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Principal Financial Group (NYSE:PFG)

Q4 2012 Earnings Call

February 01, 2013 10:00 am ET

Executives

John Egan - Vice President of Investor Relations

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

James Patrick McCaughan - President of Principal Global Investor

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

Analysts

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Sean Dargan - Macquarie Research

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

Eric N. Berg - RBC Capital Markets, LLC, Research Division

Erik James Bass - Citigroup Inc, Research Division

Yaron Kinar - Deutsche Bank AG, Research Division

Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division

Operator

Good morning, and welcome to the Principal Financial Group Fourth 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 fourth quarter and full year earnings conference call. As always, our earnings release, financial supplement, slides related to today's call and additional investment portfolio detail are available on our website at www.principal.com/investor.

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 Jim McCaughan, Principal Global Investors; Luis Valdez, Principal International; Tim Dunbar, Chief Investment Officer; and Julia Lawler, Senior Vice President of Investment Services.

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.

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 discuss fourth quarter and full year 2012 results. Second, I'll provide an update on the continued successful execution of our strategy, and I'll close with some comments on capital management. As John mentioned, we provided slides related to today's call. Slide 4 outlines the themes for today's call.

The company ended 2012 with a very strong fourth quarter. The business momentum continues to be strong, and with a better macroeconomic environment, the business fundamentals were able to come through to revenue and operating earnings. While there were some modest onetime positives, which Terry will discuss, we achieved a 16% increase in total company adjusted operating earnings per share compared to fourth quarter 2011.

We ended fourth quarter 2012 with a record $403 billion in assets under management and $30 billion in total company net cash flow for 2012, outstanding results reflecting ongoing momentum in the businesses. This reflects our competitive advantage and the strength of our advisor-focused distribution model, as well as the strength of our joint venture partners.

Some of the growth metrics from the quarter include: strong sales of $3.3 billion for full service accumulation, contributing to strong net cash flows of $1.6 billion in the quarter; strong sales of $4.2 billion in Principal Funds, contributing to net cash flows of $1.5 billion in the quarter; record unaffiliated assets under management of $98.2 billion in Principal Global Investors; strong net cash flows of $2 billion for Principal International; $85 million in Individual Life sales in the quarter, an increase of 56% over fourth quarter 2011, reflecting strong sales in all segments and continued success in the business market; and Specialty Benefits sales of 18% in the fourth quarter of 2012 over 2011, driving premium and fee growth of 5%.

Turning now to the full year. Total company results were strong, given difficult operating conditions. On an adjusted basis, full year earnings per share were up 12% over reported earnings per share of $2.66 for 2011.

Let me highlight some of the outstanding growth metrics from 2012. Full service accumulation had record sales of $11.5 billion, up 36% over 2011, and record net cash flows of $7 billion, which is 6% of beginning-of-year account values. Annualized net revenue on new sales is up 46% over 2011.

Principal Funds had record sales of $15.8 billion for the year, up 41%, resulting in record net cash flows of $7 billion for the year. Principal Global Investors had full year unaffiliated net cash flows of $7 billion, reflecting continued strong investment performance and demand for our broad investment expertise.

Principal International had record reported net cash flows of $9.3 billion, up 69% over 2011, leading to a record $69 billion in reported assets under management. Total assets for Principal International, including our China joint venture, were $80.5 billion at the end of 2012, up 32% from the prior year.

Net cash flows from our Latin American businesses continue to be strong, and we're generating increasing net cash flows from our Asian businesses as well. In U.S. Insurance Solutions, Individual Life full-year sales of $227 million were up 22% compared to 2011, driven by the nonqualified and business owner markets, which drove 55% of total sales.

2012 Specialty Benefits had sales of $256 million, a decrease of 10% from record sales in 2011 in what remains a competitive environment. The strength of our business fundamentals leads to growth in assets, leading to higher net revenues over time and ultimately higher total company operating earnings. Given the ongoing strength in our close ratios and our investment performance, we remain confident about our competitive position and our ability to continue to grow our businesses into the future despite challenging macroeconomic conditions.

Next, I'll comment on our success in further implementing our strategy in 2012. We announced 2 significant acquisitions last year in Latin America, solidifying our position as a retirement leader in the fast-growing emerging markets in this region. The acquisition of Claritas in April, a Brazilian retail mutual fund and asset management company, complements our existing pension leadership position in Brazil, where BrazilPrev, our joint venture with Banco Brasil, is the fastest-growing pension company in that market. As a reminder, Brazil is the sixth largest mutual fund market in the world and continues to grow at double-digit rates.

Additionally, in October, we announced our intent to acquire Cuprum, a premier mandatory and voluntary pension provider in Chile. We received all regulatory approvals and have completed the tender offer for this transaction. We expect to complete this transaction next week, further positioning The Principal as a retirement leader in Chile.

