Principal Financial Group's CEO Hosts 2013 Investor Day Conference (Transcript)

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Principal Financial Group, Inc. (NYSE:PFG)

2013 Investor Day Conference

September 13, 2013 9:00 am ET


John Egan - Vice President of Investor Relations

Larry D. 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

James P. McCaughan - Chief Executive Officer of Principal Global Investors and President of Principal Global Investors

Rafaël Jean Guillaume Biosse Duplan - Partner

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

Nora Mary Everett - Chief Executive Officer, President, Director and Member of Executive Committee

Luis E. Valdés - Chief Executive Officer of Principal International and President of Principal International

Ned Alan Burmeister - Senior Vice President and Chief Operating Officer of Principal International Inc

Timothy Mark Dunbar - Executive Director, Portfolio Manager, and Head of Equities

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


Erik James Bass - Citigroup Inc, Research Division

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

Yaron Kinar - Deutsche Bank AG, Research Division

Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division

Joanne A. Smith - Scotiabank Global Banking and Markets, Research Division

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

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

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

Ryan Krueger - Dowling & Partners Securities, LLC

Seth Weiss - BofA Merrill Lynch, Research Division

John Egan

Well, good morning, and welcome to Principal Financial Group's 2013 Investor Day. My name is John Egan, I run the Investor Relations program here at Principal Financial Group. I want to thank everybody here today. I want to thank everybody who's listening via webcast. I want to thank all my Jewish friends for making time today for a, one, I promise I'm going to get you out of here on time today; and b, to you and your families an easy fast. One final thank you and probably the most important thank you to everybody who made today possible. Certainly, I'll start with my IR team. I thank Bar None [ph] the best, and I'm very grateful for them. In addition to that, I have a great support cast back in Des Moines, back throughout the world really, Principal employees that made today possible. So certainly a group effort, and thank you to everybody involved in this.

A couple of housekeeping items. I guess, first, it will be webcast. So if you have a question, and we encourage questions, please raise your hand. There'll be people, Principal people out in the audience here with mics and wait, identify yourself and ask the question. Likewise, if you're listening via webcast, just follow the prompt and you could submit questions that way, and we'll be sure to get to them.

Other kind of housekeeping items, if you have your cellphone, if you could either put it on mute or turn it off, that would be great. There are surveys that we certainly want to build off today. So if you do have 2 minutes and you could fill that survey out, it will really help us and certainly make these Investor Days better and better.

There will be some non-GAAP financial measures in the presentation today. There's a GAAP, non-GAAP reconciliation in the back of the presentation deck, so you can reference that. In addition, there's forward-looking statements. You can reference our 10-Q, 10-K on our website for more information on that.

So let me break out the day, the way it will shape up. What I'll do is I'll turn the stage over to Larry Zimpleman, our CEO, Chairman, President. He's going to give an overview of Principal Financial Group, the strategy, the vision; where we are today and more importantly, where we're going tomorrow. The focus today will cover all the business areas, but there's a focus on our investment management capabilities. Larry will turn the stage over to Jim McCaughan, who's President of Principal Global Investors. He will set the stage for our investment management strategy. Joining him will be Rafael Biosse Duplan, who is our Senior Partner at Finisterre, which is the acquisition we did in 2011. He's the emerging market, fixed income, asset management specialist. Rafael will tell you about his great track record and certainly what it's like to partner with Principal. There'll be 5-minute Q&A with Jim and Raf. After that, they'll turn it over to Dan Houston. Dan Houston will talk about the U.S. businesses. That entails the Retirement and Investor Services and the U.S. Insurance Solutions. Dan will also share the stage with Nora Everett. Now Nora Everett heads up our mutual funds, our Principal fund complex. And we haven't talked much about that, but it's a great story. And Nora is here to kind of bring you up to date, talk about the success to date, more importantly, where she's going with this business, and it's a great story. So that will be a great presentation. There'll be a 5-minute Q&A after that.

Then, we'll have Luis Valdes come up, and Luis will share the stage with Ned Burmeister. Luis is the President of Principal International. He'll give you an update on Principal International. He'll talk about our Cuprum, our acquisition, how the on-boarding is going there, how the synergies are coming together and kind of what that looks like going forward. Ned Burmeister will talk about the franchise we've built in LatAm and how we're going to try and use the best practices there and kind of replicate that into Asia and kind of what we're doing in Asia. So after that, there'll be a 5-minute Q&A, and then we'll actually break for lunch. There'll be lunch out in the back, and we have a 0.5 hour break.

When we come back, we'll have Tim Dunbar. Now Tim might be new to many of you, but certainly, he's not new to us here at Principal. He's been -- worn many different hats at Principal. He'll tell you more about kind of his background. But Tim will give you an update on the general account and investments. We'll finish our prepared remarks with Terry Lillis. Terry is our CFO. He'll talk about financials. He'll talk about all those questions that you ask me, ROE, capital deployment, et cetera. So Terry's ready to kind of talk about that. We'll finish the day with a 0.5-hour Q&A. So if we don't get to your questions during the short 5-minute Q&As after each of the business breakouts, we'll be sure to get to your questions at the end here.

Larry will be the emcee. We'll have all the presenters up here and, once again, we'll get to all your questions. So it's important. After the panel Q&A, we'll have an investor reception. And what we want to do is we brought not only kind of many people presenting here, but we've also brought many senior executives out because we wanted you to get to know them. We want you to see what they do, what their businesses are. And what I want to do next is introduce several of them. So during the break and during this investor reception, you have the opportunity to go up and talk with them. Maybe if I announce your name, you can just raise your hand so the audience knows who you are.

We have Todd Everett, who is -- now I'll introduce the PGI people first. Todd Everett is from our Real Estate Fixed Income Group. We have George Jamgochian from U.S. Distribution; Mustafa Sagun from our -- our Chief Investment Officer of PGI Equities; Jill Cuniff, who's President of Edge Asset Management; we have Tim Warrick, who's head of Credits Rating; Nigel Dutson, who's a Partner at Origin Asset Management, that was the other acquisition we did in 2011. Other executives that we're honored to have here today is Greg Burrows, who runs our Retirement and Investor Services; Tim Minard, Head of U.S. Distribution, that's both on the retirement side, on the insurance side; Tracy Bollin, who's Nora Everett's CFO, CFO of Principal Funds; Deanna Strable runs our U.S. Insurance Solutions; we have Karen Shaff, who's our General Counsel; Michael Roughton is our Assistant Associate General Counsel; Mary O'Keefe, our Chief Marketing Officer; Teri Button, who runs our Treasury Department; and Joe Wallace, who is a member of our Capital Markets Group.

Now before I introduce Larry, what I'd like to do is tell you a little bit of a story, something you don't know about Larry. Now you can imagine working for Larry. We all have goals, but Larry set out a goal for all of us that was a little unique here a couple of months ago, that had to do with health and wellness. What Larry challenged all the Principal employees to do is to come up with a challenge, a road race and make a record of it. And I got to tell you, everybody at Principal -- well, most everybody at Principal, has really taken this to heart. So when you do your mingling at this investor reception and certainly, the first thing you could do is ask them what they do at Principal, but then ask them what their challenge is, and this way to break the ice.

But with that said, I'm very honored to introduce Larry, and welcome to the stage here.

Larry D. Zimpleman

Okay. Thanks, John. Good morning, everybody. So John had to sort of embarrass me with the challenge because here I am with a bad foot. The only 2 I saw out -- the only 2 that are out this morning that I know of John were you and me. So I was walking, you were running. I'm hobbling, so I got to try to get healed up here over the next month or so, or I'm going to be walking if could at best.

Well, thank you, all, for coming. I think John indicated yesterday we've got somewhere around 140 people who had registered for this event. So we're very, very pleased and honored by that.

Let me just echo what John was saying a minute ago relative to an opportunity for those of you who are sell-side analysts, those of you that are investors in Principal, you have a great opportunity here this morning. Not necessarily what I'm going to say, but you have a great opportunity here because you have many people in this room who are, if you will, filling very important roles for the company. And I know you expect me to stand up here and tell you how great and wonderful everything is, and we're going up into the right and that's what people like me do. That's what we do.

But on the other hand, you have a very unique opportunity, and I'm so proud of everybody on this team and the many Principal people who are sitting in this audience who are really out there delivering everyday. And they do a great job, and I'm very proud to be associated with them. And I would highly recommended, if you get that opportunity, please, please interact with them. Ask them what they do, ask them how it's going. You'll probably going to learn a lot more from them than you are going to be listening to me, but you got to listen to me for the next 33 minutes and 35 seconds.

So okay, so here we go. As John said, Investor Day is kind of a unique opportunity for us. It seems like even more and more, as I reflect back over the period of time, been doing this since the IPO in 2001. I'm now the last dog standing from that group. And it seems like ever more and more with each quarterly call, we're so focused on that. We're so driven by trying to divine whether trends over the last quarter, is that the start of a new trend, is that a blip in the long-term trend, what the heck is going on. So we never really have a chance to talk with you about what it is that we're trying to do over the long term. And that's why this Investor Day is so very, very, very important for us.

So I'm going to try to do today is spend a little bit of time. I know this is not new. It's not necessarily kind of compelling and late-breaking news. But I think it's really, really important for you to really understand what it is Principal Financial Group is trying to do. Suffice that, I would tell you I think it truly is a unique and differentiating and powerful strategy that has been working, and I'll show you some information around that. But more importantly, I think we put in place a foundation that's going to build significant success for the company over the long term.

So I'm going to spend some time on strategy. I'm then going to talk a little bit about execution. And I think we've always been a company focused on execution, and you've heard me talk about era of execution. But I think we really have a great track record, which again, I'm going to show you with some examples of actually accelerating our execution since the financial crisis.

Many of our competitors, many of our competitors have been very focused on either redoing their strategy, selling off significant pieces of their business, trying to get the Federal Reserve out of their hair, whatever that maybe. And that has been, for us, a great opportunity. A great opportunity. Because we've been on our footprint. We've been moving forward. We've been implementing our strategy. And I think it's maybe a little bit of a sort of Midwest humility that we don't necessarily go out and pound our chest around that, and I'm not going to pound my chest this morning. But I am going to try to make the case that these last 3 or 4 years have been a time that we've been able to actually accelerate the implementation of our strategy. So I'm going try to kind of demonstrate that with some slides today.

Then I'm going to cover kind of the normal things. I'm going to show you a little bit about where we've been in terms of our businesses, the different growth areas. You're going again see some material on funds, on mutual funds, and Nora's going to come up later and cover that in more detail. And then, I'm going to wind up with some comments on capital management and ROE.

So with that, let me take off. Again, we now sort of call our strategy Investment Management Plus. Investment Management Plus. And I really think it is the right strategy in the right markets at the right time.

So let's talk about time. Let's talk about why is our strategy relevant today. And this has been a strategy slide that we have used consistently since we did the IPO in 2001. And as I reflect back on the financial crisis, what I would say is, the financial crisis has further strengthened and demonstrated, in my view, the relevancy of this particular strategy. Now again, there's nothing here that you don't already know. The question is, who's in position to actually capitalize on the opportunity?

So what we're talking about here is, first of all, aging populations. And you're all incredibly familiar with aging populations. In the U.S., of course, we call that the baby boom generation. But you also understand that, that is a global phenomena. Countries like Japan are currently seeing their populations decline. Countries like China have a significant aging population because of the one child policy. So you can go into every market and see this aging -- worldwide aging population no matter where you go.

Second thing is, and probably the one that has changed the most since the financial crisis, is fiscally constrained governments. Fiscally constrained governments. We see this playing out in Western Europe. And what I would say from my experience in the emerging economies is, they're not going to make those same mistakes. They're not going to make those same mistakes. And we've seen pension reform in Latin America in the '80s. We've seen a bit of it in the '90s. We're actually starting to see a little more pension reform in Asia. Ned and Luis will sort of cover that in their remarks. But fiscally constrained governments are certainly a reality. And even here in the United States, the government has promised more in terms of health care and retirement than it's going to be able to provide. And we're going to have a national conversation about that probably over the next 5, 10 or 15 years, and it's going to have to be a significant rationalization. It's going to have to go on.

Now historically, employers have been the place that individuals went to for financial security, right? That's the sort of '50s- and '60s-defined benefit plans, medical insurance, group insurance, disability income, et cetera. But even here, we see a scaling back, a continual scaling back and generally a move to voluntary as it relates to benefits. So at the end of the day, at the end of the day, it is the era of personal responsibility, and that trend is more firmly in place today than ever before. And the question again is, who is going to be in the best position to sort of harvest that opportunity?

Now I'm going to just segue very, very, quickly out of this. When we -- I think during the lunch today, we're in the process of launching a new advertising campaign, a new theme for our advertising in the near future. And it's really sort of using -- you'll see some film clips from some cabs that we wrapped here in New York, and we ask people to come and take a ride with us, and in that cab was a financial advisor. And it's really fascinating when you hear these people talk about what are the things that concern them. What are the things that concern them, and what can I do. Because our whole focus here is to take action. That's really what we're trying to do. So you're just going to see real-world examples of what people are thinking about given that we've got this era of personal responsibility. So we think that's the right time. The time is absolutely right for our strategy.

Right markets, you all know this story. This is really involves 3.5 billion people in the markets that we're in today. 3.5 billion people, half the world's population. So when people ask us, analysts, investors ask us, "Well, Larry, what are you thinking about for your next market entry?" My answer is, "I'm not really that focused on that. I'm focused on going deep. I'm focused on harvesting the opportunities in the markets that I'm in today."

