The following recap provides an overview of the topics covered at the event to help you better understand the growth opportunities of this business.

Transcription

1 The Principal Financial Group Retirement and Investor Services Workshop Recap On Sept. 12, 2014, the Principal Financial Group held an investor event in New York City to provide an update on its Retirement and Investor Services (RIS) division. The two hour event started with a brief update from each of the five presenters followed by an extensive question and answer session. The presenters are all leaders with direct day to day responsibility within the retirement business and were able to provide a unique perspective to investors. The following recap provides an overview of the topics covered at the event to help you better understand the growth opportunities of this business. Greg Burrows, senior vice president with responsibility for Full Service Accumulation Greg provided the following comments: The Principal remains a retirement leader through key differentiators like Principal Total Retirement Suite SM and RetireSecure. We re also focused on addressing retirement income gaps through our retirement readiness program called Principal Planworks. Planworks encourages plan level features, such as auto enrollment and auto deferral escalation, to drive improved participation and deferral rates. Outstanding client satisfaction scores help drive strong retention and solid sales, contributing to growth in Full Service Accumulation. Nora Everett, president and CEO of Principal Funds Nora provided the key points regarding opportunities for Principal Funds. Principal Funds strategy is focused on asset allocation, multi manager, outcome based funds. As a result of this strategy and strong investment performance, Principal Funds is now the 15 th largest advisor sold mutual fund company 1. We ve had exceptional success with funds targeted to investors nearing and in retirement that address risks and income needs. Page 1

2 Jerry Patterson, senior vice president Jerry has responsibility for Individual Investor as well as Annuities and Full Service Payout. His comments focused on our success and opportunities in these areas. We have a strategic focus on the retirement income opportunity with Baby Boomers pouring into retirement. The good news is we have been ready for this for decades. We are and will continue to be a retirement leader at the plan and the individual level. We have a broad lineup of income focused products, including mutual funds and annuities. We are judiciously using our balance sheet to create strategic leverage when we opportunistically deploy guaranteed income solutions. The generalist wholesaler model to deploy income annuities has proven to be successful. Tim Minard, senior vice president U.S. Distribution Tim oversees distribution for all of The Principal s U.S. businesses (RIS and USIS) and is in an excellent position to comment on the following points. Strong sales continue across all retirement products due to the competitiveness of our products and the strength of our distribution partnerships. We continue to have the ability to drive value to both specialist and generalist advisors because of the breadth and quality of our products and solutions. Pipeline and close ratios remain solid across all plan sizes, though timing of net cash flows can be impacted by a variety of factors, which can make comparisons difficult. Kevin Farley, CFO Retirement and Investment Services Kevin expressed his optimism in achieving the five year outlook provided at the end of Specifically he noted the following key points. Our best in class and balanced portfolio of outcome based products will continue to position us for growth. We ll maintain strong expense management despite investments in the business. Margins continue to be attractive across our retirement businesses and we expect that to continue going forward. Page 2

3 Investor question and answer portion of event: Q1. You ve mentioned growth of the fee based products and also being opportunistic in the spread based products like pension closeout sales and guaranteed income products. Isn t The Principal shifting to more of a fee based model? A1. At a total company level, all of our businesses are growing but our fee based businesses are growing faster than the risk and spread based businesses. The same is true in our RIS business. The fee based businesses of Full Service Accumulation and Mutual Funds are growing faster and are the majority of our earnings. However, across the company and within RIS we continue to expect above market growth rates in all of our products. We like the diversity of our business model and think it affords us flexibility, growth opportunities, and stability. Q2. Are RIS Accumulation pre tax margins sustainable in 2014 and 2015? On a trailing twelve month basis, margins were 33 percent, so above the 2014 and long term ranges. A2. We remain confident that the percent long term range for pretax return on net revenue is an attractive and sustainable range for this business. There will be economic cycles where we ll be above or below those ranges. A strong equity market and additional variable investment income have contributed to higher margins thus far in We ll continue to invest in the business and, assuming more normal equity market returns as we go into 2015, returns could return back to the provided long term range. This business is capital efficient, which benefits the balance sheet. In regards to current strong margins in FSA, we continue to execute this business exceptionally well and remain competitive in the marketplace. Year over year we rank at the top of an industry benchmark study in terms of profit margins and opportunities for growth. Q3. What s the competitive landscape in FSA in terms of repricing? A3. Competitive pricing is not a new phenomenon in FSA. It s a process advisors and plan sponsors continuously evaluate together; they perform market checks to ensure pricing for services provided is competitive. We expect to maintain outstanding client retention as a function of our ability to deliver high quality products and services. Page 3