And in Mexico, with the 2011 acquisition of HSBC's AFORE and our exclusive distribution arrangement, we've successfully built scale in the AFORE market, which is the key to success in the mandatory pension market.

We've proven our ability to create a center of retirement and long-term savings excellence in key emerging markets in Latin America. This expertise serves us well as the long-term savings and retirement markets in Asia begin to develop. Our position in Asia is further strengthened by having large, well-respected joint venture partners like China Construction Bank, CIMB Group in Southeast Asia and Punjab National Bank in India.

In addition to strong joint venture partners, the synergies among our businesses continue to uniquely position us in these key emerging markets. In early 2012, we announced that Principal Global Investors was awarded a Qualified Foreign Institutional Investor, or QFII, license in China. Last month, we fulfilled our existing quota of $150 million. This demonstrates that Principal Global Investors' well-established and growing presence in Asia, with our strong equities management capabilities, provides a compelling proposition to clients.

Finally, we continue to pursue deregistration as a savings and loan holding company. This process will likely take several months. We remain hopeful that we will retain much of our ability to provide products and services to our principal bank customers without the ongoing oversight of our holding company by the federal reserve.

Strong investment performance continues to be a leading indicator of strong net cash flows. Our results continue to be strong across asset classes and are a differentiator for The Principal. As shown on Slide 5 and now referenced in our supplement on Page 1, 84% of our investment platform funds ranked in the top 2 Morningstar quartiles on a 1-year basis, 91% on a 3-year basis and 60% on a 5-year basis. As a result of strong investment performance results, driving large net cash flows, Principal Funds is now ranked 19th in market share for adviser-sold funds and 11th in net cash flows for 2012 based on rankings done by Strategic Insight. Our goal is to continue growing market share as we continue to develop innovative new products and expand and deepen distribution channels.

Our Investment Management + strategy, which encompasses a unique set of businesses, focused on the long-term savings, investment and risk protection needs of clients around the world, continues to differentiate our business model.

Finally, I'll close with some comments on capital management. We continue to operate from a position of financial flexibility as a result of our fee-based business model, providing increasing amounts of deployable capital. This model allows us to return capital to shareholders, as well as invest in our business through strategic acquisitions. In 2012, we allocated more than $2 billion of capital to common stock dividends, strategic acquisitions and share repurchases.

In addition to increasing the total 2012 dividend 11% over 2011, we announced last night that our board has approved a first quarter 2013 common stock dividend of $0.23, a 10% increase over fourth quarter 2012 as we seek to continue to increase our dividend payout ratio. Looking ahead to 2013, we expect to deploy approximately $500 million for common stock dividends, strategic acquisitions and any share repurchase. The bulk of share repurchases, if any, would be in the latter half of 2013.

Before I close, I want to mention that The Principal was recently named the #1 place to work among large money managers by Pensions & Investments magazine. Attracting talented employees is a key component for long-term success as a global investment management company. This recognition is strong validation that our aspiration of being a recognized global investment management leader is being realized.

Finally, I want to acknowledge and congratulate Julia Lawler on her new position within the company. Julia has been our Chief Investment Officer since becoming a public company. Julia has moved from her role as Chief Investment Officer to Senior Vice President of Investment Services, where she is responsible for overseeing the portfolios for Retirement and Investor Services, as well as Principal International. She'll apply the expertise she's gained from successfully managing the general account to a much larger share of the company's total assets under management.

Tim Dunbar has added Chief Investment Officer to his responsibility, as well as continuing to oversee [Audio Gap]. He's joined the company 25 years ago and has managed operations in Mexico and served in various roles in Principal Global Investors. I'm excited to have both Julia and Tim's expertise in these key investment management roles. Terry?

Terrance J. Lillis

Thanks, Larry. As Larry mentioned, the fourth quarter was a very strong finish to 2012, showing continued business momentum as we move into the new year. This morning, I'll focus my comments on operating earnings for the quarter and full year; net income, including [Audio Gap] the strength of our capital position and balance sheet. Reported fourth quarter 2012 operating earnings of $244 million were up 21% over the reported fourth quarter 2011.

Looking at Slide 6, you'll see the positive onetime benefits that helped fourth quarter 2012 operating earnings per share. The extraordinary and accelerated dividends the company has paid in fourth quarter 2012 benefited fourth quarter results by $0.03, and variable investment income from alternative investments added $0.01. Combined, these items benefited current quarter operating earnings by $0.04 per share.

On an adjusted basis, fourth quarter 2012 earnings per share were up 16% over the year-ago quarter, reflecting strong execution and lower share count. Looking ahead, first quarter 2013 will be negatively impacted by closing costs for Cuprum, as well as normal seasonality in Principal Global Investors and Specialty Benefits.