And then, finally, the strategy. Again, you all have some familiarity with this. This is a strategy that is focused on the right solutions, outcome-oriented solutions, generally fee-based solutions, right, to secure one's financial future. And when I look at our company today, you see here our 4 major divisions: U.S. Retirement, Principal Global Investors, U.S. Insurance Solutions, Principal International. That is now a highly, highly integrated set of businesses. And the power of the Principal is that synergy, that synergy and collaboration that exist between the businesses.

Now you're very familiar with some of these because we've talked about it a lot. So for example, PGI manages 65% of the assets on the Full Service Accumulation platform. So you understand the linkage, right, between PGI and Full Service Accumulation. And again, that's a very unique, that's a very powerful synergy between those 2 businesses. Obviously, PGI manages virtually 100% of the assets for our U.S. Insurance Solutions.

But probably the ones that are a little bit newer to you are the relationships, for example, between Principal International and PGI. Now I happen to believe, and we happen to believe, that although they may be local investors today in Principal International, so let's hypothetically take a Brazilian investor, right? A Brazilian investor

comes to BrasilPrev, our joint venture, interested in saving long term for retirement. Today, they're thinking in terms of Brazilian. And they're probably thinking in terms of Brazilian sovereign debt because that's the primary market and that's the primary opportunity that's there. But we believe -- and we're already starting to see this, we believe that those investors, over time, are going to start looking for regional portfolios, they're going to start looking for balanced portfolios and ultimately, they're going to start looking for global portfolios. So the collaboration between PI and PGI is really the opportunity for Principal International to be that local asset gatherer that moves assets to Principal Global Investors for regional and for global mandates. And so we can bring solutions in those local markets that very, very few of those local competitors are able to do. That's a very powerful collaboration. And I would argue that even when we look at our competitors in many cases, it's very difficult for them to have that same level of collaboration. They just don't have those skills. They either don't have the local asset management skills, right? They don't have people on the ground in Brazil. They don't have people on the ground in Mumbai. They don't have people on the ground in KL or they don't have the global skills, right? And Principal is very unique in our ability to have the local asset management, have global asset management and a connectivity and collaboration between those 2.

In the same way, in the same way, the relationship between Principal International and our U.S. Retirement business. Again, you would think, well, those feel like different businesses. But the reality is that trends are trends. I mean, things that happen in the United States eventually make their way to other markets, right? And you can take any industry and that's going to be the case. So what we have in terms of the relationship between RIS, Retirement Investor Services, and Principal International is to be that sort of leading-edge innovator in the local Principal International markets that are going to allow us to gain significant market share because, for the most part, again, those are local competitors who can't really match the capability.

Now let me give you an example. Again, I'll just use Brazil because it's probably the best example at this point. LifeTime Funds have been a kind of known commodity in the U.S. for 15 years, 20 years, somewhere around that, right? Well, we took our LifeTime Funds concept, we took it to Brazil. We took it to BrasilPrev who launched the first LifeTime Funds in that market. Today, we have in excess of $1 billion in those LifeTime Funds in Brazil. Those are the kind of product solutions, outcome-oriented solutions that again is going to be very difficult for any local Brazilian asset manager to be able to replicate. And we have the opportunity to do that again and again and again, not just in Brazil, but to take those concepts and leading-edge product development ideas to all those local markets. So again, lots of opportunity for collaboration and sharing between our U.S. Retirement business and Luis and Ned's Principal International business over time.

So we've always been about execution. Again, era of execution, you've heard me say this before. But I want to now sort of move to that point I made at the start, that I think that our execution over the last few years has really accelerated our strategy and has really begun to distance us from many of our competitors, whether they're U.S. players or whether they're international players.

Now this sort of goes back a long period of time. I'm not going to talk about most of the things on here, it's small print. You have it in front of you. You can look at it if you like. But what I would say is, if you look at the periods since IPO in 2001, you'd notice 2 things: one is that we've accelerated, we've accelerated sort of our M&A activity, number one; and two, we very much focused that on both international and on asset management. So we clearly have been building out our international footprint and our asset management footprint in an aggressive way over the last 12 years.

So if we just now look at the period since the financial crisis, and I just put 2008 on here, just to take a look at what we've been doing. And remember that during this period of time, there are competitors of ours out there, or at least people that you all would call competitors of ours, for example, that haven't increased the dividend or haven't been able to increase the dividend, or haven't been able to repurchase shares perhaps until very recently. And in our case, we've increased the dividend almost 80% over that period of time. 80%. We've deployed over $1.1 billion cumulatively in dividends over that period of time, just since 2008. In addition, in addition, we've done 7 deals, 7 deals, 4 in the asset management space, 3 in the international space, that totaled $2 billion. So we've used this crisis period as the opportunity to more aggressively implement our strategy. So you're looking at a total capital deployment over that period of time of over $3 billion, not only to build out our strategy, but also as an opportunity to return capital to shareholders, return capital to you, right, to the extent we can't use it effectively to further implement our strategy. And I think, again, this is a very sort of unique story vis-à-vis many of our competitors, and we're going to continue to do this.

So the one that I want to just talk about very briefly, of course, of that $2 billion, the vast majority of that is as it relates to Cuprum. Cuprum is the premier AFP provider in Chile Bar None. And Luis, Luis, of course, started his career in Chile, and now is running Principal International for us here in the states. But Luis and his colleagues in Latin America have been calling on Cuprum for more than 10 years. Because I get the question that says, "But Larry, if they were such a premier provider, why in the world would they sell?" Right? Why would they sell, and why would they sell to you if it was such a great company?

Well, the reality is that, again, these companies and the owners of these companies recognize that their world is no longer a local world. Cuprum doesn't really have -- isn't in the hands of an owner who knows globally how to manage assets, where retirement trends are growing -- are going. Those aren't -- that's now where the playing field is moving to. So in the case of Cuprum, having had an ongoing discussion and relationship for them for 10 years, when the owners of Cuprum realized that their industry was changing and they were going to be challenged to be able to stay current with where the industry was going, they knew it was time to pick up the phone and call Principal. And that's how we're able to construct this deal.

So these things, again, they don't just happen overnight. They may take 3 years, 5 years, 7 years, 10 years. But at the end of the day, that's how winning strategic acquisitions are made. They're made in a very sort of proactive fashion. They're not an auction. They're done in a very strategic and thoughtful way. Now let me just say post the close, which I think was February 4 of this year, we announced it in October last year, we closed in February this year, as you'll hear from Luis, that was sort of record time. We've never seen one closed in 4 months. Again, it reflects the positive feeling that I think exists for Principal Financial Group in Chile. And since then, what I'm happy to report is that things are going even better than we would have expected. I won't steal Luis' thunder other than to say that again, once again, Cuprum was recognized for being the best in the AFP industry in terms of client service and investment performance. That's the 18th time in 22 quarters. 18th time in 22 quarters. So we're very, very happy with where we are with Cuprum.

Okay. So let me drop back, give you a little bit broader perspective, going back to the IPO. As I said, I'm really now the last one. Barry Griswell, many of you know Barry, led the IPO for Principal. Barry was a great leader. He was a great CEO. He put in place the strategy that I was talking about earlier in terms of the era of personal responsibility. But Barry is also a great salesman, those of you that know Barry. He's a great salesman. Because if you look at the IPO, at that point in time, we really only had one proven business, to be honest about it. Maybe if you wanted to be kind, maybe 2, if you thought about kind of the U.S. insurance businesses. But that was a more mature business, right? But we're certainly a player there. But the primary interest at that time was really around the 401(k), the Full Service Accumulation, the U.S. Retirement business.

However, however, we did tell an aspirational story, and this is where Barry's sales skills come to the floor, we did tell an aspirational story about the opportunity in the U.S. mutual fund space, in the Principal International space and in the global asset management space. We told a story around that, and we told a story around how we thought we could take advantage of those opportunities, harvest those and grow the company over time. Now at that point, as you can see here, $28 billion aggregated, $28 billion aggregated between those 3 businesses. So where are we today? We've gone from $28 billion to $302 billion.

So this is a story of creating an opportunity, implementing a strategy and executing on that strategy. So today, we now see each of those 3 businesses at that $100 billion level where we now have mass and scale, and we have the kind of margins that are appropriate for those businesses.

Having said that, we, of course, always do, and when Terry comes up here, he's going to talk a little bit more detail around sort of our 5- and 10-year projections, which for the most part are bottom-up projections. They're bottom-up projections, meaning, we go to the local, we go to the businesses. We ask them to get together as a management team, give us their best insight as to what they think the next 5 and 10 years may look like. And what they come back with, in terms of our latest kind of forward-looking views, is we think we easily have the possibility to more than double that in the next 5 years. More than double that in the next 5 years.

And so when I stand here and I look at the company today, with $450 billion in assets under management, and I think about what the company had when I started and when I joined the company in 1971, we had $2 billion. We had $2 billion. So this has been a real story of execution. A real story of execution. And again, I think, sometimes, in the press of sort of quarter-to-quarter, trends of this, trends around that, DAC asset this, DAC expense that, we can lose sight of some of the longer-term journey that we've been on as an organization and the opportunity that we have going forward.

In terms of operating earnings, again, at the time of the IPO, we were essentially a U.S. company. You see a very sort of small sliver here. That really represented a small stream of earnings from PGI actually at the time because Principal International was essentially a breakeven operation at that point. You can see where we are today now, back to $1 billion. Now about -- actually about 30%. This particular number doesn't have a full year of Cuprum in the numbers, okay? But if you actually try to sort of annualize for that, you'd say we're about 1/3 in terms of global earnings today coming from non-U.S. So we are well on our way to becoming a truly globally diversified company. And again, when we look forward, we think that turns into sort of 35% to 40% non-U.S. revenues and earnings within the next 5 years. So this is really what we've been about. This is really achieving our aspiration of really being a global investment management leader.

Strong business momentum. This really tries to just picture where we are today.

I don't really need to spend a lot of time on this. We've had 2 great quarters so far in '13. I can't predict the future. I don't really know, but I know we do have strong momentum. We have great distribution relationships. We have great service personnel. We have great sales people who are out there competing each and everyday. And you can go through every one of these businesses and, I think, be very impressed with the kind of momentum that exists.

Again, you'll hear in Full Service Accumulation, we're very, very focused on growing that new case revenue, ongoing net new case revenue. That's working very well for us. PGI continues to garner more than its fair share of institutional mandates, and Jim may talk about that in his comments.

The one I want to just spend a minute on that's relatively unique is U.S. Insurance Solutions. We don't give Deanna and her team enough credit for what they do. You all are pretty familiar, I think, with the U.S. insurance market or specifically, the U.S. life insurance market. And I don't know what you would say is sort of the industry growth rate for the U.S. life insurance market, but let's be kind and say it's 6%. Would that be kind? Sort of 5%, 6%? And you can see here, if you look at our U.S. Insurance Solutions sales, they're up 22% year-over-year so far this year. Now how does that happen? It happens because, first of all, we've got a focus on the right market. We're very focused on small medium business, and we're very focused on business owner solutions. Dan, again, is going to talk about this in more detail when he comes up here.

But it really is the ability to provide those value-added services that go along with the fact that insurance is a funding mechanism. Insurance is not the end. Insurance is just a means to the end. So whether it's nonqualified deferred compensation, whether it's a state planning, whether it's buy-sell agreements, there are real reasons why insurance is the right funding mechanism in those business owner situations. And that's what drives a 22% increase in sales kind of year-over-year.

Now I'm sure Deanna would be the first one if she were up here to say, "We're not saying we can drive a 22% sales increase every year." I can't say that we can do that. But it does show that there are ways to drive above-market sales, and it's not simply by trying to sort of price it aggressively and hope for the best. Right? That's not a strategy. That's not a strategy. But there are very viable ways with the kinds of nonqualified deferred comp, buy-sell activities that we do that really help us drive business.

Terry, again, is going to talk about this in his section, but this again is a journey. When we became a public company, roughly 30% of our earnings at that point were fee-based. Today, that looks like 60%. In 5 years, that's going to look something like 70%. And I would just -- and in the same way, let me say, from the standpoint of capital, we mentioned here higher dividend payout ratios. So today, we're in that sort of low 30% range, 30%, 31%, 32%. We are on our way to 40%. We are on our way to 40%. And when you think about each percentage point increase, that alone is an incremental kind of $10 million, $11 million of capital available to shareholders on top of what we get off operating earnings growth. So you are going to see exponentially the opportunity to return more capital to shareholders or to continue to successfully and aggressively execute the implementation of our strategy.

We are on track for the deployment of $400 million to $600 million that we announced at the end of 2012. We're sort of in that $405 million range right now, with different actions that we've declared. We still have a fourth quarter dividend. So we're well on track to be right in the middle of that -- at least at the middle of that range of $400 million to $600 million. So the story continues. We see the trend continuing. We believe we're on the right track.

A few comments on ROE. A few comments on ROE. I don't think I go to an investor meeting that I -- and it is the question. Because ROE is the measure of capital efficiency that you don't get the question about, "When can you achieve a 15% ROE?" Now I don't happen to believe necessarily that a 15% ROE is a magic number, although it sort of seems to be the hurdle that I think most people think about. I would start by saying, first of all, that we're one of the few company -- or a few, but we are a company that's had a 15% ROE. If you go back and look at 2006, 2007, we had a 15%-plus ROE. It's a really small print up here, and I sort of apologize for that, but if you go into -- you've got the books in front of you. If you go in and look at 2007, we reported a 16.4% ROE in 2007. And how do we get to that? Well, we had $1.1 billion of earnings, and we had average equity at that point of $6.5 billion. That's a 16.4% ROE.

