Good morning, and welcome to the Principal Financial Group Fourth Quarter 2019 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 call over to John Egan, Vice President of Investor Relations.

Thank you, and good morning. Welcome to Principal Financial Group's fourth quarter and full year 2019 conference call. As always, materials related to today's call are available on our website at principal.com/investor. Following a reading of the safe harbor provision, CEO, Dan Houston; and CFO, Deanna Strable will deliver some prepared remarks. Then, we will open-up the call for questions. Others available for the Q&A session include, Renee Schaaf, Retirement and Income Solutions; Tim Dunbar, Global Asset Management; Luis Valdés, Principal International; and Amy Friedrich, U.S. Insurance Solutions. 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 filed by the company with the U.S. Securities and Exchange Commission. Additionally, some of the comments made during this conference call may refer to non-GAAP measures. Reconciliation of the non-GAAP financial measures to the most directly comparable U.S. GAAP financial measures may be found in our earnings release, financial supplement and slide presentation. Dan?

Thanks, John, and welcome to everyone on the call. This morning, I'll share performance highlights for the fourth quarter and full year and accomplishments that position us for continued growth. Deanna will follow with details on our financial results and capital deployment. 2019 marked Principal's 140th anniversary and a year in which we closed one of the largest acquisitions in our company's history. We are proud to serve more than 33 million individuals, including China and nearly 200,000 businesses in more than 80 markets around the world, and I'd like to thank both our customers and our employees for being a part of Principal's journey. 2019 was another good year for Principal. We delivered non-GAAP operating earnings of $1.6 billion, a 2% decrease compared to a strong 2018 that benefited from a large PGI performance fee. This result reflects ongoing fee pressure, continued investments in the business and the impact from the Institutional Retirement and Trust or IRT acquisition. Throughout 2019, we continued to demonstrate strong business fundamentals, balanced investments in our businesses with expense discipline and be good stewards of shareholder capital deploying nearly $2.1 billion, including $1.2 billion for the IRT acquisition. This acquisition doubled the size of our U.S. retirement business and positions us as a top three retirement player. The integration remains on track and we'll be hard at work throughout 2020 to make sure the transition is as seamless as possible. While working to integrate the acquisition, we continued to grow our existing U.S. retirement business in 2019. Compared to 2018 RIS-Fee sales increased 30%, reoccurring deposits grew 10% and we saw a double-digit growth in employer matches. I also want to highlight, strong results in U.S. Insurance Solutions, including record pre-tax operating earnings for the segment in 2019. Both Specialty Benefits and Individual Life…

Thanks Dan. Good morning to everyone on the call. This morning I'll discuss the key contributors to our financial performance for the quarter and full year, as well as capital deployments and our capital position at year-end. Net income attributable to Principal was $301 million for the fourth quarter and $1.4 billion for the full year. Quarterly net realized capital losses of $96 million were primarily driven by derivative losses associated with hedging activities with minimal credit losses. Reported non-GAAP operating earnings were $396 million for the fourth quarter or $1.41 per diluted share. Excluding significant variances, fourth quarter non-GAAP operating earnings increased 13% and non-GAAP earnings per diluted share increased 14%, compared to fourth quarter 2018. The year ago quarter was negatively impacted by a 14% decline in the S&P 500 and unfavorable macroeconomics in Latin America. Reported full year 2019 non-GAAP operating earnings were nearly $1.6 billion or $5.58 per diluted share. Non-GAAP operating ROE excluding AOCI other than foreign currency translation was 13.1% at year-end. The full year non-GAAP operating earnings effective tax rate was 16.9% within our 2019 guided range. As communicated on our 2020 outlook call, we expect our 2020 effective tax rate to be between 16% to 19%. As shown on slide 4 we had three significant variances during the fourth quarter including negative $14 million in RIS-Fee, primarily integration costs from the IRT acquisition and a negative $3 million impact in Principal International due to lower than expected encaje performance in Latin America. These were mostly offset by a $12 million benefit in PGI from a reduction in an earn-out liability for Principal Real Estate Europe formerly known as Internos. This reduction was due to a change in the timing and pattern of revenues during the earn-out measurement period stemming from two factors;…

[Operator Instructions] The first question will come from Alex Scott with Goldman Sachs. Please go ahead.