On a reported basis, 2012 full year earnings per share were up slightly. Adjusting 2012 for the third quarter actuarial assumption review, 2012 earnings per share were up 12%. This is a very strong result despite macroeconomic pressures such as low interest rates, a strengthening U.S. dollar and pricing pressures.

Now I'll discuss business unit results. Slide 7 and 8 are the same slides that we provided on our outlook call. They summarize the expected 2013 and 5-year revenue growth rates and margins for each of the businesses. These drivers of profitability provide greater clarity for earnings growth by business unit and are key to how we measure our businesses going forward. We continue to believe we'll achieve the net revenue and pretax margin ranges we announced at our November 27 call.

Turning now to Slide 9 on Retirement and Investor Services. Our Accumulation businesses had net revenue growth of 18% in fourth quarter 2012 versus fourth quarter 2011, driving operating earnings up 27% to $134 million. Adjusting for the benefit received from the extraordinary dividends paid by companies during the quarter and variable investment income, operating earnings grew 16% in fourth quarter 2012 compared to the year-ago quarter. Strong growth in account values was driven by very favorable sales and retention that boosted net cash flows and positive asset appreciation.

Fourth quarter operating earnings for full service accumulation at $81 million were up 39% from the year-ago quarter, reflecting 17% net revenue growth, improved quarterly pretax return on net revenue and $8 million dividend benefit.

Underlying fundamentals within full service accumulation remains strong. The sales pipeline continues to build and close ratios continue to improve. In addition, full year 2012 recurring deposits were up 11% over 2011, reflecting growth in eligible participant count as a result of strong sales and client retention.

We expect 2013 full service accumulation sales to be comparable to 2012 based on assets, but expect to achieve double-digit growth in annualized net revenue on new sales. We expect to continue to drive sales across all plan sizes, small, medium and large, but with greater emphasis on small to mid, where we will capture a higher percentage of proprietary asset management. This shift may also result in lower net cash flows in 2013, but again will enable us to drive higher growth in annualized net revenue from new sales.

Operating earnings for Principal Funds at $13 million in fourth quarter were up 25% from the year-ago quarter on 23% increase in revenue and improved pretax margin. On a full-year basis, sales and net cash flows were outstanding at $15.8 billion and $6.6 billion, respectively. We continue to see strong investment performance and high demand across multiple strategies, including global diversified income fund, preferred securities, MidCap Blend Fund, high-yield and our target-risk funds.

Individual Annuities operating earnings at $31 million, up 12% from the year-ago quarter, benefited $3 million from variable investment income, which partially offset continuing margin compression due to the low interest rate environment.

Slide 10 covers the guaranteed businesses within Retirement and Investor Services. Fourth quarter net revenue was down 3%, while operating earnings of $19 million were relatively flat over the year-ago quarter. On a trailing 12-month basis, pretax return on net revenue remained stable at 78%. We continue to approach this business opportunistically and we'll issue investment-only and full service payout business when market conditions generate attractive returns.

Turning to Principal Global Investors. Operating earnings of $26 million were up 50% over the year-ago quarter. Slide 11 shows fourth quarter revenues grew 11%, driven by higher average assets under management while holding costs relatively flat quarter-over-quarter. On a trailing 12-month basis, revenue is up 8%, and pretax margin expanded to 23%, both strong and expected results.

Investment performance remains competitive. The exit of a large Origin client, as well as a restructuring of the emerging market team, caused slightly negative unaffiliated net cash flow in the fourth quarter. However, we believe the negative flows were confined to the fourth quarter as the emerging market team maintained stellar performance following the transition, reflecting the strength and consistency of our investment philosophy and process.

On a full-year basis, unaffiliated net cash flows of $6.9 billion was very strong, reflecting positive flows in several categories such as currency, real estate and stable value. Our pipeline is at its strongest in many years, and we're confident we'll have strong net cash flows in 2013.

Looking at Principal International, fourth quarter 2012 operating earnings of $45 million are down $5 million from the reported fourth quarter 2011. However, as shown on Slide 12, adjusted operating earnings were up 14% when removing the additional month of earnings from BrazilPrev and the tax credits in the year-ago quarter.

Fourth quarter 2012 combined net revenue grew 16% over the adjusted year-ago quarter. Full year 2012 combined pretax return on net revenue improved to 56%. Despite foreign exchange headwinds during 2012, operating earnings, net cash flow and assets under management continued to grow.

Now that we're nearing the close of the Cuprum acquisition, let me remind you that earnings from the business will be on top of the existing strong organic growth that we're already seeing in Principal International. We continue to expect roughly $0.12 of total company earnings per share accretion in 2013 from Cuprum.

Turning to Individual Life, Slide 13 shows fourth quarter 2012 premium and fees grew at a strong 8% over fourth quarter 2011 due to strong sales in the current quarter. Operating earnings at $28 million were up 2% over fourth quarter 2011, reflecting the headwind from low interest rates.