Now what's happened since 2007, you can see we're sort of back to that $1.1 billion because what's happened is as we reflected on the lessons of the financial crisis, we'd looked at $6.5 billion today and we would say, "That was light. That number was light." It was light for the businesses that we had at that time. Because since then, we've sort of lost about $140 million to $150 million of spread and risk-based earnings, things like CMBS securitization; things like investment-only business; things like the medical business, which we've either completely gotten out of or wound down. Completely gotten out of or wound down.

So we've substantially improved the risk profile of the company. And we've now replaced that $140 million to $150 million with $140 million to $150 million of fee-based earnings. So the risk profile of the company has substantially improved and, at the same time, you can see we've grown the average equity by $2 billion.

Now I don't know and I don't -- and I would say, in a world that continues to have challenges, both in terms of macro economics as well as regulatory challenges, I would say management isn't yet settled and Board of Directors isn't yet settled on what the right number is. Is the right number closer to sort of $8.5 billion? Or is the right number closer to $6.5 billion? I think it's closer to $8.5 billion. But regardless, regardless, when we do our modeling, there's no question -- based on the businesses we're in today, there's no question that, that 15% ROE is not only achievable, but doesn't represent any sort of ceiling in terms of where we can go with ROE over time.

But again, in this world of lots of change and, to some degree, still macroeconomic challenges, that's going to -- we want that to unfold over a period of time. And we still believe that, that sort of 50 to 80-basis-point ROE annual improvement remains a very kind of viable target for us. So with that roughly 11.5% ROE today, that probably says in kind of 5-ish years, all other things being equal, we could easily achieve that level and continue to move beyond that over time. And again, Terry is going to talking about that in a little bit more detail.

So here's the longer-term record. Again, when we look at -- particularly, I think what's impressive here -- I showed you the 3 businesses now, each add over $100 billion. So we've grown our assets under management at a compound annual growth rate of 14%, while we look at an S&P that's grown to 3%. I think that's a very impressive record of execution sort of across the company. Because again, this has been asset growth across every one of our businesses.

And so again, I think in terms of 7% operating earnings, 9% EPS, I think it's a very credible record of execution. And really, the best is yet to come. I really have no doubt that the best is yet to come for this company.

I just want to say a couple of words because again, I think it signifies -- not only do we believe that we're making progress in implementing our strategy, but others believe we're making progress in implementing our strategy. And so let me just mention a couple of things on this page. First of all, the recognition by pensions and investments last year, that PGI, Principal Global Investors, was the #1 place in investment management, in asset management among the larger asset management companies, is a very, very significant recognition of the path and the progress that Jim McCaughan and his team have made over the last decade. And that's something that we're very, very proud of and, I think, again shows what -- how the rest of the world really views PGI and the quality of the team that Jim and others here this morning and others back in Des Moines and all around the world really represent. So we think that's one very important recognition.

I would also say the recognition from Nora's team, 4 Lipper Awards, she's going to talk a little bit about that. Again, it reflects a growing understanding that Principal Funds is a player in the U.S. retail market. You see the recognition by our Islamic Asset Management company in Malaysia, of the best Islamic asset management company. That industry is going to be a double-digit growth industry for the next several decades. There's no question about that. And again, we're well positioned to take advantage of that trend.

I would mention -- not on this slide, not on this slide because it was just released yesterday -- our Malaysian joint venture asset management company -- so not the Islamic company, but our asset management company -- CIMB Principal Asset management, once again won the award for best asset manager in Southeast Asia, the fourth year in a row that we've won that award. So again, these are very highly thought of companies operating in very fast-growth markets.

And finally, I just want to talk about IT. Again, we don't have time in the context of an investor meeting like this to really talk about our IT strategies, and I wish we did. But needless to say, Principal has been consistently recognized for its IT skill, innovation and expertise. You see here 2013 Best Places to Work In IT. It was our 12th consecutive year. And there's another recognition which has been given consistently over the last 25 years that is the most innovative users of technology. Most innovative users of technology. And this is not just a financial services thing. This is all industries. And again, we were notified about 3 days ago that the most, the 500 most innovative users of technology, Principal this year is #59 on that list. In 2006, we were #1 on that list. We've been on that list 16, 16 years in a row. So technology continues to be a very important enabler of our business.

So with that, I appreciate the fact again that all of you are taking time to be here. We know that you're all busy, and the fact that you'd take half a day to come and spend it with us is very meaningful to us. I look forward to the opportunity, first of all, to hear your questions when we get to that point, and then ultimately, be happy to try to meet with many of you as we go to lunch and have a reception. So thanks very much for being here.

And with that, I'm going to turn it over to Jim McCaughan. As you know, Jim is the CEO of Principal Global Investors. Jim is a 30-plus-year veteran of the global asset management business, and he's now becoming renowned for, first of all, his ties; and secondly, looking at him today, I think his socks. So with that, Jim McCaughan.

James P. McCaughan

Thanks, Larry. I'll try and give you a bit more of them ties and socks, but thank you. Thanks, Larry.

As Larry described, the way that we at Principal have evolved, investment management capabilities are at the root of everything we do. All of our businesses working to increase peoples' financial security, whether in the U.S. or around the world, are really dependent ultimately on our being able to provide strong and distinctive investment management capabilities that we work together with Simone. So the team a Principal Global Investors is really daily connected with all of the business units of Principal. And I hope to illustrate that with a few numbers.

What I want to do in the next 44 minutes, apart from answering questions at the end, is to give you an overview of, not only the strategy, but also the execution that Principal has in the investment management area. And I thought, when planning this, that it was best to tell you about some of our investment teams. We have 17 boutique asset managers within the Principal Global Investors group. And rather than go through all 17, which would monopolize the meeting, we're actually focusing on 2. And I will tell you a bit about Edge Asset Management, but if you really want to know it, its President, Jill Cuniff, is here, and we'll be able to talk with you during the breaks. And then we'll have Raf Duplan, a partner of Finisterre based in London, who I think is just a superb manager of emerging market debt. Emerging market is a hazardous area. We've seen that this year, but it's also, long-term, a very attractive area to be in. And Finisterre has handled the ups and downs very effectively this year. So Raf can tell you a bit about that.

So we'll give some of the general on Principal Global Investors, but also these 2, for instances, which I think are a taste of -- for what we have in all the other investment teams. Here are some high-level facts about Principal Global Investors. You can see on the left that we're quite diversified. $47 billion in real estate actually makes us a top 5 U.S. manager of real estate. A strong and growing equity group, with 4 of our groups managing equities and then around half of the assets under management in fixed income. You may well say to me, "Fixed income has been a miserable place this year." The Barclays Aggregate is down, whereas U.S. equities are handily up at the moment.

But I would say, we've been pretty well placed in fixed income. We have a lot of stable value. We have a lot of whats effectively stable value through general account assets. We have short-duration yield products in the high-yield and real estate debt areas. So I would say, we're a lot better placed than most bond managers. We haven't had the mistaken view that yields would stay low forever and you just had to push out on duration like many bond managers do. And so I'm pretty pleased with all of the areas in general, and we'll return in a moment to investment performance.

The other thing to say, some of the points made on the right of the slide, clients in over 60 countries are thinking as Larry talked, what was the number when we did the IPO? It wasn't a lot more than one. It might have been 2 or 3 countries at that point. So we have really developed into a genuine global asset manager, with people managing money around the world, but managing money for institutions and investors around the world. So 60 countries. It includes some of the biggest and some of the most demanding clients. The reason we've put this second point here, managing assets for 12 of the 25 largest U.S. retirement plans, and these are mandates, these are not simply investment-only bonds, these are mandates, and 8 of the world's 25 largest retirement funds, the reason we mentioned that is they're a tough crowd. And while we're providing investment solutions to the people that come to us through Principal mutual funds, our Full Service Accumulation, we are not thrusting proprietary asset management on them. We are a strong enough investment manager that coming to us for investment management excellence is a reason to do business with all our business units. And this is really a proof point of that in terms of us working with the roughest crowd, the toughest crowd in the industry.

And then Larry mentioned that we manage the bulk of the assets for some of the other business units, 60%, it says here, of Full Service Accumulation. I think that's rounded down actually. I don't think Larry's 65% is too wrong. I think that was rounded up. So anyway, close to 2/3 of the assets from Full Service Accumulation are managed by us at Principal, and then the vast majority of the mutual fund assets. Nora will talk about how she and her team have developed the mutual fund business. But we take very seriously the partnership there, that we have to produce strong investment capabilities and performance for them.

And the last point on corporate stewardship, what does that mean? Well, we've had awards for being the best in green real estate, for example, and the UNPRI is something we've signed up to. So we take that very seriously as a long term and sustainable business in investment management. That's the high level. It's produced, we call it here, steady AUM and revenue growth. I think I would actually plea for, on the revenue piece, a little bit better than steady. I think that's actually been quite good revenue growth. And a lot of that is dependent on providing innovative products that can get premium fees, and you'll notice the revenues have grown a bit faster than the AUM. We have had pricing power in particular in the institutional market because of our distinctive investment products.

Earnings growth. I think the thing to mention here is. 2011. So newly out of The Great Recession and the financial crisis, we looked at our margins and they historically were 20% pretax, with pretax profits as a proportion of revenues. And we as a management team felt, long term, that's too low. But cost cutting isn't the answer, because we need to continue to increase revenues for the opportunity ahead of us. And by the way, it is advantageous to our shareholders to continue investing in the business, and all of that investment is expensed. So the growth depresses the margins. So how are we going to get to where we want to be in terms of pretax profit margins? The answer is by growing some of these premium services over a multiyear period. And what we said in 2011 was, on a 5-year view, we'd get to 30% pretax margins. Well, first half, it was 25.3%, halfway there in 2 years.

So it's a long-term aim, and there is a long-term plan to get there. Some quarters, it'll look good. Some quarters, it'll look bad. But as Larry emphasized, we and the management team at Principal are really focused on what that strategy and execution can produce for our clients and ultimately, therefore, for our shareholders. So thinking about the longer term, we're well on the way to the plans we've outlined in investment management over the last few years.

So what are these growth drivers? Now I'll talk later actually about how the industry is changing, but we aim to be a top-tier manager. I'll define that in a moment, but part of it is in terms of investment performance. Serving all the businesses of Principal. This phrase, multi-boutique, I'm increasingly coming to the conclusion it really doesn't do justice to our operating modeling. You'll hear more about that later. But it's multi-boutique in the sense that we firmly believe that small and focused investment teams work better than big bureaucracies. Capital markets, as you all know, are incredibly competitive. And as a result, we think very focused investment teams going deep in the area of the rim is the way to go. So that's why multi-boutique works.

Now that, obviously, is less scalable perhaps than a big machine, but it's more in tune with the demands that clients have now in capital markets. The scalability comes in distribution and business processes. With that in mind, we have, over the last few years, set up a global operating platform for asset management implemented around the world in a way that all of our boutiques can exploit. And that works on operations. It works in distribution. And the fact is, when we take on a new boutique partner, one of the first things we thrust at them is the idea of doing roadshows with our clients all over the world. And that actually is one of the ways we get growth, and we've been very pleased with how that's worked. So the bulk of our growth is actually organic, and we use acquisitions as a catalyst for that growth.

So I think the multi-boutique is not really enough in describing what we do. The global presence and the shared services and shared distribution are also very important and, by the way, very distinctive. Several of the most successful investment managers in business right now describe themselves as multi-boutique. I would argue that our global platform, both operationally and for distribution, is better developed than of them.

On investment performance, I used the phrase top-tier earlier. What does that mean? Well, we have a number of quantitative measures. I won't take you through them all, but if you look at a broad range of investment products, and we have many, firms that do well over a long period tend to be above median. 40th percentile is a typical level. We monitor ourselves pretty rigorously quarter-to-quarter on a 1-, 3- and 5-year basis against that sort of measure. The average should be well up in the second quartile. So that will be one measure of top-tier. Another definition is avoiding the disasters, and there's not too much red on this chart and what there is, is very short term.

So if you look at top-tier managers, they tend to have very little in the bottom quartile and about 1/3 each in the others. And that would be another quantitative way of describing top tier. I should expect the management team monitors that kind of measure on a pretty rigorous basis. But in terms of sharing with you, I would just point to those 2 examples as ways we ensure we're competitive. But, of course, there are others. Do we have the outstanding products that people are focused on? And the answer is yes. And in the mutual fund space, I think Nora will talk about that, we provide capabilities that lead to 4- and 5-star funds. In the institutional space, are we search-competitive? And the answer to that is yes. If you look in the industry, this is an industry where leadership is changing a lot at the moment. There are some of the big names in investment management losing quite a lot of assets right now. There is a lot of churn. We're losing core mandates, as we've talked about in a number of the quarterly calls. But more importantly, we are tuned in to where the demand is coming from. And to the extent we're losing revenue as some mandates go out of fashion, we're actually more than replacing them, and that's why our revenues are growing.

So those are some of the definitions on top tier. But you can see on this, in terms of the 3-year annualized ranking, there's no red. That's very good. There's a preponderance of the blue, the top half. That's very good. And I think the sales numbers prove that we've got the competitive products. And I'm going to be counting on Nora to describe some of those later, because we work very closely together on those.

This is really talking about fund platforms. The top line here is principal mutual funds beautiful, the sub-advised piece, and that's the business that Dan and Nora are responsible for. Our UCITS funds are provided to international institutions, our collective investment trust to the large DC platforms and plans. And you can see there, in the longer term, no red, a preponderance of blue. In the short term, what do we do when an investment strategy gets into some trouble? Well, I think it's very important you do 1 or 2 things. You either change something, or you stick to your discipline. There's no halfway house in that. For an investment group that's showing up a bit of red on these dashboards, you need to be very clear as to which you're doing. And I can tell you, we have and are doing both in different situations, where we assess what the trouble is. And you will never have an organization where everything is strong, especially if you're diversified. But the key test of a management team is, can they put it right whenever there is anything showing up red on the dashboard? We have a track record of doing that.