Hi, good morning. First question I had was on RIS-Fee. Just wanted to see if you could provide some comments on the way the end of year has gone in terms of any changes to the plans, I know there's been some moving pieces around, the way commissions are paid in the past. Also just thinking about the proprietary versus non-proprietary mix of assets, would you anticipate that as a percentage of AUM would sort of begin to flat line? Or would that continue to move down at the pace that it's been moving down?

Yeah. Thanks Alex. This is Dan. Thanks for the question. A couple of notes before I throw it over to Renee, I don't -- when I reflect on the results for 2019, they were really positive. If you look at that planned growth on a full year basis, over 250,000 new participants being added over that period of time, and frankly the sales number is really, really strong. So the fundamentals of the business remain very much intact. As you know, we've had historically very strong proprietary asset management sales in large part, because performance has been good. And again, it differs on size, whether it's small, medium or large. But we feel very good about our ability to continue to provide a comprehensive bundled solution, including administration, record-keeping and asset management. And there's a lot of collaboration that occurs between PGI and RIS to make that happen. But, I'll throw it to Renee. I know you're excited about what you've got going on, not only 2019 Renee, but 2020.

Yeah. Absolutely, so Alex, thank you for your question. And the first question that you had was around the movement that we're seeing from commission-based compensation agreements to fee-based. And the guidance that we provided last year on this was we would typically see about revenue pressures of about 1% to 2% due to this, which of course doesn't impact pretax operating earnings because it's netted out in the expense line. But we -- what we are seeing is exactly in line with that. And so when we look at fourth quarter results we see about a 1% to 1.5% movement from commission to fee-based. And that's exactly what we would anticipate. Your other question dealt with the percent of proprietary assets? And what we might anticipate seeing there. First off, we're really proud of the results, our sales results in 2019. And we introduced pricing and the way that it's packaged to encourage and to incent proprietary -- sales of proprietary assets. And so if you were to look at, the percent of proprietary assets for our small-and medium-sized plans, you would see that they run above market, above the industry. And institutional was pretty much in line with what we see in industry. Despite that, we do see downward pressure on this, as a -- as kind of a normal -- something we've been talking about now for several quarters, it's the result of more propensity for employers, particularly large employers to move towards passes and also the bifurcation of the record-keeping decision from the asset management and the investment management decision. If you look at net cash flows overall for target date funds, they've been fairly flat. But we're pleased with what we see in terms of how we perform to market. But we do anticipate that we'll continue to see pressure here, ongoing simply because of the bifurcation between, record-keeping and investment management decision.

Does that help Alex?

Yeah. That is very helpful. And look, I appreciate that the flows and the sales have been quite strong there. So I don't mean to take away from that. Second question I had was just on Secure Act. If you could provide any more details on sort of the action plan, are you going after multi-employer pooling? And is there anything in the works there?

Yeah. Certainly and as you know we advocated for the passage of the Secure Act. We feel good about it. Really sort of three key pieces. The first of which is the formation as you know the -- of the MEPs multiple employer plans. We've been in that business for a very long time. So we understand how to work with contracts that have adopting employers. So the fundamentals are very much in place. There will be a change. We'll end up partnering with a third party, to help us facilitate that. But there's very much a battle plan in place to help, provide small- to medium-sized employers, gain coverage and improve adequacy. The other was the in-plan income solution, which again, we've been in the annuity business for 75 years. We know how to do that. The safe harbor is going to give customers more confidence about adding that provision. And then there's a small incentive for small plan formation in the way of a tax credit. So I'd say, all in all, we look at that as being a positive. And as I said in my prepared comments, this will take time to emerge. This won't happen overnight. But just like the last major piece of pension legislation which for me was auto enrolling and auto escalate these things collectively put us in a better position to cover more American workers, so, that positive for the Secure Act.