On a trailing 12-month basis, after adjusting for the impact of actuarial assumption review and the amortization basis change, pretax operating margin is 17% within the targeted long-term range of 16% to 21%. We expect to be at the lower end of this range as long as the low interest rate environment persists.

Specialty Benefits operating earnings at $32 million were up 23% over the same quarter a year ago. Slide 14 highlights Specialty Benefits premium and fee growth of 5%, a solid result, given continued pressure on employment and wage levels. Fourth quarter 2012 operating earnings also benefited from a lower claims loss ratio. Despite the high group disability loss ratio in third quarter, the overall loss ratio of 68% for the year remains at the midpoint of our targeted range.

On a trailing 12-month basis, pretax operating margins of 9% is in line with our long-term expectation of 8% to 12%. Let me remind you that operating earnings for Specialty Benefits are very seasonal, where typically we roughly see 20% of annual earnings coming from the first quarter, 25% in the second and third quarters and 30% in the fourth quarter.

The corporate segment reported an operating loss for the fourth quarter of $39 million. We experienced additional debt interest expense until we early retired our 2014 notes in late December, as well as some costs associated with the Cuprum acquisitions, which were partially offset by miscellaneous income.

Looking at 2013, we continue to expect the normal quarterly run rate for corporate earnings to be a loss of $35 million to $40 million, with an additional $7 million after-tax loss of onetime Cuprum closing costs in first quarter 2013.

For the year, total company net income was $773 million, an increase of 25% over 2011, driven by gains from the sale of assets and better-than-expected credit losses. Aftertax credit-related investment losses in 2012 at $110 million, down 25% from 2011, reflect a continued downward trend to a multi-year low. Our investment portfolio continues to perform extremely well.

Book value per share, excluding other comprehensive income, finished 2012 at $29.20, a 7% increase over 2011, despite the write-downs due to the change in actuarial assumptions in the third quarter. This represents a solid growth in the company's intrinsic value.

2012 reported return on equity of 9.6% was negatively impacted by the third quarter actuarial assumption review. Adjusting for this, return on equity was 10.7% in 2012, up 50 basis points from 2011 despite the macroeconomic challenges.

Looking now at capital adequacy, we estimate our year-end risk-based capital ratio to be 415% to 420%. Relative to a 350% RBC ratio, we have approximately $2.5 billion of total deployable capital. Approximately $1.5 billion of capital is earmarked for the purchase of Cuprum. We expect to complete the transaction on February 4.

As outlined in Slide 15, we allocated $2.1 billion of capital for common stock dividends, strategic acquisitions and opportunistic share repurchase in 2012. The evolution of our less capital-intensive, fee-based business model allows us to continue a pattern of increasing our dividend payout ratio, representing 30% of 2012 net income.

Additionally, we repurchased 9.9 million shares, with approximately $260 million in 2012. Looking ahead to 2013, we expect to deploy $400 million to $600 million of capital with a continued commitment to increasing long-term value for shareholders. As Larry mentioned, last night, we announced our first quarter 2013 dividend of $0.23, a 10% increase over the previous quarter dividend.

In closing, we're very pleased with the continued growth and momentum of our businesses, as well as the outstanding execution by our team in 2012. This concludes our prepared remarks. Operator, please open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of Chris Giovanni with Goldman Sachs.

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

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 Donald Zimpleman

Chris, this is Larry. I'll have Jim comment on that.

James Patrick McCaughan

Yes, Chris. The large account that 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 of a loss there. However, I would point out that Origin has had growth from other sources, and we're expecting revenues in 2013 to be at or slightly above the run rate when we bought the firm just over a year ago. And just in case I can anticipate your next question, the testing of goodwill, 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 a case where 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're definitely in the frame and a very credible contender for that kind of case.

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Okay. And then just 2 other quick ones. One, in terms of the growth in number of plans. You're 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 Donald Zimpleman

Chris, yes. This is Larry. I think we said in the earlier comments to give you some kind of insight into that, as you know, the actual new sales were up about 36% in 2012. We commented that the annualized fee revenue of that business was actually up 46% over the prior year. So you can see that we're gaining traction, if you will, in terms of, if you will, 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 a 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 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.

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Okay. And then just last quick one in terms of the Cuprum acquisition, the multiple you guys paid 13x. The announcement this morning from Met, they're acquiring a similar business for 10.5x. 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 Donald Zimpleman

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 11x to 12x 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 that 2 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. And 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 is 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 Valdez

As Larry mentioned, our preliminary analysis about this transaction is confirming our evaluations for this business in Latin America, in particular 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 valuation for our acquisitions. And again, we are very clear that Cuprum was a very good acquisition for us and we're very happy about that.