In terms of winning mandates, here's a number. They are #29 on Institutional Investor's top 300 investment managers. We were, I think, in 2005, about #45 on that chart. So we're coming up. The peer group is an interesting one. It's a fragmented industry. But one of the key elements of that has been, as Larry described, the growth of our institutional and non-affiliated investment products. And you can see here the growth in the AUM in the recent years.

On the left, you can see there some of the recognitions. I won't go through that. That overlaps a bit with what Larry talked about earlier. But it's very much a proven multi-boutique approach, and it's distinctive because it leverages Principal's global platform.

I mentioned here strong succession planning. We've got 17 boutiques. In the last 3 years, 2 of them have had major succession events. They've been handed well. And I think that's always a difficult thing, because investment can get very personal. When the leader of a firm retires, is there a long term capability there? We are very rigorous about working on this and making sure we can execute.

This is a listing of our current boutiques. We've highlighted with a dark blue rim the ones that are represented in this group here. You'll hear from Finisterre in a moment, but please -- I think the Principal Global Investors group is all on that table over there, so grab them if you want to talk about how we manage money in the particular areas. 17 boutiques here. I'd make 2 or 3 points about it. One is, there's an awful lot of yield assets there not only in fixed income, but also in real estate and alternatives. Yield assets are important because of the demographics that Larry was talking about. We made the decision 10 years ago we'll have the best suite of yield investment capabilities available, because we see the demographics coming. I would argue we're getting there and that, that's one of the sources of our growth. And interestingly, with the way the markets have worked in the last 6 to 9 months, it's been important to get yields without too much bonds duration. And that's been something I think we've been quite successful in.

So that would be one feature. Another would be emerging markets. Not very fashionable this year, but long term, attractive. We believe the growth stories are still there. We have 2 groups managing emerging equities. That's Principal Global Equities and Origin. We have 2 groups managing emerging market debt, Finisterre and Principal Global Fixed Income. You'll hear from Finisterre in a moment. Long-term growth in emerging markets is something we are well positioned for.

So these are some features of the group of boutiques we've accumulated. There are some gaps. We will carry on looking for acquisitions, partly for gaps, but partly also to provide diversification in the big rivers of the investment industry. Equities are huge, but we've got 4 groups managing equities, the 3 -- 3 that are shown under equities here, also Edge. That's actually having diversification in a big river like that. It's very important for a platform and a broadly capable organization like Principal.

To then move on to the for instance and talk about 2 of our 17 boutiques. Firstly, on Edge, acquired in 2007, you'll recall, many of you, that we acquired Washington Mutual Advisors, the investment management arm of the now defunct Washington Mutual. That was a good acquisition for Principal Financial because it gave us momentum and strength to build on in retail mutual funds. But the other thing it gave us was Edge Asset Management, which is a very distinctive, very fund-oriented investment management group.

And innovation has been part of that heritage. The target risk funds, with 5 funds ranging from conservative to aggressive, are very important assets for Principal Financial working with some of our client bases. It's very interesting, for example, that the career agents who historically have been tied to the life business, they love the target risk funds because they can profile their clients and use appropriate levels of risk in a professionally managed portfolio. Lots of examples like that of these acquisitions and asset management, these organic developments in asset management helping the other businesses.

Then income-oriented strategies because of the demographics. So for example, the Edge income fund, the Edge equity income fund has been either 4 or 5 star for most of the last few years and actually is a very competitive product in that space.

So those are some of the high-level points about Edge. This is a listing more specifically of their capabilities. You can see it's kind of microcosm of the whole business in the sense that it's equity, fixed income and asset allocation but very much tailored towards particular approaches and particularly, income.

Edge has been very much involved across The Principal. We mentioned here, for example, the growth in assets under management. That's been terrific, and we bought this thing just before the financial crisis. So the growth has been very strong as it became possible. Over 95% of the assets are sourced by Principal. The 5% is growing fast, however, and one of the benefits from the point of view of Jill's objectives of growing away from Principal as you get better fees in the institutional market and typically, in the 30 to 40 basis points range. As you can see, the revenue of Edge is still fairly modest, $19.5 million in 2012, running at about 10 basis points of assets. That's because it's all managed for the in-house business or all of it in 2012 essentially was. But as that grows and as Edge provides more innovative solutions for the related businesses, that will be more added value and more revenues and also works more with external clients. Edge, for example, has a great success building business with UBS's financial advisors, and that's something that we'll aim to continue. So the growth story is really about investment performance and working with different distribution.

With that, I would hand over to Raf to talk about Finisterre.

Rafaël Jean Guillaume Biosse Duplan

Thank you, Jim. This is a real privilege for me to be presenting today at this PFG Investors Day here at the New York Stock Exchange. I'm very grateful for the opportunity that Jim and Larry are giving to me to talk about Finisterre for a few minutes. Finisterre Capital is a long/short investor and emerging market fixed income. We have an unconstrained global mandate to invest across geographies, asset classes and across the capital structure. Finisterre was founded about 10 years ago, in 2002. The majority stake was acquired by Principal in July 2011, and it's hard to believe how much we have done and achieved over the last 2 years. There are 36 professionals based across 4 locations in the world. We have 6 partners. Interestingly, of the 6 partners, 3 are funding partners of the business and 3 have been brought in, to Jim's earlier point, have been brought in as part of a deliberate succession planning dynamic, which we had in place before the acquisition, and -- the PGI is very much helping us take forward at this stage.

What we aim to do as a company is deliver quality returns across emerging markets, and quality returns meaning above-average returns, volatility-adjusted, being of good quality and with as little [indiscernible] as possible to the various asset classes that our investors will naturally be exposed to.

So this emphasis on a risk-controlled environment, this emphasis on protecting capital in downmarket is something that distinguishes us. We have been in emerging markets individually for -- partners have been for more than 20 and 25 years each. The fund has been going on for 10 years and has well performed over the cycle. And clearly, as Jim said, we're facing strong headwinds in 2013, in particular, and probably going forward as well, but we don't think this is a source of concern to us. I would say the other way around. It's probably the source of opportunities.

Our investor base is essentially institutional. We have, in line with some of the best-practice hedge fund in the industry, seen a migration of investors from fund-of-funds looking for short-dated outperformance towards public and private pension plans and insurance companies looking for quality returns over the cycle, anything that we have benefited from it.

Our AUM today, after the numbers we've seen, I almost have to apologize. It's a very small drop in the principal ocean, $1.8 billion. This $1.8 billion, which generated $47 million of revenue in 2012, so clearly, at the high margin end of the business.

I apologize for a lot of data on these charts, but the point we're trying to make here, you'll see some of these red dots are return volatility numbers for a variety of assets classes, including U.S. high-grade, emerging markets, external and local debt, S&P, Wall stock market, et cetera, and Safari FMG. If you're not familiar with this, it's the index that tracks emerging markets hedge fund returns. And a point here is twofold. The first one is over -- since inception, every single one of the Finisterre strategies have produced above-average returns, but they have done so not at the cost of above-average volatility.

So our contention is that there is an ability for hedge funds having a full gamut of outside tools to be able to produce -- not as much to produce higher return by putting more risk on but producing a better return by putting more intelligent risk on. And these are over -- carries off, respectively, 10, 7 and 7 years, that being reasonably robust over the cycle.

Our investors, I touched on it before. Geographically, they're well diversified across the U.S. and Europe. We have started with the help of PGI over the last 2 years, getting our thoughts together and leveraging PGI's distribution in the rest of the world. A big source of allocation to hedge fund is coming these days from emerging markets themselves. And we believe that in non-Japan Asia, in the Middle East, in Latin America, there are a number of places where we could be doing better, and PGI is helping us achieve this goal.

The partner institution, I mentioned briefly that we've been migrating from fund-of-funds toward pension institutions. About 70% across the firm today into credit strategies, about 90% of our investors who are pension institution. And we believe this number will be maintained as we specifically target this type of account and hopefully getting to a place to target Sovereign Wealth Funds as well by leveraging the core relationship of PGI in the field.

I'll make a small comment about the 4%, almost 5% of money that is allocated by partners in the place of Finisterre. We have, in-house, a philosophy of encouraging our partners and employees to invest with the firm. We think it makes good sense in a number of ways. It makes good sense for them because they've been good investments. It creates an ability to retain talents among the better-compensated employees. And of course, it creates a strong alignment of interest between our staff, our partners and our investors, which is good for corporate governance.

Our AUM have grown steadily since inception of about 25% growth rate. We're getting at a point now with the help of PGI on distribution, the added resources we're putting to the firm. We firmly believe that despite what's happening in emerging markets, our strategies are scalable from today's levels and that this ongoing growth rates, it would make sense for the Finisterre AUM to grow just somewhere between $3 billion and $5 billion over the next 3 to 5 years.

Let me focus for a few minutes on the various areas which have been great sources of successful partnership between Principal, PGI and Finisterre. We levered -- PGI distribution is one of the first win in Japan at the end of 2012, in other words, the first Finisterre product sold to a PGI client in the region. We also were selected to participate in a multi-strategy product put together by the fund company by providing a '40 Act-compliant version of the credit strategy. Thirdly, we used the immense capability that Principal and PGI have established in platforms in order to give some of our prospective clients access to products that just wouldn't have been possible were the platform not there. We channel and raise their money, for example, in one of the Finisterre strategies, and we're about to launch -- on top of an existing regulated product, the '40 Act product, we're about to launch using the strategy as well over the next couple of weeks, again, based on the platform, the Dublin platform, which PGI has set up, and thanks to their considerable work in the field.

And finally, we had also an investment directly from the Principal Life general accounts into the Finisterre credit strategy. So 4 areas in less than 2 years, distribution, innovation, facilitation through platform and direct investments, which have been -- would have been unthinkable for us at Finisterre to develop on our own, certainly not in this time frame. But also, we happen to believe, and I think that Jim agrees with me, that this is a fabulous area to look value, this place between the large traditional asset management industry-regulated product and which can bring hedge fund risk management skills.

James P. McCaughan

Thanks, Rafael. As I said earlier, I see the investment management industry as being in a remarkable time of change. The nature of that change, I think, is quite clear if you pause to look at what's happening to the various investment managers. What used to be strong for the industry was active core strategies. Give me 2% over a large index, and I'll pay you a fee of 50 basis points. Those mandates hardly exist anymore. And equities are, indeed, in fixed income. The clients who want broad market exposure are growing for passive, and that's one feature of the change. Another feature of the change, though, is the desire to have particular specialty capabilities, especially in less efficient markets like emerging markets, debt and equity, like high-yield, like private assets, like real estate.

So what we have done is -- we're not the big player in passive. That's a $1 trillion business, and there are some people doing that, but that's not us. What we are is going after the active piece, in particular, in these less efficient areas, and that's less efficient in a capital market sense. That's where we have developed a position within the investment management industry that we believe is very distinctive and extremely well aligned with where client demand is going. And that's really, I think, key to my belief that we are peculiarly well suited for this time of rapid change.

It's actually the late '70s since this industry was in such a period of change, and that was all to do with the invention of investment performance measurement, kind of an unusual industry that's had nearly 40 years without too much change, but it's coming. And it's in its early stages. But I think our growth in the last 2 or 3 years has been an indication of how well placed we are for that.

There are, in your books, and I won't go through a lot of detail, some descriptions of particular product innovation, but something I would say about this page is that quite a lot of it is about moving capabilities from where they started into other markets. So if you take global opportunistic equities, we started that as a USIS fund about 4 years ago. About a year ago, with a strong 3-year track record, we introduced it to the '40 Act world, and it's going well with institutions now. We nurtured and built that product, and that was under Mustafa Sagun's leadership. And that's now something that our clients really want.

Here's an illustration how something we did 4, 5 years ago has an impact now. This business is really not necessarily all about -- you have 2 good quarters, but it's not all about making each quarter good. It's like doing the right things that 3, 4, 5 years out will pay off. So that's an example. Edge equity income going into the non-U.S. areas, country sample, something we do well in the U.S., but the appetite for that internationally is fairly strong.

These are some recent and upcoming product launches. You'll see in the U.S., there is a continued emphasis on getting yield without too much Treasury duration, hence, things like PGZ, the Principal Real Estate Income Closed-End Fund that we launched here in the New York Stock Exchange in June. That is invested in CMBSs and other real estate debt. High-yield, not too much duration. I think there's a theme there, which is that it's very attractive for giving access to those markets to the individual investor. There's a lot of stories around these products. I give you them as something to look at just for evidence of the fact that we're moving rapidly into areas that people see us attractive.

I mentioned earlier green real estate. We started a green real estate fund, I think, about 4 years ago. It's done very well. It's a fund that went through its investment period and will have a fixed life. But we're launching another one. And based on that success, we think we'll get a lot of interest. So those are the types of things we're doing in terms of developing investment management product.

We're all around the world. It goes without saying. We show in such a bluish color where we manage money: portfolio management, research and trading. Some of the other areas are either operational or sales offices. And then the triangles indicate the offices of Principal International, who are our business partners in various local areas.

When I mix with people who do jobs rather like mine, running global investment firms, I hear a lot of them saying things like emerging markets have been good to us, but we now need local capability, and we got it. And we got it through the businesses that Luis leads in terms of many of those emerging markets. So we're just well positioned, I believe, for how things are changing.