Thanks very much.

You're welcome.

The next question is from Erik Bass with Autonomous Research. Please go ahead.

Hi. Thank you. First just one follow-up on the Secure Act and it's specifically the open MEPs. Do you see that, as all kind of new opportunity? Or do you get a sense many of your existing small plans that they may be looking to move into kind of an open MEP structure to try to lower their costs?

Yes. I actually think it's going to be for more new than existing. And again you have to recognize -- and we again as I mentioned earlier Erik have some experience in this space because there are limitations. There will be a limited number of planned choices. There are other constituents involved in the decision-making. So, not only will we see emerge multiple employer plans with both multiple record keepers out there providing those services, but I got to believe every single organization like Principal will participate there and as we continue with this digital transformation have our own small employer plans that are very cost-effective very convenient and would effectively allow them to have perhaps a little bit more flexibility. But Renee you want to add some additional comments there?

Yes. I agree that I think we'll see most of the planned take-up be with new plans and start-up plans. Perhaps the one reason why existing plan sponsors might be interested in an open MEP is if they can curtail their fiduciary liability. And we're still waiting on final regs to see exactly how that may play out but that could be a driver for -- to incent existing plans to adopt the open MEP structure. But I agree it's going to be predominantly driven by new plans and start-up plans.

But the regs for what I'd describe in three buckets is over 800 pages long and it's still going to require the industry to digest that.

Got it. Thank you. Appreciate the color there. And then just secondly I was hoping you could talk about the impact of the macro and political disruption in Hong Kong and Chile. And just provide an update on what impact do you see that having potentially on near-term results in these markets and for Principal international overall.

It's a good question. I'll make a few comments before throwing it to Luis. And again I think as a reminder to all of us as you think about what is appropriate pension policy by country you also have -- and although we don't aren't in the record-keeping business in France, you also have people on the streets demonstrating against the changes to their pension policies. And we've been saying for years that the era of personal responsibility and accountability is here. Governments aren't in a position to fund it. And sure enough as you look at Chile and Hong Kong and France and other areas around the world including Brazil, you're seeing more pressure being placed on elected officials to come up with a reasonable retirement policy for people aging. And so on one hand, it's a huge opportunity for Principal at the same time we've got to make sure that we're advocating and we're helping steer and drive pension policy. And I can't think of a better person to talk about that on the international front than Luis Valdés. Luis? Luis Valdés: Okay. Thank you very much. Hi Erik. A couple of things first to start with. The root cause of these social unrest in Hong Kong and Chile are first of all completely different. Also the other thing that we have to keep in mind that in both places they do have different political systems in nature, so hence the evolution pace path of the negotiations and solutions are going to be different are going to take quite amount of time and at this moment are kind of unknown. What do we have in common in these two places? First, we have had no major disruptions in our operations in both places and we have had second a minor short-term financial impact in both locations. I wanted to say something. We're reporting record AUMs for Hong Kong for 2019 and we're reporting on a trailing 12-month basis record operating earnings for Hong Kong as well. So, this is a micro scenario in the short-term going into macro perspective. And having said that and because the severity and the duration of this social unrest both markets are going into a no growth if not in a recession for the next couple of years. So, what we're doing in light of this new reality we are recalibrating our operations in Chile and in Hong Kong with two main objectives; first of all to continue servicing our clients and to protect their interest and to continue improving their customer experience and second, to keep our expenses in line with our revenues going forward. We're well prepared and we continue monitoring how the macroeconomics are going to evolve in those markets, but we're taking actions and -- actions in order to be pretty much more in line about is -- might happen in those markets.

Hopefully that helped Erik.

Yes. Thank you. Appreciate it.

The next question is from Jimmy Bhullar with JPMorgan. Please go ahead.

Hi, good morning. I had a couple of questions. First on the -- overall, your results are obviously pretty strong, but it seems like retirement earnings for each of the past -- the fee side each of the past couple of quarters have been a little light. And I'm not sure how the wealth block is performing versus your initial expectation and specifically on how much of a headwind the low fed funds rate is for income on trust accounts for the acquired block.

