transaction. I think you are going to pay at least 450 million common dividends. If you were to call the preferred with that, I guess is that factored into your 800 million to 1 billion estimates?

Hi Sean this is Larry, I will just get that over to Terry for a comment.

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

And then I guess a question for Larry. Keeping in mind that the DOL proposal. And given the fact that a low cost provider has made its intentions known that it wants to move into the small and medium business for a 1K plan business. Do you think that I guess I just want to hear your thoughts on if that’s going to materially impact your business given that advisors may believe that they have increased liability in placing small and medium businesses in retirement plans?

So, a couple of things there that are frankly a little bit independent, but in the earlier remarks Sean you heard me comment with respect to the DOL fiduciary proposal. Now again I will say like others and other companies that have commented kind of early on in the process it's a 1,000 page think about that for a second it's a 1,000 proposed regulation and -- but the -- if I step back from that for a second I step back from the details what we're talking about is an even more complicated landscape for our retirement plans not just from a potential legal perspective but just overall more complicated and every time this happens and again I've seen it for more than 30 years it redefines what scale is in the sort of 401(k) and retirement plan business and it will continue to push I believe it will continue to push market share from second and third tier more local players that frankly just don't have a platform the compete they don't have an investment option line up to compete and these increasing kind of compliance and the regulatory costs are going to make it more and more difficult and as you know 70% of our business is takeover business in other words 70% of our business is business coming from second and third tier players who find it difficult to compete so I think that pressure is going to continue to be there. Now with respect to Vanguard first let me say I have tremendous respect for Vanguard as an organization. I have tremendous respect for the business model that they have constructed. But I do believe Sean I do believe that that business model is not appropriate for every investor, every retail investor neither is it appropriate for every small or medium employer because the reality is most small and medium employers access the market through advisors and they need a lot of help and sort of handholding through the process of not only setting up the plan but servicing out on an ongoing basis and that's very difficult to do that well when you are a low fee player like a Vanguard is so again we respect them but we think that our advisor driven model is really going to be at the end of the day is going to be the winning model in the small and medium space. So, I hope that helps.

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

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

Well I mean again I want to just start by saying I think it would be premature for any of us to necessarily draw conclusions at this point with respect to what may or may not be allowed I guess with respect to compensation generally what I would say is that we believe that transparency is the best way to sort of deal with overall to deal with compensation issues and I think that the department of labor would agree with that. And I can tell you that going all the way back to ERISA in 1974 we have been among the leaders frankly well out in front of many competitors in terms of making sure both at the time of sale and on ongoing basis that our retirement plan customers have a full and complete understanding of compensation both direct compensation plus any other volume related compensation that may be attached to that if for some reason volume related compensation were to go away for some fashion and frankly I don't know why it would because it is not necessarily any sort of amount that's taken from our plan participants but that were to go away we’re still on a very level playing field we’re still dealing equally with the other retirement service providers and to squeeze of course as you would recognize Steven the squeeze is actually going to come on the financial advisors and the brokerage firms the squeeze is not necessarily going to come on the retirement service providers.

Believe me at Raymond James we’re well aware of that. I guess what I'm interested in here though is fund choice as well do you see fund choice changing maybe being forced by advisors to move away from your proprietary offerings?

Well. That's another interesting question so let me make a few comments on that. First of all again we've never had a business model where we are trying to put proprietary funds on a platform in some less than clear fashion as a way to sort of try to stuff proprietary product inside a retirement plan. So, for example if you look at our target date funds Steven I would say we are today still one of the few that has outside managers in as a part of our target date fund line up, because while we think PGI is one of the top global asset management companies in the world the reality is they can't do everything perfectly and so they are going to be situations where it's appropriate to bring in outside managers. I think the real test here and the real issue is going to be do your proprietary funds compete do they compete in terms of investment performance, do they compete in terms of fees and if they compete in terms of investment performance and fees then I can't see any reason why the Department of Labor would just per se wall off your ability to put those investment options which are value-add for the participant why they would not allow those to be on the platform. Final point I will make is as Dan commented when you are sitting here today with A5 or more percent of your investment options in the top half of their Morningstar peer group it would be our investment performance stands on its own, not only inside our retirement platform but frankly through the DC investment only space which has been one of the fastest growing parts of our business where you can kind of see the strength of our investment platform and the interest that it has not only to Principal's retirement customers but retirement customers of other service providers as well.