This is a busy chart, but on distribution, at the top there, you can see Principal Global Investors on distribution, getting our clients to getting clients in the institutional market and also getting to private individuals through what we call third-party distribution, which is really very parallel to the alliance management capability that we have in retirement services. And then looking on the lower part of this chart, the international strategic alliances are important. You may wonder, CIMB Malaysia, it's not a big country. Well, Mustafa's group running equities has raised over $1 billion in the last 1.5 years from their clients in Malaysia for global investing. So these things can come through very effectively once the client attitudes turn, and then working with Principal's distribution across all business units.

In terms of the 5-year outlook, as Larry mentioned, we tend to try to build a plan to see things like what the capital uses will be, what the dividend policy will be and on so. This is really how, on a 5-year view, Principal Global Investors looks. And we don't think the growth we're suggesting there is too ambitious. We actually see the growth rates as being maintained rather than very much increasing. So we see the margin goal that we set 2 years ago being very sustainable, and we see our positioning relative to the market, as I've described it, as being very conducive to this kind of outlook, which will be a lot of value for shareholders and will also produce investment capabilities that will drive growth in the other businesses.

So really, to conclude the prepared remarks, these are really what I would say are the key takeaways on Principal Global Investors. I would actually say really not -- it's not put this way in the chart, but I'd say that we really do have just about the strongest investment management platform in the industry in terms of capabilities and performance. But also, we have the ability to deliver that in a lot of different ways through the other business units of Principal. And that's a great collective asset we have and really underpins, I think, Larry's confidence in our overall strategy.

And then this point about multi-boutique, we're a bit more than that, and it's the global distribution and global operating capabilities that make that the case. I was talking earlier with Raf about his aim to increase portfolio management in different parts of the world. Well, part of the answer to that is you, as partners of Finisterre, won't have to go set up an office and licenses and put systems in and so on because we've got all that. So that's actually something that can accelerate his growth and therefore, our growth. So the global operating platform is actually -- I would regard as a pretty big asset.

So with that, I hope that's given you a flavor of where we're going. We would like to take any questions that you have.

Question-and-Answer Session

Erik James Bass - Citigroup Inc, Research Division

Erik Bass with Citigroup. Just a question on margins. And I think you commented on the second quarter call that one reason that your margins look lower than competitors is because of the amount of in-house assets and the trends for pricing. Can you just help us think about how that would look on a more comparable basis and kind of if you see those assets kind of as truly as third-party?

James P. McCaughan

Yes. I think the response to that has to be in 2 stages. The first is from the point of view of the shareholder, it shouldn't really make a difference. When we manage a mutual fund, it's a little bit moot whether the money goes to the people managing the money or the people forming and marketing the fund. If you took Principal Global Investors and Principal mutual funds, we capture the economics, and there is a lot of investment management economics elsewhere. That'd be the first point I would make. It's really not that heated an issue, frankly, and not one that should get a lot of calories burnt by analysts. However, if you look at our business, we've never really disclosed what the different fees are as between transfer pricing and external. So you can work it out from the financial supplement. Our revenues on the institutional assets are comparable with others, but actually, in terms of the assets, risen a bit in the last few years. But close to 40 basis points gets you there. So the $100 billion of non-affiliate assets accounts in round numbers for about $400 million of revenues. That will enable you to parse really what's about in the PGI line, about in-house management and external. I think the financial supplement gets you there. But having said that, it's not something I would say is of vital importance to investors because we capture the profit in Full Service Accumulation and mutual funds in Principal International to an extent, as well as in PGI. I do think looking forward, though, a lot of this is legacy and historic. Looking forward, we have devoted quite a bit of assets to try and to get the split right. So over 2 or 3 years, I think you'll see something that is much more the sort of comparable you're talking about. So I know that's not a full answer, but I think it's about as -- I think it's a fair one in terms of the implications for the whole company.

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

John Nadel from Sterne Agee. Jim, I'm curious, looking at the 5-year outlook of growing AUM from about $270 billion to $400 billion, obviously, there's a lot of moving parts there, right? Market conditions, there's potential for M&A, there's the potential growth from Full Service Accumulation. Can you give us maybe some help in understanding what the component parts are that are sort of building up to that $400 billion?

James P. McCaughan

Yes. The institutional piece, we believe, will continue to grow both in revenues and assets by somewhere in the low to mid-teens. So in other words, that's, I think, is the biggest piece of the revenue Principal Global Investors looked at at the segment. It's also, from all the trends we're seeing from pipelines and so on, very promising on that timetable for low to mid-teens growth. The growth rates we have elsewhere are really a collaborative decision between us and primarily, Dan Houston's team because Full Service Accumulation, as you know from the last call, we're looking much more at profitability there than just purely asset growth. So you might deduce from that that the growth there might be slowing a bit. I think you'd be right there, but Dan can cover that in a bit more detail. So the fastest-growing pieces would be the institutional, as I've described, and the collaboration with Principal International, where they're certainly in the mid-teens to higher growth rates and where, as Larry described, there may be a propensity to increase the international piece. That's where the premium growth is coming from. The slower growth will tend to be retirement services and the general account businesses. I hope that helps with the flavor, but I think you'll get more about the RIS piece from Dan and Nora's presentation.

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

That's certainly helpful, Jim. Just one quick follow-up. Is there any acquisition activity built into that target at all?

James P. McCaughan


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

Is there any M&A activity built into that 4-, 5-year target?

James P. McCaughan

Yes, this particular one is x acquisitions. So the way we do it collectively, and Terry could talk about this, is we forecast out 5 and 10 years for particular businesses. So we then have a piece that we call acquisitions. So this is the organic piece. And I hope there will be acquisitions, of course. One more.

Yaron Kinar - Deutsche Bank AG, Research Division

Yaron Kinar from Deutsche Bank. In looking at the 5-year outlook and maybe following up on John's question, I think the only change I see from last year was in that $400 billion of AUM, the component of the non-U.S. assets now seems to be much greater. And is that simply a more successful execution of the emerging market platform, or is there more headwinds that you're -- or are there more headwinds that you're seeing in the U.S. than you initially anticipated?

James P. McCaughan

Yes, interesting question. I divide the U.S. into 2 pieces, actually. U.S. institutional is really tough, particular -- I mean, the U.S. corporate pension plans are very highly into passive and liability-driven investing, which doesn't play to our active strategies. So there's very much in the U.S. institutional space, not so much money in motion. So no matter how good we are, that's a difficult area to grow right now. In the U.S., however, we are pretty optimistic working with Principal mutual funds about what we can do in the high net worth and retail markets, particularly through the wire houses and the financial planner network. So the U.S. will be slower growing partly because of the constraints on the institutional market. But there is a bright spot, which is really that third-party distribution and where the private individual is. In terms of the international piece, the growth is not just about emerging markets. Japan is hardly an emerging market. It's in many ways the opposite. It's a very mature population, a declining population. That has been a terrific growth area for us because they're seeking yield. And so I think it's very much a matter of where the opportunities are. I mentioned Malaysia earlier. We were plunking away at Malaysia for years and not getting a lot, and then suddenly, you get quite a lot. International distribution is like that, but I would say on the institutional side, we see a lot more outside the U.S. than we do inside, but it's not just the emerging markets.

I think John wants me off, so I should introduce, not that he needs any introduction, Dan Houston.

Daniel J. Houston

Thanks, Jim. It's good to be here this morning, and great to see so many familiar faces. I'm going to take a shot this morning at discussing both USIS, as well as Retirement and Investor Services. I'll spend some time just talking about operationally, what's going on within the businesses, and I want to give you a bit of an update on the overall strategy for these businesses.

I say broadly, we're seeing nice recovery in U.S. amongst small to medium-size businesses. We feel very good about this particular segment. I'd be remiss if I didn't call out U.S. Insurance Solutions in my comments this morning. I realize that we had intended for this to be primarily focusing on investment management. But what I would tell you, the underpinnings of our USIS business very much depends on Jim McCaughan and his team doing superb job in asset management. I'd also remind you that if we look at -- about half of our sales that occur within life insurance are attributable to Retirement and Investor Services because it's the use of the nonqualified deferred compensation strategies. Half on the mutual fund, but the other half are funded with life insurance. So again, we feel very fortunate to have life insurance and other specialty benefit insurance products available to make to our small to medium-size customers. It's had nice earnings per share growth, and it continues to demonstrate nice stability for the organization.

I'd also point out here on the slide, you'll note that market share continues to be quite significant, in particular, as it relates to specialty benefits. You can also look at our industry ranking. Think about that, #2 in nonqualified deferred compensation. Again, very formidable. #5 broadly across specialty benefits. This represents nearly 79,000 relationships with small to medium-size businesses. So make no mistake. Insurance is a very important part of what we do. There's some overlap among the advisors. There's certainly a strong penetration in those small to medium-size businesses.

I know many of you within the last 48 hours saw a notification that came out from the New York State insurance department withdrawing from their support from the AG38 compromise. And later on, during our broader Q&A, we can get into it in more detail. What we would tell you is, when look at those current reserves, they're adequate. They're very much adequate. And they're very much in compliance with the stated rules and regulations of AG 38.

We've already talked to the State of Iowa Insurance Commissioner, had dialogue there. They, of course, have worked with a third-party actuarial consulting firm and confirmed back to us that these are adequate reserves and backup these -- to backup these liabilities. So again, that's something we'll work through. There's, frankly, still a lot of missing information. Not a lot was said coming out of the Commissioner's office, but we'll continue to work through that.

As it relates to this slide. I just want to point out that really, we think about it in 3 different buckets. And the first is around traditional individual insurance. We're probably unique in that we make a broad range of life insurance products available all the way from universal life with secondary guarantee to a more basic term product. But one of the differentiators is, we have a product that allows the investor to invest in life insurance that has a large component of accumulation. Again, this is very leverageable because, Jim, in many cases, is managing his assets in our general account.

Also, non-qualified deferred compensation. It's a very important part of our offering. It's part of our Total Retirement Solutions. About half the time, it's funded with life insurance. And I can assure you, as I look out there and see increased regulatory issues that we are up against relative to caps and so forth that may be put on qualified retirement plans, we'll all be very lucky to have options available to us that would allow us to top off these plans. When you hear from Luis, he talks about a similar form of program when they talk about the voluntary components in Chile because the qualified plan does limitations. So again, we feel very good about that.

And then Larry touched on it a little bit, Business Owner & Executive Solutions. They need our help, buy-sell agreements. They need our help as it relates to estate planning. They need our help as it relates to transitioning the ownership of these businesses to other individuals, and life insurance becomes a very efficient tool that allows us to do that. So about half of our overall sales are business-oriented, about half are not. And I would just tell you that our universal life with secondary guarantee is not one of the funding products that we use for deferred compensation, and about 40%, somewhere between 35% and 40% of our sales, would fall into the category of universal life with secondary guarantees.

Let me migrate here for just a moment and talk about our Specialty Benefits division. Again, led by Deanna Strable and her team. It's a very profitable block of business. It's very diversified. It's diversified by industry, diversified by coverage, i.e., long-term disability, short-term disability, dental and vision. Again, we have a really long successful track record of having managed these liabilities. You'll also notice in the blue bars here, the growth rate for Principal Financial Group relative with the growth rate of the industry. Again, we consistently are more profitable and have faster growth than many of our key competitors.

I'll migrate now to Retirement and Investor Services. We fought some headwinds here in the last few years. This year was kind of nice. We've got some nice tailwinds that we're working with. And in spite of those nice tailwinds, I'd also tell you that there's a lot of hard work going on down in the trenches. We're continuing to work with small- to medium-size employers, better preparing their plans as it relates to retirement readiness, preparing their baby boomers for retirement. This is where a lot of heavy lifting. This is where we take huge advantage by our broad range of distribution reaches to all the local markets in which we operate.

We've also seen some nice spread improvements that have occurred that have helped us in our RIS Guaranteed businesses. So let me drill down just a little bit in more detail some of you who aren't maybe as familiar with our story. But this is what I think of the Retirement and Investor Services operating system. We're trying to move from wealth accumulation all through retirement income. But you'll notice that orange bar across the bottom of the house here, that's investment management. We will be successful because of our ability to effectively partner with Jim McCaughan and Principal Global Investors to provide truly world-class asset management. And that's fundamental to what we do. And that's supported by the employers that we work with and supported by the individuals that we work with. And again, we have a nice range of products, whether it's mutual funds, Full Service Accumulation, annuity products, the life products. This collection of products and the networking that occurs within each one of these businesses is what allows us to enjoy a lot of success to drive future long term profitable growth for our shareholders.

There's one thing I want to point out here. And I'm going to have Nora clean this up when she gets on the stage. But we really do have to maintain one sleeve of investment strategy to support retirement plan customers, and there's another sleeve that's oriented towards what I'll call our retail individual investor.

Having said that, we get huge advantage though by overlaying that with the consistency in our Alliance Management Group. We maintain roughly 33, 34 relationships with very large institutions that are distribution partners of The Principal Financial Group. And they're representing PGI, PI. They represent USIS and RIS. So again, consistent messaging to our largest partners.

Secondly, asset allocation. These outcome-oriented funds. It has become and it is going to continue to be the primary way in which we are successful penetrating these markets. And then, lastly, Jim is very good, along with his team, in what he does. And at the same time, we are required, the market dictates it, that we also have a capability that allows us to hire subadvisors to help supplement our primary role of asset management. And again, Nora will get into that here in just a few minutes.

This is a very small random sampling of products. There's roughly 14 products here that have been launched since 2008. And again, raised over $10 billion. These all have that orientation around outcomes-oriented strategy, supporting this movement from accumulation to payout.