Operator

Your next question comes from the line of Sean Dargan with Macquarie.

Sean Dargan - Macquarie Research

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 is baked in there, and at least 10-year treasury yields are higher. Should we not think of the outlook as being conservative now at this point?

Larry Donald Zimpleman

Sean, this is Larry. Well, we all know that a quarter's a quarter. So it's certainly true that the macroeconomic 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 sort of stay in a favorable mode and may even ultimately become tailwinds as compared to the latter part in 2011 and most of 2012 when the macroeconomic event -- factors were really headwinds. So perhaps some reason for optimism, but it's still very early.

Sean Dargan - Macquarie Research

Got it and one follow-up. You said that you are going to close the Cuprum acquisition next week, and you got the shares tendered from Penta. But I thought I saw something in the news about the Chilean regulators having a 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 Donald Zimpleman

Sure, I'll have Luis comment, Sean. 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 pensions regulator. So our intent will be to complete this transaction. We're estimating right now on February 4. So Luis, anything to add?

Luis Valdez

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 a very successful one.

Operator

Your next question comes from the line of Randy Binner with FBR.

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

I wanted to kind of jump to the couple of laws and policy items. One, Larry, you mentioned the S&L deregistrations kind of not affecting the bank performance. But I was wondering if we get a little more color on kind of what that looks like on the ground. And then the other question I have is just around DRD. We're right ahead of the budget that comes out in a couple of weeks or 3 weeks. I mean, any thoughts on how DRD might change with the upcoming budget?

Larry Donald Zimpleman

Yes, Randy, maybe a couple of comments. I'm not completely sure that I caught the gist of the first question on the S&L deregistration. I think that again, we continue to pursue that. As I said in my comments, we think it will take several months, but we don't -- we haven't seen anything so far that would cause us to think this is proceeding in any way different than we would have expected. It does appear that while there's still actually very few deregistrations that have been completed, it seems like a time frame in sort of the 6- to 9-month period sort of end to end, seems kind of reasonable. But I will also say if you've seen one deregistration process, you've seen one deregistration process because they really are all a little bit different because the entities may want to offer some banking products, maybe not others, another deregistration may not want to offer any at all. So they really are different. But again, I would just say that the discussions have been very, very constructive. I think the right questions are being asked and the right answers are being given and the process is moving forward. So we'll continue to keep you updated on that one, but again, everything is moving as we expect. On the DRD issue, I mean, there is a DRD tax benefit for an obvious reason to avoid double taxation. If we -- I think the only basis on which DRD gets changed, Randy, I think is if there's a broader corporate tax reform that happens in this country. And I would say while in the latter part of 2011 as I make my frequent trips to Washington, D.C. and listen to decision makers there, I might have had some hope in the latter part of 2011 that there actually might have been some corporate tax reform. But I will tell you that as I listen to the dialogue today post the election, I would say my view that the probability of corporate tax reform is going down and is going down fairly substantially. So I'm not expecting and we're not expecting necessarily any significant change in DRD unless a broader corporate tax reform happens. So that's about the best I can tell you on that one.

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

No, understood and we agree on that. I guess on the bank -- sorry, if I was vague in my question, but we assume some level of operating earnings from the bank and it's not a huge part of the business. But I mean, I guess so far, that process is not affecting how the business is operating or is it too early to tell?

Larry Donald Zimpleman

Correct, yes. So the bank earns about $8 million a quarter, and it's a little bit too early to tell as to how that might change. I think if we have -- if we're able to accomplish all the things that we want to accomplish with the deregistration, which would still allow us to offer some level of banking products, maybe not the full suite we have today, it could impact that number a little bit. But again, relative to total complex, it's not going to be significant. I hope that helps.

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

Yes, it does.

Operator

Your next question comes from the line of Eric Berg with RBC.

Eric N. Berg - RBC Capital Markets, LLC, Research Division

There seems to be a changing dynamic, you discussed it in detail in your 401(k) business, where asset growth seems to be slowing but meaning you're getting very strong net flows. But because those strong net flows are fairly stable and against a growing asset base, the rate of growth, while still positive, is slowing. It seems, too, that you're changing the nature of -- you're trying to change the nature of your customers in favor of customers who may give you more revenue. I don't know about the profitability but more revenue. There's so much going on here. I guess the first question would be this, maybe, Terry, could you go over exactly what you were saying about the outlook for sales in 2013 for flows and for revenues because those are 3 completely different ideas? And I just want to make sure, for starters, I understand that, sales, flows and revenues in FSA.

Larry Donald Zimpleman

Okay, go ahead Terry.