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

One question on 401(k) sort of profitability, I guess as we think holistically for Principal overtime is it a more important driver the basis points kind of fee that is charged or is it the level of assets managed? When I say level of assets managed in sort of proprietary offerings?

Yes so this is Larry and I will have Dan probably want to comment as well. But what I would say is that there isn't meaningful -- there really is would be no meaningful difference with respect to proprietary versus non-proprietary. And we've tried hard over the years to have a business model that doesn't necessarily result in largely different returns by plan size. So for example your small plans are two or three times as profitable as your large plans. Now I am not saying there aren’t some differences by size, now are there some differences that all of a sudden proprietary assets were a 5% of a single plan. But when you think it's really important financials are subject to the investment decisions that are made by plan sponsors and advisors. So I think again I just wanted -- I know some have commented on sort of a decline in margins from first quarter ’14 and what I want to suggest is that margins in those periods of time were actually above what we would consider to be normal industry trend. So we’re very pleased, very pleased with where we are today with respect to the return on net revenue for a full service accumulation. So I'll let Dan add a comment.

Yes, that’s right Larry the variable investment income a year ago was quite strong relative to the current quarter and certainly we saw traditional P revenue arise during that period of time. The other comment I guess I would make about the profitability profile of these plans has a lot to do with TRS. And so to the extent that we have more than just a 401(k) relationship there is defined benefit there is ESOP and there is deferred compensation that clearly becomes a variable in terms of the earnings that could be generated from that plan. The second component of course is our ability to retain assets. So those are number of plans we have the ability to retain assets in a Principal rollover IRA or somehow the stay within the plan and then the last part I would say is remember that we’re paying market pricing or near market pricing for the majority of the plan assets managed by PGI and of course PGI is capturing a component of profitability as well. So I think you do have to look at this from a much more macro-comprehensive way than just simply getting it down to either what the investment option is or whether or not it is a small plan or a large plan.

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

That’s certainly our intention, that’s certainly and what I would call our core base pricing strategy. Correct.

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

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

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

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

Sure. Yaron so it's a very good question. So, let me just make a few comments and obviously Dan has a lot of perspective having actually have been in the field and done this in the real world, so I'm sure he’d want to comment as well, but I cannot emphasize enough having again it's been a very long period of time in this business that retirement plans have to be sold they have to sold in the small employer marketplace, so say any under 100 life even under the 250 life market they have to be sold there isn't -- there are a very few small business owners that would sort of wake up this morning and say okay today is the day I've been thinking about and today is the day I'm going to go out there and get bids for my 401(k) plan it just doesn't work that way in the real world and this is why the financial advisors’ role we believe is so critical in order to extend the coverage inside the under 100 life marketplace it is the advisor who is really the one who if you will creates the opportunity through conversations to business owner brings in several proposals because the business owner themselves aren't that knowledgeable in these issues and ultimately helps them make a good decision for themselves and their employees. Now there is probably a 10% I make that number up I don't know what it is but there is a 10% to 15% of the market that the owner would consider themselves very financially sophisticated they might feel like they don't need a financial advisor but I will tell you Yaron my experience is that's a relatively small percentage of the universe and even that proportion probably doesn't really again have the capability to go out on their own and sort through record keeping systems, compliance issues, plan design issues on their own there was a day when we had a 401(k) plan in a box you could buy 401(k) plan from Principal and many other in the early days of the Internet on a self serve basis and quite frankly we folded that particular product after about three years because they wasn’t enough demand for it so anyway I hope that helps and Dan wants to comment.

