Principal Financial Group Earnings Call Insights: Origin Account Losses and Conservative Outlook

Principal Financial Group (NYSE:PFG) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Origin Account Losses

Chris Giovanni – Goldman Sachs: I guess, first question, can you comment just in terms of the large account that you lost within Origin? In terms of maybe what you were collecting on fees relative to the rest of the book?

Larry D. Zimpleman – Chairman, President and CEO: Chris, yeah, good morning. This is Larry. I’ll have Jim comment on that.

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James P. McCaughan – President, Principal Global Investors: Yeah. Thanks Chris. The large account exited Origin was about $800 million in asset value, and the fee was a bit lower than Origin’s typical because it’s a large account, but it was in the order of below 30s of basis points. So there’s a bit loss of there. However, I would point out the Origin has had growth from other sources and we are expecting revenues in 2013 to be at or slightly above the run rate when we bought the firm just over a year ago. Just in case I can anticipate your next question, the testing of goodwill there, we’re well in the right side of that one. So, although that was an outflow in the quarter, we are pretty confident of the general situation and the solidity of Origin’s client base. Just to elaborate, if I may, this was the case for a large client wanted to move several managers into a single strategic relationship. We pitched for that. I believe we were a very credible finalist, but on the day we didn’t get it. I think that’s true of many of these large institutional pitches, but we are definitely in the frame and a very credible contender for that kind of case.

Chris Giovanni – Goldman Sachs: Two other quick ones. One in terms of the growth in number of plans, you are getting some pretty nice growth there, really in all employer sizes. Can you just comment some on the fee dynamics in terms of what you’re seeing in that growth maybe versus your core book and what you currently have in place?

Larry D. Zimpleman – Chairman, President and CEO: Chris, this is Larry. I think as we said in the earlier comments to give you some insight into that. As you know, the actual new sales were up about 36% in 2012, but we commented that the annualized fee revenue of that business was actually up 46% over the prior years. So you can see that we’re gaining traction, if you will, in terms of revenue per dollar as it relates to new sales and part of that is as a result of focusing a little bit more on the small and medium. Now, I’m always little cautious because when we suggest that we’re focusing more in the small and medium, it sounds like we’re sort of running away from a different part of the market, and that’s not really the case. This really again is more about deploying additional resources and making additional investments. And so it’s not like we’re running away from an existing book of business or larger plans. We just think at the moment there remains a great opportunity. Part of this, as an example, Chris, is time with our Edward Jones relationship. You may remember we brought that relationship on at the start of 2012. And they’re an example of the type of firm that is completely and squarely focused on small, medium business. So just as we follow these opportunities, it’s taking us a little bit more in that direction, which, of course, we like financially anyway.

Chris Giovanni – Goldman Sachs: Then just last quick one in terms of the Cuprum acquisition, the multiple you guys paid 13 times. The announcement this morning from Met they’re acquiring a similar business for 10.5 times. So just curious why the price that kind of you pay, is it the assets to a participant where you think there’s better growth on the voluntary side? A little color would be helpful.

Larry D. Zimpleman – Chairman, President and CEO: Yes, it’s a very good question, Chris. I’ll make a couple of comments. Luis may want to add some things. First of all, I think that you would have to be a little careful of evaluating the sort of initial financials that come out in a transaction like this. There’s some confusion, I think, about the multiples because there’s a piece of the company actually owned by BBVA directly. There’s a piece that they control through ADRs. So there’s going to be – I think it’s going to take a little while before we ultimately know what that multiple looks like. I will tell you, based on kind of our own calculations, we think the multiples, both on their transaction and our transaction are in that kind of 11 to 12 times PE range. So I think by the time all the dust settles, we’ll find those are very comparable PEs. If they are comparable PEs, I would still argue that our Cuprum acquisition represents better value, and the primary reason for that is – two things. First of all, the average AUM per contributor is much, much higher in Cuprum. And Luis may be able to give you some detail on that. And the other thing is that the real opportunity in Chile, the real opportunity and the growth opportunity in the future is really on the voluntary side. So one of the things that you want to look at very carefully in evaluating an acquisition there is how many of the contributors are eligible for additional voluntary. So in the case of the industry overall, that’s about 50% of the contributors. But in the case of Cuprum, our acquisition, about 70% of those contributors are eligible for voluntary contribution. So, that’s really the growth opportunity and the longer-term opportunity in the AFP business. So, I think there’s really no question that sort of pound for pound and strategically, Cuprum represents better value than Provida which is a well-respected AFP, but it’s more of a middle-income, lower middle-income, whereas ours is more of a middle-income and affluent sort of segment. So Luis any comment?

Luis Valdes – President, Principal International: As Larry mentioned, our preliminary analysis about this transaction is confirming our evaluations for this business in Latin America and particularly in Chile. As Larry mentioned, you could see some differences between Cuprum and Provida, but all in all, we are very clear that we have the right evaluation for our acquisitions, and again, we are very clear that Cuprum was a very good acquisition for us and we are very happy about that.

Conservative Outlook

Sean Dargan – Macquarie: When I think about the strong operating results that you showed in the fourth quarter, and I look at the assumptions baked into your 2013 outlook and I think the S&P 500 has performed better than that’s baked in there and at least 10-year treasury yields are higher. Should we not think of the outlook is being conservative now at this point?

Larry D. Zimpleman – Chairman, President and CEO: Well, we all know that a quarter is a quarter. So, it’s certainly true that the macro economic conditions Sean that have been in place since our earnings driver call have been more favorable, the macroeconomic events have been more favorable than would have been implied in our earnings drivers. So, I accept the premise of the question. I think we’ll just have to see, however, because we obviously don’t do quarterly guidance, we don’t even really do annual guidance. We do guidance on earnings drivers. So I think we’ll just have to see as we go forward into 2013 whether those macroeconomic events are sort of stay in a favorable mode and may even ultimately become tailwind as compared to latter part 2011 and most of 2012 when the macroeconomic factors will really headwind. So perhaps some reason for optimism, but it’s still very early.

Sean Dargan – Macquarie: One follow-up. You said that you are going to close the Cuprum acquisition next week and you got the service tendered from Penta. But I thought I saw something in the news about the Chilean regulators having concern with the tender process. Can you just maybe give us an update on what that concern was and if that’s taken care of?

Larry D. Zimpleman – Chairman, President and CEO: Sure, I’ll have Luis comment on, but again, just to be clear the tender offer process has been completed. It’s been completed successfully and we do have in hand all the approvals from the pension’s regulator. So our intent will be to complete this transaction. We’re estimating right now on February 4. So Luis, anything to add?

Luis Valdes – President, Principal International: No concerns particularly about the tender offer in particular. The regulator was asking to — us to clarify certain aspects in the article within our prospect related with expenses mainly, but no concerns in particular. Those items were pretty clarified and the tender offer was declared very successful one.