Terrance J. Lillis

Sure. Eric, this is Terry. What I said was that we're expecting sales for full service accumulation in 2013 to be a comparable asset level. However, the revenue that's going to be generated off those new sales should be at a higher level and then actually seeing double-digit growth in that revenue generated by those new sales. Why is that? Because as Larry mentioned, we're going to be focusing on and adding more resources to the smaller to midsize client, not necessarily moving away from the larger client. But as we do that, it will generate more revenue because we'll see more proprietary investment offerings. So as a result of that, there should be some additional profitability for the business.

Larry Donald Zimpleman

And just to make -- I'm sorry, just to finish off a comment on the flows because you asked about flows. So -- well first, on a general statement, Eric, you're correct that obviously a growing block of business, it can become more difficult to maintain growth as a block gets bigger and bigger and bigger. Witness Apple as an example as a company. So we sort of all know that's true. In the case of flows, again, what we'd expect is that sales will be relatively flat. Likely what that means, Eric, is that flows would actually be down a little bit. Net flows will be down from $7 billion. Now just so as people don't overreact to that, recognize that $7 billion of flows in 2012 was over 6% of the beginning-of-period account value. And you'll remember that our long-term guidance has been 4% to 6%. So we are outside the high end of that particular range. So the fact that flows maybe a little less shouldn't necessarily be a concern. It's really more back in line with what our longer-term guidance had been. And then finally, you have the issue of revenues, which Terry said, will be increasing our annualized new sales or annualized revenue of new sales another 10% to 15%. So what's happening here basically is that the margin, if you will, on new business and the margin on existing business are now starting to compress and get very close together, which is what's going to stabilize the overall returns on full service accumulation going forward.

Eric N. Berg - RBC Capital Markets, LLC, Research Division

If I could ask just one follow-up and then we'll go on to the next caller. Since you don't -- I don't think you report out that portion of your new money coming in the door that is going to be managed by Jim's group. I don't think you do as opposed to by sub-advised relationships or full third parties, both sort of completely outsiders. We don't get that breakdown. I'm looking for a way to keep score on how you are doing with this effort to bring in more revenue-rich business? And I'm just wondering about the following: do you think that we should be tracking as a way to keep score the rate of growth of your revenues versus the rate of growth of your assets with the idea being that if in fact you are succeeding in taking in more revenue-rich products than in the past, that rate of growth of revenues should be higher than the rate of growth in assets, if you can follow my line of thought?

Larry Donald Zimpleman

Absolutely, Eric, this is Larry. I absolutely follow line of thought and agree with -- conceptually agree with what you said. If you look at -- I think it's Page 27. We don't need to talk about it now. We need to move on but on 27 of our financial supplement, you can sort of track what we're talking about in terms of PGI's investments as a proportion of the full service accumulation platform. I would just say as a general comment on that, that percentage has been holding or increasing slightly. So PGI is managing about 55%, 56% -- I'm sorry. In total, the proprietary is about 66%, and PGI manages about 55 points of the 65 points. So we're doing well on that score. And the reason we've included the revenue in the script, we'll continue to do that or think about maybe adding that to the supplement.

Eric N. Berg - RBC Capital Markets, LLC, Research Division

Thank you for that reminder about Page 27. That's helpful.

James Patrick McCaughan

Then the page -- I mean Page 29 goes into detail that I think would answer exactly your question, Eric. This is Jim.

Operator

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

Erik James Bass - Citigroup Inc, Research Division

Do you think about PGI's current capabilities? Where do you think you're best positioned? And maybe what asset classes do you think you still need to add to or increase capacity? I guess related to that, can you talk about how you think PGI's positioned if we do start to see a shift from fixed income to equities more broadly?

Larry Donald Zimpleman

Yes. This is Larry, and first of all, let me also say, welcome and we appreciate the coverage that you've picked up on us. So with that, I'll have Jim take your questions.

James Patrick McCaughan

With your last question, which is really what happens if the emphasis goes in customer demand from fixed income to equities. As you know, we've done really well in Principal Mutual Funds and full service accumulation, as well as Principal Global Investors from the investor focus on yield-biased assets. We have had very good flows into high yield into preferred securities and then the global diversified income fund that was launched in Principal Mutual Funds. So as you rightly indicate, our strength in fixed income has stood us in very good stead in the last 2 or 3 years as that's been what investors want. We have actually got some very competitive investment products and equities as well, and some were mentioned in the script with the MidCap Blend Fund, which is the same team manages the Blue Chip Fund, which is Large Cap Quality Growth. We have the equity income fund and the capital appreciation fund at Edge. So if the start -- if the bias in investor demand towards equities continues as it seems to have started in January, then we will be extremely well placed to capture that looking forward. On the broader question of how we're managing Principal's investment platform, it's very important nowadays to have really top-performing assets in various categories. And then equities, for example, I mentioned our capabilities managed by Principal Global Equities and by Edge, we also have some very high-quality capabilities at Columbus Circle and at Origin. Their performance is probably broadly second quartile [Audio Gap] with their very strong capabilities that will show well at times. So with those 4 groups, I think we're pretty well placed in equities. In real estate, we've been a leader for a long time. Our big thrust for future development there is likely be to be towards international real estate. We've already got a global client base, a very strong global client base for U.S. real estate. The gap in our product range is really managing a private real estate on an international basis. So we're quite happy there, but we have work to do on the international side. And by the way, that can be both organic and by acquisition. And then lastly on fixed income, as you know, we added to emerging market debt with the Finisterre acquisition. We've been developing very successfully emerging market debt within Principal Global Fixed Income. So I would say our suite of yield-biased assets is probably taking our fixed income and real estate together about the strongest in the industry. I feel pretty good about where we are, but clients will continue to demand strong investment across the board. So as well as adding for gaps, I think some further diversification in our investment capability will be important so that we can continue producing for our clients and for sales channels top-tier investments whatever happens.