4 Q4. What do FSA sales look like in the second half of 2014? How should we look at FSA net cash flow for 2014? A4. As we said on our second quarter earnings call, our goal for FSA 2014 sales is to be in line with the prior year. As we get closer to the fourth quarter, there s still some work to be done here. With a strong equity market, not as many plans go out for bid so there s not as much churn in the market. Regarding net cash flow, this will fluctuate as markets go up and down. For example, in a strong equity market environment like we ve recently seen, withdrawal rates have improved, yet dollars of withdrawals have remained similar to 2013 due to market growth. Q5. Are you sacrificing growth for profitability? A5. Our job as a management team is to find the right balance of growth and profitability, recognize the ebbs and flows, and adjust accordingly. We ll continue to focus on the right mix of profitable business, remain competitive in the marketplace, and provide top notch service. All of these lead to continued growth over the long term. Additionally, our strong investment performance is a leading indicator of growth. Q6. Traditionally, target date funds inside of 401(k) plans have shifted to more fixed income focused as people enter retirement. What s your view on the best target date glide path to help people get to and through retirement? A6. We believe strongly in the effectiveness of target date and target risk funds to help individuals save for retirement. Asset allocation uses a broad mix of fund types and the goal is to be outcomes based. We ve proven our ability to be successful with this strategy in our mutual funds and 401(k) business. Since ours is a hire through retire strategy, we feel the best glide path provides a balance of equity and fixed income options not only as people save for retirement but also to help them through retirement. Q7. Are you interested in the large case pension closeout business? A7. We have been in the pension closeout business for a long time. We are able to quote on 100 percent of the market if we want to. Our sweet spot for this business is $50 million and under because that s where we feel we can get the best return, in the mid teens range. We will do a deal above $50 million if it makes sense, but we probably aren t going to play in the jumbo space like the recent GM and Verizon deals. We re judicious about how we approach this business because of the capital requirements needed as well as to maintain our profit requirements. Page 4

5 Q8. What are the opportunities in the Defined Contribution Investment Only (DCIO) business? A8. We entered into this business approximately five years ago, so we aren t new to this space. Much of our DCIO business is driven by the advisor. Because we have strong relationships with advisors, we re being brought into the conversation regardless if the plan sponsor wants the total retirement package or just investment only. Strong investment performance will continue to drive those opportunities as well. We obviously want to handle both the recordkeeping and investment management, but if they choose another record keeper, we feel good about our DCIO offering. Q9. How do you categorize the relationship between Principal Funds and Principal Global Investors (PGI)? A9. We work closely as a team to maximize the synergies across the whole organization. Approximately 75 percent of Principal Funds are managed by PGI. Nora and her team work closely with leaders in PGI and are involved in discussions around strategy, product development, and M&A. When The Principal does M&A, it is for the benefit of the whole organization, not just one business. For example, recent acquisitions in PGI, such as emerging market debt, added capabilities for Principal Funds as well. Principal Funds is a multi manager fund company. So while Funds benefits from being a part of a leading global investment management company, they also provide clients with access to a wide variety of capabilities and options. Q10. Is there room for Principal Funds margins to expand? A10. Yes. When talking margins in Principal Funds, it is important to remember that percent of our revenue will flow through as commissions in the same period. We look at an adjusted Return on Net Revenue (RONR) on this business to account for that. The adjusted RONR has been growing at a good clip as we add scale. There is still upside, but probably not at the same growth rates we have seen in the past when our operations were just starting to ramp up. Q11. Transfer pricing between RIS and PGI is something that gets mentioned from time to time. Doesn t it make more sense from a multiples standpoint to have the earnings show up in PGI? A11. Our view is that the geography shouldn t matter to investors. That said, there are some reasons why the revenue PGI receives from the affiliated businesses is different than the revenue they receive on unaffiliated business. The overall size of the mandate they are managing for RIS would lead to some of that. Also, on the affiliated business, RIS is handling the distribution so keeping some of the revenue to offset that cost makes Page 5