Yes just a couple of comments and again thanks for the question firstly if I had to start is compounding on what Larry said it's more than just plan level service it is a participant services it's local service relationship management it's things like retire, secure and plan works when you sit down with an employee of less than 50 or 100 employees let's say they don't want an unsuccessful plan well what's an unsuccessful plan, it's low salary deferral low participation and confusion among the employees on what it is that is available to them it is the financial advisors that are representatives from Principal that make these plans come alive to the average small to medium sized business employee and that has everything to do with driving participation, increasing salary referrals, staying in the plan making sure they've got good investment diversity and then also just a reminder there is really two parts two halves to expenses related to the plan one is related to the asset management fee and one is related to the record keeping administrative cost. When it comes to record keeping administrative cost whether it's a Census or Vanguard partnership or Principal those are going to be very-very comparable when you look at the fees associated with asset management then it gets out into an active passive debate I went back and took a look at our existing block of business, this is our existing 401(k) plan block and our merging plans of less than $5 million 96% of those plans today make available a low cost index option, 99% of all of our clients over $5 million already have a low cost at least one index investment option so again it's really not low fee low service high fee high service it is how do you want to spend if you’re a investment lineup do you want to have heavily more biased on lower cost investment options so you can use our collective investment trust you can use our index suite and you can supplement that with more actively managed funds but then you have the separate conversation around record-keeping and administrative related expenses and believe me you do some of those economies of scale on the small case market so again if you already have a lot like Principal does over 35,000 plans we know how to service a small client that chooses passive or CITs as their investment option hopefully that helps.

One follow-up Larry when you talk about the deal or proposal it sounds like it's actually you view that's more of an opportunity that many potential threat but I'm curious to hear your thoughts as to where you make see where you believe in these early days there could be more pressure on your business whether it is from a compliance spending side or other?

Yes, yes Yaron while you answered the question the -- and first of all in my comment what I'm trying to do is to just have people understand does that when there is a 1,000 page proposed regulation like this there is both challenge and opportunity and so we well understand the challenge side and many others do as well and my only point was to suggest that there is opportunity as well so the things that are challenges it's simply the kind of increased complexity and at least by my view and again this is based on many-many years of experience when you have a 1,000 page proposed regulation that is kind of sitting there and is not yet final and nobody really knows what the rules are I can assure you that’s an environment where it's going to be very difficult to see many new plans be formed, right. Because if you were thinking about putting in a 401(k) plan this sort of a thing at the margin is going to cause you to say you know what I'm going to wait a year, I am going to try to figure out what this regulation looks like. So sort of at the margin I think as far as new plans are concerned I think it's going to be a bit of a dampener, but on the other hand I think for us and for other retirement service providers that really have the scale and the technical expertise to compete again more importantly what’s going to happen is there is still about a 1,000 players in the 401(k) industry today, a thousand players. There shouldn't be a 1,000 players in the 401(k) industry. And so there is going to be 500 of those that are going to be going through an analysis of whether they really want to stay in the business once all of those regulations are finalized and we understand what the new rules of the game are going to be.

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

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

So again I will make a few comments and ask Dan to weigh in as well. So, with respect to the first part of your hypothetical, so the customer walks into Smith Barney or Morgan Stanley or whatever of course it works the other way, of course it’s the Smith Barney broker who walks into the small employers office, because that’s again the way these plans gets sold. And the first thing I would say is that of course that broker isn't going to present singularly a Principal proposal. I mean I don't know the average but my guess that in the initial stages any broker is going to present -- first of all after they go through a discovery process with the small employer what are you looking for, they could present as many as five to seven different retirement services providers and it's through subsequent conversion and involvement with our sales team which again is among the best in the industry and locally deployed that the financial advisor and the small employer then ultimately decide okay out of these five to seven quotes which one am I going to select who is going to be the retirement services provider. Now you are correct that more and more today the choice of the provider, the retirement services provider is somewhat separated from the choice of who's going to manage the assets. So it's a kind of the second step decision. Again go back to what I said before, first of all when Principal's investment options are high performing options in the top half of the Morningstar peer group or the top 25% or the top decile and investment fees are competitive there isn't any reason in the world, there isn't any reason in the world that a rationale advisor and a small employer wouldn't see fit to put that on the platform. I mean the reverse situation could be equally true. So again when I think when it comes to investment platform what you need to sort of think about is it's a very level playing field. And what PGI and some of our other chosen sub-advisors bring to us is product that is manufactured specifically for retirement plan clients. Many of the competitors that are out there are using kind of share class versions of their retail funds that aren't manufactured for the retirement space. So it's one of the unique differentiators of Principal and I think it’s going to continue to service well albeit we’re going to have to negotiate kind of a new set of forces and factors but again I remain very confident having seen us go through 40 years of these changes in legislation and regulation I'm highly confident that we’re going to figure out the right way to compete whatever the new business model is going to be.