Erik James Bass - Citigroup Inc, Research Division

Perfect. And then just on that last point, it sounds like you expected that diversification to come both still organically as well as through potential additional M&A. Is that right?

James Patrick McCaughan

Yes, absolutely. I'll give you a specific example. We took our high-yield capabilities last year and developed short-duration high-yield products, which have gone very well with certain parts of the client base. That's the kind of organic diversification that needs to be done as well to satisfy changing client demand.

Operator

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

Yaron Kinar - Deutsche Bank AG, Research Division

I want to look at the full service accumulation business from maybe others because -- so new sales were up $3.3 billion this quarter, which clear on an absolute basis is an impressive number. But if I look at it year-over-year, it seems like growth has slowed down a bit. I was hoping to get a little more color on why that was the case.

Larry Donald Zimpleman

Yes, Yaron, this is Larry. The better metric really is to look at the sales over, I would say, I would recommend, a trailing 12-month basis. And of course, we're now at the point where we're calendar year over calendar year. So I think really the way to look at that would be to look at the whole year, which is $11.5 billion over $8.4 billion in 2011. Within the context of quarter-to-quarter, sales could be a little bit lumpy. So even though the fourth quarter sales 2012 were frankly just a bit higher, that wouldn't be the comparison because these things will kind of ebb and flow. In other words, there's not a lot of difference between having a 12/15 effective date, which is a sale in 1 year versus a 1/15 date, which is a sale on the following year. So you really need to get sort of a trailing 12 months. There's a lot of momentum behind the business. If we look at our pipelines, our pipelines continue to grow, and our close ratios actually continue to hold or get better. So we do have optimism going forward, albeit, as Terry has said I think both in his script and in some answers, what we're really focused on in 2013 is a combination of moving assets and moving net revenues. So it's going to be a balanced approach in 2013.

Yaron Kinar - Deutsche Bank AG, Research Division

Got it. And then in terms of the increased focus on small mid-level accounts, can you remind us kind of what you would characterize as a small account?

Larry Donald Zimpleman

Yes, good question. We normally think about smaller plans as being sort of in the below -- plan assets below the sort of $100 million to $150 million range is normally what we would think of as kind of small- and medium-size plans. So these are -- oftentimes, they're startup and quite often, they have $5 million, $10 million, and midsize would get into the $50 million, $70 million range. But those would be plan assets. Again, about 70% of the business we write is a takeover plan so there are existing assets. So those are -- that's our notion of small and medium.

Yaron Kinar - Deutsche Bank AG, Research Division

And do you think about it in headcount numbers as well or is it just assets?

Larry Donald Zimpleman

Well, we actually would probably think about it more in terms of assets per participant. So I mean that would really be the way we think about it. There are plans that have very large headcounts, and some competitors will go after those because they are a large headcount. But as we know in this business, Yaron, what really drives the business is the combination of revenue and profitability and revenue is, for the most part, revenue is tied to assets.

Yaron Kinar - Deutsche Bank AG, Research Division

Got it. I guess what I'm getting at here is I've seen the headlines over the potential impact of the health care reform on companies keeping headcount low below 50. I was just curious if that would have any impact on either growth trajectory or plans?

Larry Donald Zimpleman

Yes, I mean, frankly, I hadn't sort of extrapolated that into the whole equation, to be honest with you. I don't -- I think, really, as long as payrolls continue and salaries continue to sort of hold in at the level they are, as long as we don't get back to a 2008, '09 where you were seeing significant reduction in compensation in an attempt to save expenses. So as long as salaries continue to hold steady and merit increases continue to be given, those are all favorable trends for our business.