Let me migrate now and dive down a little bit deeper into Full Service Accumulation. This is obviously a very important segment for the organization. Greg Burrows is here. He leads this personally. On the orange bars, this is reflective of what the growth rates are for the reoccurring deposit -- or I'm sorry, net cash flows for Full Service Accumulation. The blue bars are The Principal's bars. And you can see in the case of Full Service Accumulation, that we consistently outpace the industry relative to net cash flow. You can say the exact same thing as it relates to mutual funds. So good, solid net cash flow growth for both Principal Funds, as well as Full Service Accumulation.

Full Service Accumulation continues to be a large contributor to the overall company success. We still depend heavily on total retirements -- our Total Retirement Suite. I'll drill down into more details here in just a few minutes. Talk a little bit about what we're doing around retirement readiness, and how that impacts our customers. Also, the importance of small- to medium-size business. Jim had talked about that, but I'll pile on. And then also talk about what's driving this revenue growth.

TRS is a very important part of our strategy, defined benefit, defined contribution, non-qualified deferred compensation and employee stock ownership programs. Just a couple of stats you might find of interest. Number one, when we have a TRS prospect, oftentimes, they never came to us as a TRS prospect. They were a standalone 401(k) plan prospect. And with the help of those field deployed individuals, I look out here and see some of our own sales talent and relationship managers and sales reps, who do a phenomenal job, they're the ones that are often introducing the idea. Have you thought about a non-qualified plan? Have you thought about employee stock ownership program?

In those instances, when we introduce one of those concepts, we are twice as likely. Our close rate goes up by 2x when it's a TRS prospect. And our ability to retain our business is twice as good in retaining the business. And we have half the lapse rate when we have multiple relationships. So again, this is a very, very sticky business with Principal Financial Group. Still more than about 60% of what we do and what we have resonates with our targeted customer.

These are those reoccurring deposits that we've talked about in all the earnings calls. They are very important. You can see the growth rate here. Our compounded growth rate is about 9%. And this is the heavy lifting. This is the part of going out there, implementing our Retire Secure strategy, putting feet on the street, going out there, sitting, visiting down with the individual plan participants around increasing their plan contributions, increasing their deferrals, roll-ins also are inclusive of this strategy of going out and speaking directly to customers.

Employers are starting to make matches. Of those institutional clients that we have, where they have a stated match, now more than 75% of those customers now have put their match back in place. Some may have gone to more of a discretionary match. But we would tell you, that we think the match is, in large part, are fully recovering. What we're still, I think, missing in this particular slide is still that drag related to unemployment. We still got to see a bit more recovery as it relates to unemployment.

This SMB focus, it really does matter. Here you can see, when we look at our total block within Full Service Accumulation, about 71% of that is proprietary. When we look at those plans with fewer than $50 million, that number is closer to 79%. That 71% is inclusive of what we call our foundation options, which is where both PGI or one of our hired subadvisors is listed as the manager of those accounts. We get nice double-digit growth. If you look at the last couple of years, we've really enjoyed some nice growth rates relative to revenue growth by focusing on small- to medium-size clients. And look at this number relative to the number of plans written. 4,000 plans sold in 2012. That's roughly 1,300 more plans than we'd sold in the prior year. Of those 1,300 plans, many of those, more than half of those, are actually newly-established plans. So if you're looking for the metric that tells you -- is business -- are new businesses establishing qualified retirement plan? The answer is, yes. We're starting to see some momentum out there. We went for a long period of time where we had net plan growth -- net negative plan growth in this country. So were starting to see that momentum come back. And you can see Principal's success in being able to have a positive number, over 2,000 plans of less than 500 employees on a net basis here since 2012 midyear.

So again, there's a lot to be excited about relative to small- to medium-size market segment. And as many of the people in this room know, that is our focus. Our average size plan, about 100 to 105 employees.

This is a slide that Jim kind of touched on. In some respects, it's somewhat perhaps even the reverse. But this is trying to be a representative sampling. This is trying to give you an idea of the synergies across the organization. Because this $350 million are revenues that have been sourced within Full Service Accumulation and then distributed through the rest of the complex. A portion of it could have gone to PGI. It could have gone to the annuity lines. It could have gone to the mutual fund line. And you can see that, that number is projected in 2018 to be roughly $0.5 billion.

So again, that Full Service Accumulation platform serves as a very, very vital source of revenues throughout the organization. As Jim appropriately pointed out, at the end of the day, we trade on one stock exchange, one ticker, and this collectively is a well-organized organization. It allows us to have a lot of collaboration across the various business units.

Individual investor. Again, there's a lot of legislation out there relative to promoting and doing a better job around retirement planning for individuals. We still have a very significant shortfall rate relative to getting individuals ready for retirement. The average deferral in this country is somewhere around 6%, 7%. If you want to replace 85% of your pre-retirement income at age 65, you've got to get that savings rate somewhere closer to 13%. And we're going to be working very hard to drive those kinds of issues. So again, whether it's mobile technology on iPads, whether it's telephony on your mobile phones, we're spending a lot of time and energy making sure that we make the appropriate investments today. As Larry had pointed out, where we're ranked on IT -- in Information Weekly (sic) [InformationWeek], we are known for being a very progressive company relative to deploying technology.

And then, here, individual investors. This is that additional asset capture. This is by having individuals out there in the marketplace, part of our Retire Secure program, part of what our people are doing on the phones. But this is that additional asset capture by their rolling into their existing Full Service Accumulation plan. It's also those additional retail sales. Another $2 billion here -- nearly $2 billion in 2013. Great growth rate, over 22% over this period of time. Because we have feet on the street out there talking to our customers, and they're anxious to have a more comprehensive approach to their retirement planning. I've had the good fortune now to work with Nora Everett over the last -- for my entire career with the company, but certainly within the last 6 years. She was previously Deputy General Counsel, worked in the law department. She moved away from the dark side. She came to the light side. The only person in this room who don't think that was funny was Karen Shaff. But it has just been a privilege to have Nora join the funds company. She picked up where Ralph Eucher has left off. And clearly, from the slides that Larry showed earlier, has just had tremendous success.

So with that, I'm going to throw it over to Nora.

Nora Mary Everett

Thanks, Dan. Good morning. I am very privileged to be here. I look forward to sharing our Principal Funds story with you this morning. Because as you will be able to tell, I'm just a little bit excited about it.

We really -- our story -- if you think about Principal Funds, and that's not a brand that you would have heard 6 years ago. We are, in many ways, a bit of a startup. And the reason we're a startup is until 2007, when we acquired Washington Mutual's retail mutual fund business, we did not distribute our retail mutual funds outside our own proprietary, our own affiliated distribution. So the only distribution we had prior to 2007 were our own career agents and our 401(k) business. Our Full Service Accume business. So think about that.

Starting in 2007, we had the challenge and the opportunity of building our Principal Funds brand and business for the very first time with independent channels, with those 300,000 financial advisors around the U.S.

And think about this, most of our competitors, most of our competitors, other mutual fund families, had been distributing in those channels for literally decades. So we saw this as a opportunity. We saw this as a challenge to build our brand, to build our business for the first time starting in 2007. So from one perspective, we were are a startup. But we had 3 very, very significant competitive advantages that most startups don't have.

First and foremost, Principal Global. If you think about what Jim McCaughan talked about with Principal Global and those boutiques, they are our go-to subadvisors. 77% of our assets under management being managed by a long tenured, very successful global asset manager.

Second competitive advantage, and this is very significant, we had already built on the retirement side of the business, a multi-manager investment platform. And why did we build that platform? Why is it multi-manager? The demand from our defined contribution retirement business for open architecture. The demands on that platform that you not only have affiliated subadvisors, but you also have non-affiliated subadvisors. So that team, 1.5 decades ago built multi-manager, research, due diligence, oversight, infrastructure, and also built a product development team that was all about combining managers and combining asset classes.

So as we go forward in this conversation, just think about those 2 platforms and the power of those 2 platforms working together. And then add a third platform, our retirement distribution. So we didn't come new to this game from that perspective. We already had an extensive retirement distribution platform built locally across the U.S. And most importantly, from our perspective, from the retail mutual fund perspective, already had deep relationship with the largest distribution firms in the country.

So we had the benefit of taking a startup culture, the startup innovation, the startup energy, hooking it do 3 very successful franchises. And I think what you're going to see here is, we got the benefit of accelerated growth. We could take innovative product design. We could commercialize it. We could execute on it on a very accelerated basis. And here is where we see the results.

And look at the sales numbers. When you look at sales going from 2009 at $7.7 billion, more than doubling last year to $15.8 billion. And this year, at $11 billion for just the first half of this year, matching all of last year, all of 2 years ago at $11.2 billion, you can just feel the sales momentum there.

And why is that? Twofold: One, we've made a significant investment in distribution; and two, we were able to acquire a very talented wholesale team. So that combination is creating this momentum. One of the most important metrics for us is obviously net cash flow. And you can see, like a lot of our brethren, we came out of the global recession. We had a negative number in '09. But look at the growth since then, from $1.6 billion in 2010 to $6.6 billion last year, named one of the Hottest Fund Firms in the country because of that cash flow. And then this year, the first half of this year, very healthy positive net cash flow at $4.7 billion.

And what I like about this number is something you can't see from the slide. That net cash flow is coming from multiple areas. That net cash flow is coming from every one of our leading asset classes: Equity, fixed income and asset allocation. And that positive net cash flow is coming from every one of our distribution channels. Both our affiliated, channels and our non-affiliated channels. So when you think about the diversity of that positive flow, it's a very healthy positive net cash flow number.

And the good news for us is, we're starting to see the translation to bottom line growth. Obviously, starting at $23 million of operating earnings in 2009, we're a relatively small contributor to The Principal Financial Group. But look at the growth in the number. The $50 million, more than doubled last year. And then you can see, we're on a nice trajectory this year with regard to operating earnings growth.

The return on revenue. We've given you a number that's comparable to our peers. The adjustment there is just taking all the commission income that comes in because we're a broker-dealer, immediately passes through as commission expense. We've adjusted for that like our peers do. But what you see there is a nice trajectory in that margin expansion, from 16.2% in 2009 to just, at the end of last quarter, 2Q, almost 30% at 29.7%. So we're very pleased with that translation of top line growth starting to show up in the bottom line.

And you can see no surprise, especially given our growth model here. We're exceeding. We're outpacing our peers. 12x the industry sales growth, year-over-year sales growth. Strong net cash flow, 4x the industry average last year. That's been translating into market share gain. So we've gained market share. And our peer group is advisor sold. This is not the direct sold. We compare ourselves to those mutual fund families that work through advisors. But when you look at that peer group, we've gained market share every quarter over the last 3 years, jumped 5 spots. We would -- our expectation is, we'll be able to continue to gain market share, especially if we continue to outpace the industry on these net cash flow numbers.

Jim has spent quite a bit of time on investment performance. And I can't overemphasize how critical that is. Obviously, the investment performance across the platform is critical. But just as important is investment performance with regard to those funds that are in demand, in demand in the retail space. So we'll talk about that in a bit. I want to spend my time with you this morning focusing on the other 2 growth drivers. Product diversification and channel diversification. Because if you're sitting out there saying, "Yes, these are great growth numbers over the last couple of years, but can you sustain that kind of growth?" I'm going to point out why I'm confident that we can sustain that type of growth. One is product diversification. When we look at that 65 mutual funds that we provide in the retail and the defined contribution investment-only space, they cross every major asset class, and more and more we're building in that alternative asset class. We've got multiple dimensions of diversification. We can provide a single manager fund, and we can provide a multi-manager fund.

We can bundle it all together and provide that advisor and investor a fully bundled solution, like target rate or target date. Or we can back off, allow them -- sell them the underlying building blocks and a low them to build it. If their value prop is, we build it. We can give them the building blocks. So we've got the ability to pivot, both from a product perspective and from a distribution perspective based on the changing demands of the investor and the advisor. And it gives us a huge advantage, especially relative to competitors that just don't have that breadth of product diversification and don't have access to distribution like Principal Funds does.

This is -- I'll give you a quick look at the asset allocation or the asset class diversification. You can see we're well balanced between equity, fixed income and asset allocation. And at our core, we're an asset allocation franchise. That shows in the numbers. That shows in our ranking in the industry. We've got $35 billion of life cycle funds assets under management. $20 billion in our LifeTime target date series, almost $11 billion in our target risk SAM series, subadvised by Edge Asset Management. We're an asset allocation franchise. And what we've been able to do is take that franchise and start to evolve it.

That number is pretty impressive to me, $23 billion. 3.5 years, in 3.5 years, we've sold $23 billion of our retirement income mutual funds. And Jim spoke to this, but let me highlight this. We've got a huge array of retirement income fund. We can allow advisors to go up and down the income spectrum. They can start with our high-quality short duration. They can move to our high-yield fund. They can go into our are very unique Preferred Securities Fund. And then they can move into the equity income funds. Whether they want large cap, mid cap, small cap, Edge subadvised. That has allowed us to get -- to see these kind of sales over the last 3 years. And one of the primary drivers in this lineup is one of our outcome-based products, Global Diversified Income. This is a fund that today sits at $8 billion and was only launched 5 years ago.

So why are these outcome-based funds resonating? Well, before I get to that answer, let me give you -- let's back up about 6 years and let's talk about what the mutual fund product design team did. Because what they did all those years ago was flip the design process on its head. Rather than starting with the investment strategy, they started with the investor, and they started with the investor who was either entering or in retirement. And they said, "What does that investors need? What are the critical risks or the critical needs of a retiree?" And they identified income. They identified inflation protection. And they identified market volatility, capital preservation. And then, because of our multi-manager platform, they designed single funds with multiple asset classes and multiple managers with one outcome in mind, income. Global Diversified Income being the solution. Protection from inflation, our Diversified Real Asset Fund being the solution. Market volatility protection, our Global Multi-Strat Fund being the solution, with Finisterre being one of our long, short managers. You get the idea here. Turn the process on its head. Because of our multi-manager platform, we have the universe of investment strategies that we can choose from. We're not constrained by that. We're just solving for one outcome. And this has been a tremendous franchise. We were able to get to $10 million long before we had 3-, 4- and 5-year track records. And why is that? They're outcome-based. And the subadvisors are long tenured experts who have track records running the mandates that we handed them. So you can see the power of the franchise there, and this is the result.