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

Eric Jim McCaughan want add just one quick comment as well.

Sure.

Eric it's Jim here. I just want to add to Dan's point about the split decision that we welcome transparency and so that should give us opportunities in the DCIO space the reason these plans sponsors and plan participants choose us is as have been described it is investment performance it's the multi-asset multi-manager products target date target risk increasingly global diversified income diversified real assets those are all extremely attractive carefully constructed products as Dan described specifically for the retirement market with those products transparency should help us not hinder out looking to the future and we see that great growth opportunity in the DCIO space if as one hoped the move continues to be towards greater transparency.

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

Jim could you give some additional color on the drivers of PGI’s strong flows in the quarter and then also commentary on the current pipeline?

On the institutional side we've been nicely building up flows and as Dan described of the strong international component a lot of different countries different parts of the world we've been nicely building up sales over the last two to three years and what happened in the first quarter is we continued the momentum of sales it was growth but not massive growth this is not an usual quarter in terms of institutional sales but we tightened up our act in retention and that was really the issue that led to the very-very the positive that led to the very strong institutional cash flow in the first quarter. In terms of where it's coming from it’s true that it's very diversified in terms of investment category the bias I would say there is if I look through our list of sales is towards different kinds of income biased products whether it's our assets underlying diversified income funds investment grade credit high yield preferreds emerging debt and then income equities has been a very strong capability for us real estate and REITs so it's very diversified across countries and across investment capabilities and really the difference this quarter to each quarter last year that made us stronger was greater retention. Now looking forward I do see the continued development of the pipeline of new business as being very encouraging. We also has a senior management team get to see all our substantial clients on a very regular basis and I would say the tone of those meeting is currently extremely solid we feel very confident that the improved retention can be continued now clearly that depends on future events but the current tone is extremely good.

And then one on the deal or proposal if I could, there is a carve out for plan brokers providing advice to plan sponsors on plans that's over 100 participants or over 100 million in assets in terms of the lack of the carve out for the smaller plans is that something you think is appropriate or would that be something that Principal would be lobbying to get changed in the final rule?

Ryan this is Larry. I mean again I can’t size enough this is 1,000 pages this is proposed regulation I'm not going to sort of claim to be an expert on carve out versus non-carve out what I would say is that what seems logical and reasonable to me is that we have kind of a single set of rules with respect to investment line items we have a sort of single set of rules that we operate by whether it's whether it's a Fortune 100 plan or whether it's a 15 life tool and die maker in Rockwood Illinois so what we will lobby for once we sort of understand what the overall proposed rules are what we will lobby for is that we have a consistent standard really across all plan sizes we will argue for a level of transparency that's appropriate and the reason I say that is we are not -- I don't think there is advantages in saying a distributing prospectuses for example as an example of overkill, but we really do believe in transparency we really do believe in an informed customer we really do believe in working with well informed brokers who have great expertise to bring to the table in terms of advising the small plans sponsors so those are the things that will be focused on and I'm confident at the end of the day Ryan the Department of Labor wants to do the right things here we've had many-many meetings with them these are very experienced people who know this landscape very well and at the end of the day we share with them a responsibility to see retirement plan coverage grow in this country at the end of the day success in terms of retirement outcomes is going to depend on 401(k) plans and we are not going to go back to the client benefit plans and so we’re going to continue to press the case to the Department of Labor that we need to have a fair rules transparent rules consistent rules, so that we can see retirement plan coverage continue to be extended among employers of all size. So Dan any comments you want to add.

No, I think that really wraps up nice Larry.

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

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

Thank you participating in today's conference call. This call will be available for replay beginning at approximately 01:00 PM Eastern Time, until the end of day May 01, 2015. 21890644 is the access code for the replay. The number to dial for the replay is 855-859-2056 for all U.S. and Canadian callers or 404-537-3406 for all international callers. Thank you. This concludes today's conference call. You may now disconnect.