Okay. Good questions. And make no mistake there is a headwind with interest rates continuing to fall and it is having a negative impact on that trust and custody business. But again I get back to the fact we're in this for the long haul and feel very good about the fundamentals. Renee you want to talk a little bit further about the integration and where we stand?

Absolutely. Thank you for the question Jimmy. And I think first-off to just speak a moment about the fourth quarter results for fee. We're very pleased with the results, particularly when you look at the legacy business, the growth that we're seeing there, the profitability that we're seeing there, really very good and very strong. Our sales results I think and our net cash flow results are particularly pleasing and we're excited about the impact that we see on TRS. Our new sales are really being fueled by TRS. And that goes all across the board in terms of defined benefit sales being up 33%, ESOP beat sales being up 70%, a record year for sales for nonqualified. So, a lot of strength in the organic growth machine of that legacy business. As you pointed out when we look at the IRT business, the area of pressure that we have seen is in the interest on excess reserves. And we saw an 85% decline in the basis points that would reflect for that business. And so, we are seeing pressures there. That's been accounted for in terms of our guidance for 2020, but it does pressure results for the fourth quarter.

And how much of a -- are you going to quantify how much of a headwind that is on an annual basis, if you're assuming a stable fed fund rate this year versus where it would have been when you announced the deal?

Yeah. So, if you were to take the 85 basis points and annualize that the impact on revenue is about a $25 million to $30 million impact annualized. But to state it differently, so we have that of course baked into our 2020 outlook.

Okay. And if I could ask one more. You've been fairly active with deals, but most of them have been small sort of tuck-in type transactions international markets and asset management. So, if you would just comment on your interest in deals, and specifically if you would be open to a large transaction. You've been mentioned as an acquirer of some of like large public companies in the press recently, but just wanted to see if that's something that you would be open to as well.

Well, right now what I would say is we are going through the digestion process of the Wells Fargo IRT business. Our highest priority is successfully migrating those customers, the employees, the participants and reassuring the advisors and the distribution community that we are and they're with safe hands. And so, job one, successfully migrate those customers. And so, we've got our hands full for another five quarters, say, as we transition through that limited resources to execute and bring those clients on board. But again, as Renee was saying, we're very happy about the progress. In other parts of our business, asset management is not as connected in terms of the resources. And if there is the right opportunity that presents itself to Tim Dunbar and his team around asset management that allows us to add capabilities and scale, we would want to do that. Outside the country, in terms of replicating more of what we do for PI, we've been on record before. We like the countries that we're in. From time-to-time we do get presented with the opportunity to again add capabilities and scale, and we would -- we'd look at each one of those on a one-off. But bottom line is right now we've got our hands very full with digesting what we have on the full-service side. Does that help Jimmy?

Yes. Thank you.

Thanks for the questions.

The next question is from Humphrey Lee with Dowling & Partners. Please go ahead.

Good morning and thank you for thank you for taking my questions. I have a follow-up question to Erik's question earlier for Principal International. So -- but looking at the kind of expenses for this quarter, they looked a little bit elevated. And then specifically looking at earnings contribution by country on a local currency basis and adjusted for encaje, Chile was lower than what it had been running for the past few quarters, and then also China looked a little weaker. Like I was just wondering can you talk about what's going on there? Like from Luis' comments earlier, it didn't sound like there's any. Any structural changes or any systemic things going on in there? But I was just wondering is there any kind of some one-off expenses or anything that you can provide some color on?