Jim talked about investment performance. I won't spend any time on this slide other than to say, PGI and PGI boutiques are why we're seeing this kind of investment performance. It is tremendous when you look at the 3- and 5-year numbers. Tremendous long-term performance, which is the key track record that we -- where we sell out in the retail and DCIO market.

We won and I -- and this was one of those awards. Some awards less important than others. This Lipper Award was probably, in my mind, the award for us to win in 2013 because it represented a couple of things. It represented the fact that we had a successful asset allocation franchise, and we had the best-in-class 3-year investment performance to benefit our investors. So when we won this award against 40 of the largest fund families in the country, that to me, was a coming-out party for us with the industry and Lipper and others recognizing that we were a player, not just with the AUM, not just because we were managing $40 billion of these assets, but because our track record was not only competitive, but best in the industry.

The other one I'll call out here is Cogent Research. Cogent, and I think most of you are familiar, Cogent does a lot of work in the retirement space. This award was based on a survey of plan sponsors, retirement plan sponsors across the U.S. And this year, within the last couple of months, Principal Funds was recognized as the Top 10 Defined Contribution Investment Manager. This award is all about brand, all about reputation, but I think it represents 2 things: It represent our leadership brand -- excuse me, it represents our retirement brand, and it represents our investment management brand.

And you pull those 2 things together, and we've got huge opportunity in this defined contribution investment-only space. That's the space where we provide the investment product even if we're not providing the record keeper. And that's a space that's going to go from $2 trillion today to projected to go to $3 trillion in the next 4 or 5 years. So a tremendous opportunity for us there.

I've got a couple of slides on distribution. No surprise to you. You can see before Washington Mutual, 100% proprietary affiliated. After Washington Mutual acquisition, you can see the broad diversification and channel. We're in the wirehouses. We're in the independent broker-dealers. We're in the regional broker-dealers. We're with registered investment advisors. We're in the DCIO channel. You get the idea.

Well diversified, taking advantage of the Principal Financial Group resources and putting a national footprint in place in just 5 years. What I like about this slide is it shows you the opportunity. And the opportunity set here is that today, we work with 45,000 advisors. Our largest competitors today work with 100,000 advisors. I see that as good news. That's opportunity for us. That's opportunity for us to grow over the next couple of years and grow not in absolute, not just in absolute numbers. But if we bring a financial advisor in with one of our unique product, like Preferred Securities, we deepen that relationship and we cross-sell. So the opportunity is going to be wide, and it's going to be deep. The year-over-year growth is tremendous. But I'm more excited about the left-hand side of this chart, which shows you opportunity as we go forward.

So in closing, what I would point out, and I've got one word to leave you with, which is alignment. If you think about the macro trends out in the industry, if you think about retirees going from savings to consumption, if you think about this investment performance being redefined to outcome-based rather than just style box or peer relative to peer, if you think about that opportunity I just talked about in DCIO from $2 trillion to $3 trillion, and think about the strategy that I just outlined, and that strategy being, we're going to take this leading asset allocation franchise and we're going to evolve it, and we're going to evolve it with outcome-based products, and we're going to evolve it with an extremely unique, extremely unique, multi-manager platform. We think we're very well positioned for future growth.

So with that, back to Dan.

Daniel J. Houston

Very good. Nora's got a lot of things going for us. She's got an extreme intellect. She deals with complex matters very well. She's got an incredible work ethic, but we still work with Nora on her passion and her intensity at that. Well done.

Let me keep it going here and talk about distribution. And for those of you who want a firsthand look at distribution, Tim Minard is with us today. So over the lunch hour, if you get a chance to bump into him and you want to drill down further, please feel free to do so.

We talk about these alliance partnerships. And as I said in my earlier comments, these alliance partnerships are not limited to just Full Service Accumulation or just RIS. These are the partnerships that serve the complex to wide. So whether it's Principal International, Principal Global Investors, RIS or USIS, we leverage these alliance relationships, and they do matter. These global relationships matter. I would just point out in one point here. In the last 3 years, we've tripled the number of those partners that have sold in excess of $1 billion with The Principal Financial. That's just an extraordinarily powerful number.

The other numbers, if you look at the others, are -- we went from 12 in the last 3 years to 33 partners that have sold in excess of $100 million with The Principal. My point is, there is a lot of room for us to go deeper into these alliance relationships, not only with product, but certainly, from a geography perspective. So again, this is a very important part of our strategy.

For those of you who followed us since we IPO-ed, if you went way back, our bundling, if you will, primarily was around Total Retirement Solutions. That's FSA in this particular slide. And we, over that period of time, tried to coalesce these businesses into being more highly efficient and aligned organizations. And we did that by attaching our mutual fund complex and the variable annuity complex, this deferred compensation capability to get us to what we describe as our accumulation model.

Our next push, if you will, from accumulation model is to wrap that into selling Principal branded products all the way through. Whether it's Full Service Accumulation, whether it's mutual funds, annuities, general account, we want to ensure that we're selling, and we're putting our customers in the best possible position for long-term success by leveraging our asset management capabilities. So again, you talk about something that's been aspirational. I think we're still -- we have room to work up into the right. But by 2018, certainly, it's my hope that we have a disproportionate, large percentage from where we're at today of Principal branded funds.

This is USIS and RIS sales update from where we stand. Today, you can see good progress. These are, of course, are as of the first half of 2013. But whether we're talking about the accumulation products, which again, as a reminder, is Full Service Accumulation, mutual funds, annuity -- retail annuities, Individual Life solutions, as well as specialty benefits, we certainly still enjoy nice growth rates out there on a -- relative to our prior, as well as relative to the industry.

Now let me provide a little more context for the 5-year outlooks. This is just a short run through on USIS. You can see what we had stood here and said a year ago relative to what our 5-year outlook was for premium, fee and growth rates, it was 4% to 8%. We're right in the middle of that range. Today, it's 5%.

Pretax operating earnings are a little low at 13.7% relative to where we thought they'd be in that 16% to 21% long term. That's a couple of different things. There's low rate environment that we find ourselves in still, is a bit of a headwind for us. And the other item we talked about in the first quarter, which was some mortality losses and Individual Life. And again, that's something we think we are very comfortable with our range.

As it relates to specialty benefits, premium, fees and growth, we're below where we would like to be for specialty benefits. I would attribute a lot of this to the fact that we want to make sure that there's a profitable growth. And so we're willing to give up some of the premium, fee growth in exchange for profitability. And again, if you're doing that well, you'll find that your loss ratios are very much in line with where they should be.

Move over to RIS. Greg and his team have done a good job on the accumulation businesses, along with Nora. So the net revenue growth rate of 14% in the first half of the year is certainly above where the range is today. If you want to kind of normalize that a bit, you'd probably take 3% to 4%, because we've got an S&P 500 up over 15% on a year-to-date basis, which certainly has provided us with a nice tailwind. We've also, relative to what our projections were, have had much better retention. We've had some more favorable net cash flow. So again, that's one way to somewhat normalize your net revenue growth rates relative to our 5-year outlook.

On pretax return on net revenue, it's 30.2%, right in the middle of the range, and again, this is by focusing on that small- to medium-size marketplace. And again, a lot of the work is coming from Nora and her team, contributing to that success.

On the guaranteed business, we're slightly over the range relative to net revenue growth rates. This is attributable in part to some of the better spreads that we're experiencing right now in the line. And of course, you see that the pretax return on net revenue is right at the high end of the range.

So again, from where we sit, looking at the numbers for the first half of the year and a very strong first half of the year, and there will be a time Terry will get into a longer-term outlook, and we'll update you on those.

So what are the key takeaways, at least from my perspective? New partners, strong investment capabilities, with great products and have great local distribution, and you're going to enjoy a lot of success. I will just remind everyone in the room, we're going to continue to make significant investments in our operations. We're going to continue to invest in IT, invest in our people. It's imperative that we do that to be a long-term successful organization.

Recommitting and focusing on small- to medium-sized business, we view that as a very, very profitable segment of the marketplace. We have a lot of experience we've known there. We're going to continue to spend a lot of time there.

Nora gave me just a super update on Principal Funds. One item she didn't call out that I would, which is defined contribution investment only. If we can't win it over on the record keeping said, it's certainly our intention to catch it in what we call defined contribution investment only, or DCIO. And we'll do that by reflecting that in the mutual fund numbers.

And then lastly, Tim's capabilities and his architecting, truly a world-class distribution sales force, not only targeting small- to medium-sized businesses, but going directly at our alliance partners, as well as other unaffiliated distribution.

And then lastly, our carrier distribution. I'm frankly remiss for not citing the fact the carrier distribution . For us, those 1,000 carrier agents make up a significant portion of our success in writing small to medium-size plans. They write about 1 out of 10, and they write about 5% of our asset growth and they're also large seller of our mutual funds.

With that, we've got 5 or 6 minutes now to take Q&A. We do want to make sure you use the mic so the people listening in could hear.

Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division

Jeff Schuman from KBW. Dan, I was wondering if you could talk a little bit about FSA price competition. I mean, this year, you've kind of refocused on SMB and you're seeing some nice lift in your revenue yield. But if we were to look within market segments, how would you characterize sort of fee competition at this point, up, down or sideways?

Daniel J. Houston

Yes. It's still out there. I mean, the reality is we're competing every day. If it's a stand-alone 401(k) plan and they want passive investment options, they don't want a lot of servicing and they just want low cost, principal is not going to be their best option. Our best prospect is still someone who is committed to their employees, they want a robust education program. They've had poor carriers that weren't able to carry the waters related to compliance and all those kinds of issues. And oftentimes, as we've reflected in these numbers, they want a comprehensive solution that might include taking over their frozen defined benefit plan. They want to take a hard look at this offer. They certainly want a nonqualified deferred compensation. It is competitive out there in the marketplace. Will I say that it's abated just a little bit? Probably so. I think it's -- I think there's more emphasis. When I think about sitting in some of the panelists' presentations, it's moving away a bit from fees and there's a lot of energy being spent on, of course, making sure they got the right investment lineup, but also what is it that you're doing to prepare my employees for a retirement. Hopefully, that helps.

Joanne A. Smith - Scotiabank Global Banking and Markets, Research Division

Joanne Smith, Scotia Capital. Recently, we've seen a tickup in the small business hiring intentions index. And I was wondering if you could tell us if you've seen that in your business. And should we see that in the recurring deposits component of your assets under management?

Daniel J. Houston

Yes. Joanne, really good question. And I think you already have it and I think I actually cited that. I think those -- a portion of that nice reoccurring deposit growth, 9%, almost 10% over that period of time that I illustrated, part of that is just ongoing reoccurring deposits from employment hires. We capture it in a couple of different places. The other I had to was new plan establishment, which should give us all some level of confidence that small businesses are not only establishing, but they're established now enough to say, "and I want to put in a qualified retirement plan," which does require some thought and some effort and some expense on the part of the small- to medium-sized employer. And then Deanna in her business, they track the growth of the in-force participants and our specialty benefits line, and we've seen just modest incremental growth. That decline is now finished. It's not back to where it's historically been, which was kind of 1.5% to 2% annual growth rates, but it's starting to show positive results. So we think it's -- it would align with that study. Eric?

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

Eric Berg from RBC Capital Markets. Dan, if we'll call the business of planning an enormous customer elephant hunting and acknowledging that it's extremely competitive and the fees are probably under even more pressure there than in the small- and mid-size market, why doesn't it still make sense to pursue that business since the dollars of landing 1 month of your hospital on the Bronx are probably -- we're talking billions of dollars versus maybe $10 million, $20 million, $30 million for a small company. Why does your SMB, given that context, your SMB approach, still make sense, given the difference in dollars at stake?

Daniel J. Houston

Yes. And I'll penalize myself here this morning for, perhaps, overplaying the small- to medium-size focus. What I was trying to show is the growth drivers for the foreseeable future. We're still very much a large player. If before the split of our business, Eric, was above and below $50 million, that number, if you went back a number of years, was kind of 50-50. Today, if we look at it, it's probably 45 to 55 or 40-60. So we're very much out there. And you cited one particular area, that hospital area. They need our help. There's a lot of general account assets. There's need for things like retire, secure. And so what I would say is, as it relates to large institutional prospects, we just need to find the right one. We want to find the right one that buys into what our value proposition is and not -- and our value proposition may not resonate with some employers. And as, again, I described it, "Give me the lowest possible funds, I want all passive, I want complete open architecture. And oh, by the way, we're in the retail business and we've got 450 sites, and the average account balance is $5,200." That's just a lousy prospect for us. Okay, one more question.

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Chris Giovanni, Goldman Sachs. A lot of employee benefits providers are talking about confusion amongst corporates just in terms of health care reform and now they are focusing a lot of time in that area. Wondering how that's impacting you guys as maybe they focus more on the health care initiative and away from retirement, and just the conversations you're having with those types of corporates.

