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Principal Financial Group (PFG)

Q2 2012 Earnings Call

July 27, 2012 10:00 am ET


John Egan - Vice President of Investor Relations

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Larry Donald Zimpleman - Chairman, Chief Executive Officer, President, Chairman of Executive Committee, Chairman of Principal Life, Chief Executive Officer of the Principal Life and President of Principal Life

Terrance J. Lillis - Chief Financial Officer, Chief Accounting Officer and Senior Vice President

Daniel J. Houston - President of Retirement, Insurance & Financial Services

Luis Valdez - Chairman of Principal International Inc., Chief Executive Officer of Principal International Inc. and President of Principal International Inc.

James Patrick McCaughan - President of Principal Global Investor

Julia M. Lawler - Chief Investment Officer, Senior Vice President, Chief Investment Officer of Principal Life Insurance Company and Senior Vice President of Principal Life Insurance Company


John M. Nadel - Sterne Agee & Leach Inc., Research Division

Jay Gelb - Barclays Capital, Research Division

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Randy Binner - FBR Capital Markets & Co., Research Division

Suneet L. Kamath - UBS Investment Bank, Research Division

A. Mark Finkelstein - Evercore Partners Inc., Research Division



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

John Egan

Thank you and good morning. Welcome to the Principal Financial Group's second quarter earnings conference call. As always, our earnings release, financial supplement, additional investment portfolio detail and slides related to today's call are available on our website at

Following a reading of the Safe Harbor provision, CEO Larry Zimpleman and CFO Terry Lillis will deliver some prepared remarks. Then we will open up the call for questions. Others available for the Q&A are Dan Houston, Retirement, Investor Services and U.S. Insurance Solutions; Jim McCaughan, Principal Global Investors; Luis Valdez, Principal International; and Julia Lawler, our Chief Investment Officer.

Some of the comments made during this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. The company does not revise or update them to reflect new information, subsequent events or changes in strategy. Risks and uncertainties that could cause actual results to differ materially from those expressed or implied are discussed in the company's most recent annual report on Form 10-K and quarterly report on Form 10-Q filed by the company with the Securities and Exchange Commission.

I'd like to take a quick moment to remind you of our upcoming Investor Day on September 21. We look forward to the opportunity to provide you an update on our strategy and long term growth opportunities, as well as a deep dive into our distribution strategy for each of our businesses.

Now I'd like to turn the call over to Larry.

Larry Donald Zimpleman

Thanks, John, and welcome to everyone on the call. As usual, I'll comment on 3 areas. First, I'll briefly discuss second quarter results. Second, I'll provide an update on the continued successful execution of our strategy, then I'll close with some comments on M&A and capital deployment.

As John mentioned, we've provided slides related to today's call. Slide 4 outlines the themes for the quarter.

Second quarter saw a continuation of recent trends with strong momentum in sales and flows, while macroeconomic events impacted operating earnings. Despite a 6% decrease from the year ago quarter, second quarter total company operating earnings were solid at $216 million. Earnings per share were up 1% due to our share repurchases during the past year. The operating earnings result reflects persistent macroeconomic headwinds, including negative equity markets, low interest rates, strengthening of the U.S. dollar and stagnant job growth.

We also had lower variable investment income in the first half of 2012 compared to the prior year period, which Terry will comment on. Despite these macroeconomic headwinds, the fundamentals of our business remain strong and we continue to see sales pipelines grow. We ended the quarter with record assets under management of $367 billion. Second quarter net cash flows were $7.3 billion, which are more than double second quarter 2011 net cash flows. And so far in 2012, we have over $15 billion in net cash flows.

The sequential improvement in operating earnings demonstrates that we remained focused on execution as we strike the right balance between growth and profitability in this challenging environment. Our competitive position remains strong due to our innovative solutions, such as Total Retirement Suite for our retirement clients, voluntary benefit choices for our Specialty Benefits customers and outcome-oriented investment solutions for our mutual fund and institutional asset management clients.

We also continue to deepen and strengthen our relationships with key distribution partners. Key growth metrics from the quarter include Full Service Accumulation sales of $2.3 billion, up 34% compared to second quarter 2011. Net cash flows of $1.9 billion were nearly double that of the year ago quarter and reflect not only great sales momentum but also excellent client retention and growth in recurring deposits. Principal Funds had sales of $3.4 billion, our second highest on record contributing to our second highest quarterly net cash flow on record at $1.1 billion. Principal Global Investors ended the quarter with unaffiliated assets under management of $92.3 billion, a 16% increase over the year ago quarter and unaffiliated net cash flows of $2.1 billion, a strong improvement over second quarter 2011. Reported record assets under management for Principal International were $60.3 billion, up 14% over the year ago quarter and net cash flows of $2.3 billion are up 28% over the same time last year despite foreign currency exchange rate pressures and lower inflation in the second quarter in Latin America which reduces investment income. In U.S. Insurance Solutions, Individual Life sales of $45 million were up 6% over second quarter 2011. Specialty benefits premium and fees grew 5% over the year ago quarter to $361 million.

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