I'll make two broad statements before asking Luis to add to it. And the first thing I would say is, when you're dealing with emerging markets there's always a lot of volatility. There's political volatility, currency, FX, inflation. Certainly encaje introduces its own set of complexity. So we're quite accustomed to the fact that if you're going to do business in emerging market, it comes with a lot of volatility. The second thing I would point out and I still remember the 10 years of which PI was such a big tailwind every single quarter, PI represents about 19% of our earnings. And if I add Chile and Hong Kong together it's about 10% of the total earnings. So, the bottom line is we are at any given time going to have disruption and volatility in these various markets in which we do business. And I wouldn't look at any one quarter and any one year around expenses, and somehow think that that was not something that we wouldn't manage effectively. So, Luis you want to take it from there? Luis Valdés: Yes. Humphrey, let me start with China first in order to try to explain what you were asking. We have – certainly, it looks like the fourth quarter for China is kind of a low quarter. We have a delta between third quarter and fourth quarter of $2.9 million in OE pre-tax and we have a delta of $3.5 million in revenues. So let me try to explain this very, very quickly. The whole difference is about the average AUMs for the fourth quarter. When you look in the fourth quarter end-to-end comparison with three quarter it looks flat. But we have a lot of volatility. The intra-quarter, particularly we have $7 billion of negative net customer cash…

I appreciate the color. Thank you for that. Shifting gear to PGI. Net flows were positive for the full year. And as you look into the pipeline for 2020, do you expect the positive flows to continue? And then I have another question on the performance fees there.

I know. I do. I'll ask Tim to answer for himself. Tim?

Yes. Thanks a lot for the question. We did see a lot of momentum building in 2019 for our net cash flows. I think we talked a little bit about some of the changes that we've made to management and to the distribution team and really to the infrastructure and the ecosystem of our – of distributing our products and that bodes really well. I think the other thing I'd mention is just the strong investment performance. And while it's nice to see a pop in the short-term investment performance, what I think I'm most proud of and what we really focus a lot of our efforts on is really the consistency of the long-term investment performance. And if you look at that three-year 71%; five-year 79%; 10-year 91% that really bodes well for the types of solutions we're trying to create for our clients and our strategy of building retirement investments for all of our clients. So I think that's the backdrop of how we feel about moving into 2020, which is we have some momentum gaining. Obviously, each quarter we'll have dynamics that will be a little volatile or a little different from quarter-to-quarter. But as we look at the backdrop, we have a strong pipeline, we have strong interest in a wide array of our diverse capabilities. So we look pretty positively at 2020.

Thanks.

The next question will come from Andrew Kligerman with Credit Suisse. Please go ahead.

Great. Good morning.

Good morning.

One follow-up on the Secure Act. A few years back you used to provide some stats on what were your small accounts and I think maybe we could get a sense of what the fees on those accounts were. Could you give us a rough idea of what percent of your RIS deposits relate to small accounts and what the fee range is there? And with that answer, as we move to MEP, what would be the differential in fees, if those accounts were to move into a MEP?

Yes. So I want to make sure you get a good answer here, but I certainly don't remember providing historical pricing, because the reality is that we custom price nearly all of these plans and are they TRS are they not, what percentage of proprietary product? And there is such a wide range there. What you can sort of expect as I sort of -- even the definition of what is small, what is medium and what is large. And the reality is it kind of in our mind we break it into one-third, one-third, one-third. About one-third of that total account values are in the small, about one-third in what we describe as a medium. And then one-third which is large. And proportionally the basis points that you get on a smaller plan is going to be larger than the very largest plans that we have. But on average, the margins are very comparable in the end. So getting back to the full question around MEPs, that is a question I think that is still yet to be answered. Make no mistake there will be a lot of costs associated with the establishment and the oversight of these MEPs. I don't want anybody to get off this call thinking that it's a panacea that with the passage of a MEP there's all of a sudden going to be an incredibly low-cost option out there because it -- I just don't think that that's going to materialize. It will over time provide choice to small employers as Renee described earlier who may not or may feel that there's a different fiduciary role that's being completed or different investment options. But I suspect, we're a year away from being able to answer your question Andrew on the specificity around the competitive nature of -- in a MEP or a small plan.

Got you. Okay. And then maybe shifting over to Specialty Benefits. And you had a really nice change in premium over the last 12 months of fee premium and fees of about 7%. As you look forward, where do you see most of the growth coming? Would you expect it in voluntary? And with that, are you seeing any signs of heavy competition and pricing pressure?