6 sense. Finally, the investment mix is different. For example, PGI manages the money in the Index options for RIS. You wouldn t have that on the unaffiliated side. In regards to multiples, as long as the earnings fall to the bottom line, the geography shouldn t matter. But even if you want to think of it like that, Principal Funds should generate an asset management multiple in line with PGI s. For FSA, the multiple, in our view, should be a mix of an asset management multiple and a recordkeeping multiple. The revenue for managing the assets should still be thought of with the asset management multiple. Q12. Can you comment on recurring deposits? Are deferrals and matches coming back? A12. Recurring deposits will continue to grow, but at lower rates than we ve seen recently. As we said on our last earnings call, we expect recurring deposit growth rates to be in the high single digit range. Some of the growth we experienced reflects postrecession tailwinds employers reinstating matches and employees moving deferral rates back to pre crisis levels. Gains from these will be less of a factor going forward. Through our retirement readiness strategy, we continue to promote plan design features such as auto enrollment, auto escalate and different matching options to help workers build adequate savings. Over time, these continuous efforts will contribute to higher recurring growth rates. Page 6

7 FORWARD LOOKING STATEMENTS Certain statements made by the company which are not historical facts may be considered forward looking statements, including, without limitation, statements as to operating earnings, net income available to common stockholders, net cash flows, realized and unrealized gains and losses, capital and liquidity positions, sales and earnings trends, and management's beliefs, expectations, goals and opinions. The company does not undertake to update these statements, which are based on a number of assumptions concerning future conditions that may ultimately prove to be inaccurate. Future events and their effects on the company may not be those anticipated, and actual results may differ materially from the results anticipated in these forward looking statements. The risks, uncertainties and factors that could cause or contribute to such material differences are discussed in the company's annual report on Form 10 K for the year ended Dec. 31, 2013 and in the company s quarterly report on Form 10 Q for quarter ended June 30, 2014 filed by the company with the Securities and Exchange Commission, as updated or supplemented from time to time in subsequent filings. These risks and uncertainties include, without limitation: adverse capital and credit market conditions may significantly affect the company s ability to meet liquidity needs, access to capital and cost of capital; conditions in the global capital markets and the economy generally; continued volatility or further declines in the equity, bond or real estate markets; changes in interest rates or credit spreads; the company s investment portfolio is subject to several risks that may diminish the value of its invested assets and the investment returns credited to customers; the company s valuation of securities may include methodologies, estimations and assumptions that are subject to differing interpretations; the determination of the amount of allowances and impairments taken on the company s investments requires estimations and assumptions that are subject to differing interpretations; gross unrealized losses may be realized or result in future impairments; competition from companies that may have greater financial resources, broader arrays of products, higher ratings and stronger financial performance; a downgrade in the company s financial strength or credit ratings; inability to attract and retain sales representatives and develop new distribution sources; international business risks; the company s actual experience could differ significantly from its pricing and reserving assumptions; the company s ability to pay stockholder dividends and meet its obligations may be constrained by the limitations on dividends or distributions Iowa insurance laws impose on Principal Life; the pattern of amortizing the company s DAC and other actuarial balances on its universal life type insurance contracts, participating life insurance policies and certain investment contracts may change; the company may need to fund deficiencies in its Closed Block assets that support participating ordinary life insurance policies that had a dividend scale in force at the time of Principal Life s 1998 conversion into a stock life insurance company; the company s reinsurers could default on their obligations or increase their rates; risks arising from acquisitions of businesses; changes in laws, regulations or accounting standards; a computer system failure or security breach could disrupt the company s business, and damage its reputation; results of litigation and regulatory investigations; from time to time the company may become subject to tax audits, tax litigation or Page 7

8 similar proceedings, and as a result it may owe additional taxes, interest and penalties in amounts that may be material; fluctuations in foreign currency exchange rates; and applicable laws and the company s certificate of incorporation and by laws may discourage takeovers and business combinations that some stockholders might consider in their best interests. 1 Strategic Insights Mutual Fund Management Companies Rankings and Analysis, June 2014 Page 8