Terrance J. Lillis

Yaron, this is Terry. One of the metrics that we look at is the movement in the recurring deposits to get to that point. Pre-financial crisis, we saw a significant increase year-over-year in recurring deposits due in large part due to salary increases, deferral increases, participation increases as well as employment increases. Now we're seeing some of those deferral increases, the participation, the new contracts coming on generating that. But we're not seeing a lot of additional movement inside an existing plan in terms of new employees. Now in order for us to get a quantum leap in that recurring deposits, you'll see when employment comes back, you'll see that increase occur there.

Operator

Your next question comes from the line of Jimmy Bhullar with JPMorgan.

Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division

Larry, overall, obviously, it seems like it's actually a pretty strong quarter. A couple of points that I thought were a little weak, FSA margins came lower especially if you adjust for the DRD whether you look at it on a return on net revenue or ROA basis. And then PGI flows were a little light. You mentioned the Origin issue, but there's also the restructuring of the emerging markets' teams so do you expect an ongoing -- any ongoing weakness because of that?

Larry Donald Zimpleman

This is Larry. On the point about FSA margins, what I would say on that, and I've said this many, many, many times, is I think it's important not to take a period that's going to be as short as a calendar quarter and try to sort of annualize or divine some inflection point in that. I think the key thing here is that we are adding more revenue per dollar of new sales, we are compressing the revenue rates between the existing book and the new sales book, and that is going to stabilize those margins and move in to that range that we talked about over the long term. So I feel very, very good about where we are with our strategy around margins for that particular business. And I'll let Jim make a few comments on the emerging market restructure and how well that's gone because it's actually a positive point.

James Patrick McCaughan

Yes, the emerging market restructure led -- some clients obviously are unsettled by any change, and it led to outflows in the order of about $1 billion during the fourth quarter. Obviously, that was offset against the PGI levels some very robust inflows elsewhere. I would characterize the emerging market restructure as firstly, we have managed by recruiting people that know our strategy and have been with us in the past and have followed us closely. We've managed to put a very solid team together that actually is as experienced as it ever was before. And we've been around all of the big clients quite intensively because you obviously communicate very closely on any changes. And I would observe as far as we can see that they're pretty rock solid and actually very encouraging of those in terms of the way we're evolving that process. So we feel we're in a very good situation. Basically, we were very proactive in terms of communication and remain very close to clients and distributors. And I think basically, the $1 billion outflow was a short 10% of the assets managed by that group, and basically it was a fourth quarter event. We're not expecting any material amount going forward.

Larry Donald Zimpleman

And Jimmy, this is Larry. I would just make 2 quick additional points, data points. I said in my comments that PGI was recognized by Pensions & Investments as the top place for larger money management firms. It's interesting to note that the primary determinant of that award is based on employee input from PGI. So I think that should give you good insight and comfort about how the broad group of PGI employees feel about both PGI and Principal. And the second thing I would say and Jim's a little bit humble on this one -- the second thing I would say is in the restructured emerging market team, there were actually 2 employees who formerly worked at PGI who came back, who left and came back to PGI as part of the emerging markets' restructure. And I would venture to say you'll find very few instances in the asset management business where people would hold up their hand and ask to return to come back to the place they worked previously. So those are very strong proof points for PGI's capabilities going forward.

Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division

Okay. And not sort of dance on the call, but the Edward Jones partnership seems like it's gone pretty well so far. But maybe if you talk about it, if it's fully ramped up already or do you expect to further pick up in contribution from that?

Larry Donald Zimpleman

Yes, this is Larry. The Edward Jones relationship has gone very well. I think that the buildup of the pipeline to, let's just say, any given level but typically, we think in terms of $1 billion, is faster in the Edward Jones relationship and ramp-up than anything we had seen previously. Although I think in fairness, it reflects the fact that Principal really is a marquee name among financial advisers for either mutual funds or retirement plans. So that relationship's going very well and it is part of the contribution toward the increase in plan count of 1,250 in 2012. So we're very excited about that going forward.

Operator

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

Larry Donald Zimpleman

I'd just again like to thank everybody for joining today's call. We're pleased with our very strong finish to 2012, and we think that the continued momentum of our businesses makes us optimistic going into 2013, although we know there will be continued macroeconomic pressure. As we prepare to complete our Cuprum acquisition on Monday, we look forward to creating a best-in-class retirement platform in Chile and in other key markets in Latin America. We continue to believe that our fee-based business model gives us greater financial flexibility and the ability to create long-term shareholder value through capital deployment, as was demonstrated with our increase in common stock dividend announced last night. So thanks again, everybody, for listening. I look forward to seeing many of you on the road in the days ahead. Have a great day.

Operator

Thank you for participating in today's conference call. This call will be available for replay beginning at approximately 8:00 p.m. Eastern Time until end of day, February 8, 2013. The access code for the replay is 83659918. The number to dial for the replay is (855) 859-2056 for U.S. and Canadian callers, or (404) 537-3406 for international callers. Thank you. You may now disconnect.

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