I can never remember a time where we didn't have heavy competition and pricing pressure in any of these businesses. But again, a lot of credit to Amy and her team for what they're putting in place their focus, their retention. But I'll let her specifically answer your question.

Yes. With regards to -- kind of starting with the pricing pressure, I think we do always see that pricing pressure. I think what -- and I feel like a bit of a broken record here talking about the small case market. But when you look at the small case market, there are just some dynamics there that sort of serve as natural gates that keep some of our other competitors out of there. You got to do things in the scale to -- you have to process 10,000 cases a year as opposed to 1,000 cases a year. You have to do some things with your in-force pricing. You have to be willing to look at it as an advantage that you can have make a pricing decision because you're -- most of your block is only in a one-year rate guarantee. So what I can guarantee for us is we will continue to grow in that small case market. We've built a system that works for that footprint. We have the underlying technology and we have an awesome sales force lined up against that. I would argue that some of the relationships we have with brokers and advisors who serve those markets -- and again they're not always the bigger name sort of regional or national players. A lot of these are people who have businesses that serve small local communities and we've established really deep and strong relationships there. So as the economy continues to grow, as businesses continue to hire and add, I would continue to see that being a fuel for our premium and fee growth for SPD.

Thanks for the questions, Andrew.

Thanks.

The final question will come from Ryan Krueger with KBW. Please go ahead.

Hi, thanks, good morning. My first question was on international. You referenced the $80 million of adjusted earnings as a good starting point going into 2020. That seems a bit lower than what was implied by the guidance in December. So, I just wanted to clarify, if I was thinking about that correctly. And if so what caused the change?

Luis you want to help clarify that? Luis Valdés: Yes. Let me try to put this in perspective because, we have had this discussion. And particularly when you're looking, what we have reported in Q3 first, so it looks like we're -- we have a comparison with that. It's $92 million versus $80 million. It's important to put this in precise very easy to explain the difference. First of all, $4 million headwind in FX. The same $4 million that we have an additional and an elevated prepaid -- prepayment fees and $3 million more about elevated expenses that are related with the recalibration of our business in Hong Kong and Chile. So, if you're taking that in consideration, you -- immediately you're going to make the math between $92 million and $80 million. I really believe that, as we said and Deanna said, the $80 million, $81 million that we're proposing is a good representation of our run rate into 2020 and it's pretty much more in line with our guidance that we put together in the month of December for PI.

Okay. Thanks. And then, just this last one, Deanna, you mentioned high single-digit EPS growth from a normalized level in 2019. Is the normalized level around $5.55, if I'm making all the right adjustments?

$5.55. So, I think -- are you looking at an after-tax basis or pretax basis?

I was -- I think -- I thought the high single-digit growth was for adjusted --

EPS. You're right. Yes. I don't have that right in front of me. I think how we would do that is, we took out all significant variances in 2019 and then we normalized for the integration costs in 2020. So, we can get back to you on that exact EPS. But that's how -- that's what led to that calculation.

Okay. Great. Thank you.

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

Yes. Thank you and appreciate everyone's questions this morning. I just want to assure investors out there that, we spend a lot of time aligning our expenses with our projected revenues. That's always been a hallmark of the organization. It will continue to be a focus of this management team. Second, we made a big bet with RIT and successfully migrating that over. That does not escape us and we focus a lot of time and attention to successfully migrating that business, the support. And you're starting to see the realization of that digital portfolio as we digitize our business and become more relevant. We have enormous confidence that those investments will continue to pay off for investors. So, we're going to stay focused on these efforts and certainly appreciate your continued support. We look forward to seeing you on the road. Thank you.

Thank you, for participating in today's conference call. This call will be available for replay beginning at approximately 1:00 p.m. Eastern Time, until end of day, February 4, 2020. 7479802 is the access code for the replay. The number to dial for the replay is 855-859-2056 U.S. and Canadian callers or 404-537-3406 international callers. Ladies and gentlemen, you may now disconnect.