Daniel J. Houston

I love your question from a couple of different perspectives. The first of which is it's remarkable to me the ability that we had to retain more than half of the business where we had a health insurance relationship when we exited that business. We retained over half of those relationships for specialty benefits. So that's a positive. A lot of the buying decisions today, they're separating. That's a health care decision, this is a specialty benefits. And we're in the voluntary business. We're in the workplace business. We're in the employer-paid business. So clearly, we can establish ourselves, and we have a network ability to do that. My greatest concern as it relates to just health care is just the sheer cost and it's you're competing for the dollar. And that isn't just for specialty benefits, for disability and dental and vision. That hits the 401(k) business because if you've read the paper, there's movement now that seems to be starting relative to going to kind of a capitated dollar amount that you would give to your employees and say, "Hey, whatever you can go out there and buy for $10,000 a year for your family, it's all yours." And that probably won't rise with the cost of inflation related to health care. And if that's true, it's going to be ever increasingly pressure on employee benefit dollars. I think that's the more long-term systemic issue that we're going to have to work our way through. But it's real, but we certainly are working the strategies to do that. Did you have one quick follow-up?

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Just your read across -- for the retirement 401(k) business as well, if that's distracting kind of the decisions that they're making in that market.

Daniel J. Houston

It really isn't because I don't see that happening. You see the new plan establishment. A lot of times, you've got different people and companies making those kinds of decisions. They certainly have enough time to be very thoughtful about preparing their employees for long-term retirement. And at the same time, they've got to make sure that they've got, a competitive health insurance product. And remember, as this employment recovers and you're looking for the real talent that's out there, the skilled workers, that's a very competitive market at this -- in the marketplace, in the U.S., at least. And I think, clearly, you have to have good employee benefits to attract employees.

We've exhausted our time. It's been a privilege to present to you this afternoon or this morning. But it's now my privilege to introduce a good friend of mine, Luis Valdes. Luis, as you know, runs Principal International. He's done it in a remarkable fashion, having taken over for Norman Sorensen.

So with that, my good friend, Luis Valdes. Thank you.

Luis E. Valdés

Thanks, Dan. Good morning. Let me set the stage for our presentation today. We're going to have 2 presenters for Principal International. We're going to have Ned Burmeister, he is our Chief Operating Officer in Principal International. He has a very extensive experience, more than 30 years with Principal Financial Group. He is a very knowledgeable about our retirement services business in U.S. But more than that, he has a very extensive international career with that. He has a very good experience in Europe. Certainly, he lives in Asia, and he is a global traveler and more. So he's going to be in charge of our second chapter, in our presentation. He's going to go a little bit deeper about our strategy in Latin America and in particular, in Asia.

And I'm going to be in charge of our first chapter here, going further with our global strategy for Principal International. So we're going to spend some time, giving you some thoughts about it. And my second topic is going to be to talk about our growth strategy for Chile. And in particular, we're going to make a kind of close up to Cuprum and how Cuprum is behaving in the last, whatever, 6 or 7 months with us.

So having said that, let me go with our presentation. And what we're doing outside of the U.S., essentially in Principal International, is to build a real franchise; a global franchise; a solid, strong and dominant franchise; and pensions, long-term saving and asset management. That's what we're doing. Where we're doing this? In selected emerging markets, in particular, 3 markets in Latin America and 7 markets in Asia. And you know well them: Mexico, Brazil, Chile, Mainland China, Hong Kong, Thailand, Indonesia, Malaysia, Singapore and India.

With that, our footprint is pretty impressive. We cover almost 50% of the world's population with that footprint. But also, it's pretty interesting to say that this is our global strategy. This is what we call out as our global strategy for Principal International. And then you're going to be able to learn more with Ned, particularly that we have a kind of slightly different topspin for Latin America. And we have another different -- a slightly different topspin for Asia.

What I'm trying to say with that, it is that we have our global strategy, which is our main guide for Principal International. But at the same time, we have to be able, in order to define and to understand each market in particular, in order to understand where those sweet spots are. I mean, I would -- these sweet spots are very, very important for us. And we have to be able -- in order to define those places and we have to be able to deploy this global strategy in order to make this strategy a very successful one.

So the question here is this a successful strategy? And the answer is this has been a very successful strategy for us. Here, you have some numbers. And here, I'm going to share with you some 3 observations. The first observation is that we're about to double the size, to double the size of Principal Financial Group or Principal International in the last 3 years. That's the first observation.

The second observation is besides the fact that we acquired Cuprum in 2013, and certainly, Cuprum is going to be a very important contributor to our growth this year and beyond, you could see also that in the last 3 years, in the last 3 years, our organic growth has been remarkable.

In fact, in the last full 3 years, between 2009 and 2012, we could see that our CAGR for our net customer cash flows is about 44%, 44% growth rate year-over-year; 26% for our total AUM; 20% for our net revenues; and 16% for our operating earnings. This is our -- this is the piece that we have had in the last 3 years, which has been mainly an organic piece.

The third observation, the last observation here, is because our size and because we're getting the scale, we're being able to improve our profitability here. Here you could see how our pretax return on net revenue is evolving. So we're being able also -- we're being able in order to improve our profitability. So the answer is, at least these are the facts, this strategy has been extremely successful for us, and mainly because we're having a very disciplined and very well-focused execution right after this strategy.

So talking about execution, I'm going to go into my second topic, which is our growth strategy in Chile and Cuprum. Cuprum is a very important piece of our growth strategy in Chile, and particularly, Cuprum is adding -- we could say this is adding the last piece that we were missing in order to have the right kind of strategy in Chile and the right set of businesses in Chile.

Cuprum, as you know, this acquisition was announced in October 8, 2013, and we were able to complete this transaction in February 4, as Larry said. This is a 4-month record time for this kind of transaction between the announcement and the completion because you have to consider that we were able to get all the authorizations that are needed from the regulatory bodies. We had to go with the tender offer. We had Christmas time, New Year, summertime in Latin America and more, and we were able to do all of this in 4 months.

Why this is so important? Because execution is really important. Because as long as you're announcing this acquisition, you have to be able to do and to go forward with the right on-boarding process to protect the value of these kind of assets.

And in order to protect the value of these kind of assets is really important because in particular, as Larry said, this is a premier pension provider in Chile. And in particular, what we have here is a pension company with $35 billion in assets under management, with more than 600,000 clients, with a very interesting distribution network, with 600 carrier agents and 32 branches across the board. So it's a company that certainly, it could be sensible for this kind of acquisitions.

But going forward, more than that, Cuprum, it has the best customer base in that market because it's being very focused in the affluent and high affluent market in that industry for years and years. That is why, in particular, Larry said that was the company that we're paying attention and that's the company and the target that we follow for more than 10 years because the growth opportunity in this particular market is about -- what we're going to talk about, it's about the middle class, the growing middle class in that particular market.

So having said that, I'm going to say because of that, Cuprum and as a result has reached -- Cuprum ranks #1, #1 in average balance per customer in that industry. With USD 72,000 per balance, which is almost about the same kind of average that you have in -- for the 401(k) industry here in the U.S. But it is by far the highest average balance in Chile, and in particular, Latin America.

Also, Cuprum ranks #1 in the average salary per customer. We will see that this is very important. And also, Cuprum ranks #1 in the ratio between -- from 2 doors to customer with 72% ratio, and the average for that industry is 52%, 52%. So this is a real premier pension provider. And this is the quality of the asset that we acquire in Chile, and we're going to explain to you why we have a great growth opportunity with Cuprum.

Before continuing with this growth strategy explanation, it's very clear that what we're trying to build here is a one-stop shop concept for pensions, long-term saving and asset management in Chile.

But before I continue with this, I'm going to explain to you what we have in this diagram here. In 2013, in 2013, what we're doing with Cuprum? We went into the -- a kind of phase or a stage that we call secure the business. What we mean by to secure the business is to proceed and to go forward with the right on-boarding process and at the same time, to keep Cuprum up and running. To keep Cuprum up and running is very important because we have to continue producing results, outstanding results; and if not, exceed all our expectations and your expectation, of course. At the same time, we put it together, the on-boarding process.

So starting February 4, we put the on-boarding process. At this moment, we went through all the governance that is needed. It's in place. All the line of reportings that are needed, in place. All the kind of corporate standards and reporting, which is in place, we put it at a brand new IP platform, up and running, with no problems, and more. Also, we're being able to retain the 100%, 100% of the key many years of Cuprum. So this has been a very successful on-boarding process, a very successful on-boarding process. And more than that, it's been interesting that you know that we were able to report and produce $35 million in operating earnings in the very first 4 months that were reported, which is exceeding our plan. Our plan for the same number of months was to $27 million. So we're exceeding our expectation and we're exceeding our plan.

In the year 2014 and beyond, we are going to go in the -- into the stage that we call value creation, where we're going to be very focused on the creation of our one-stop shopping. And it's where all the synergies that we're expecting, revenue synergies and expense synergies are going to be created.

In order to do this, we're going to create this concept of one-stop shopping in Chile, one-stop shop in Chile for pension, long-term savings. The 3 pillars, the 3 pillars for this concept is -- are the following one: We are going to create one single organization, which is going to be customer driven and solution driven also. That's the first pillar.

The second pillar is we are going to keep this one-stop shop as the leader in the pension industry. That we're going to reinforce our strategy in order to be also a leader in the voluntary market in Chile. That's key.

And the third pillar, it is we are going to build a one single platform in order to serve our clients. Certainly, we're going to try to blend our -- capitals of our distributions and customer service.

These main 3 pillars that we're going to put together is going to be our one-stop shop in this particular market.

This diagram, it sounds familiar and looks familiar for you because this is exactly the same diagram that Dan Houston was using in his presentation, but that is the beauty of our strategy and that is the beauty of what Larry was referring.

What are we doing? We're also exporting the best of our core competencies out of U.S. into these emerging markets. So we are using exactly the same concept. So we are going to be able, with our one-stop shop in Chile, to serve our clients from hire to retire in the whole life cycle. So we're going to be able because we're going to be able to serve this clients with the whole array of the products, nonqualified, qualified, accumulation, de-accumulation, tax deferred, after tax, individual solution, corporate solution. So we're going to be able to cover all their life cycle, as I said, from hire to retire. All of the above, producing outstanding investment returns and management services for our clients. This is the concept.

So you could see -- you can ask, "Where is the opportunity here? Why you are talking that you have a great opportunity with the voluntary market?" In fact, we have provided to you some kind of information, which is in your book. On the Page 93, you have a very brief explanation about the pension market in Chile.

Chile has a very well-established pension market since 1982. So 30 years ago, the Chilean government, they established a very well-thought pension market. But what is very interesting, the main design was around -- about the mandatory piece and about the compulsory piece of this one.

And one of the kind of interesting thing to point out here is that all these governments, including governments that are being able to think forward, they were not able to predict about what is going to be the effect of these global emerging middle class in these emerging countries, in these emerging economies. So all the -- part of that we're easing [ph] is the design this particular solution in Chile 30 years ago remains almost constant. And what happened? The country grew about -- to 5%, 6%, 7% year-over-year, a brand-new middle class emerged, millions of people are brand-new citizens, there's brand-new middle class. So Chileans in general terms, they're not saving enough. They are not saving enough, just take in consideration the mandatory system.

And you have some information. I'm not going to explain so much about this, but you're going to realize this. You have 2 parameters of design, which are built into the -- this system.

First, you have a 10% mandatory contribution out of your paycheck every single month. That's clear, 10% out of your paycheck. But since 1990 -- 1982, they decided to cut your salary for this 10%, and the salary was cut. Essentially, it was capped about -- in about USD 40,000 per year, USD 40,000 per year. So your maximum contribution per year in the mandatory system, it is more or less about USD 4,000 per year, USD 40,000, 10%, USD 4,000.

So regardless how much money you are making, the mandatory system is just allowing to use to save USD 4,000 per year. Well, the Chilean government, knowing how it's going on and knowing about this whole [ph] arrangement, about the labor market, the brand-new middle class and so forth, they decided to create a voluntary pillar, a very strong voluntary pillar for the pension market.

And in a nutshell, I'm going to tell you that today, including all the contributions, including employee contributions, employer contribution and more in a qualified instrument, in a qualified solution, tax deferred, you can save another USD 70,000 per year on top of your USD 4,000 that the mandatory system is providing to you. So you can say 17x more, 17x more, if you're going to the voluntary side. And it's very interesting to say that in 1982, just 2%, just 2% of the labor market was making more than USD 40,000 per year.

Today, more than 30% in Cuprum, 30% of our customers are capped. This is opportunity. 30% of our customer are capped. And this is the beauty of Cuprum. Because in comparison with other ASPs, like Korea, that probably you know this then. In Korea, just 3.5% of those customer are capped. That's the beauty of Cuprum. That is why Cuprum is what's our target for 10 years. So we have a great opportunity. So we're going to stay focused on what we're doing. And certainly, we're going to continue developing and we're going to continue being the best pension provider and voluntary provider in that market.

So having said that, I'm going to turn it to over Ned Burmeister. Many thanks.

Ned Alan Burmeister

Thank you, Luis. Appreciate it. Just to summarize his introduction is I'm the old guy with a lot of frequent flyer miles, I guess. But happy to have a few minutes and talk to you about the strategies we have, both in Asia and in Latin America and to help describe a little bit of the different topspins that Luis referenced in his remarks.

The enthusiasm we have for Cuprum and the enthusiasm we have for Chile extends all around the world, and it's certainly what underlies our commitment. And it's -- maybe beyond the commitment, maybe our obsession to build that successful global retirement franchise all around the world.

And as we've gone out to those 10 different markets that Luis noted, we know that there's certainly inevitabilities in those marketplaces, very similar to what's in the U.S. and developed markets, which help with our optimism and will help us achieve our growth. But there's accelerators of growth and characteries in marketplaces, which make our job and our opportunity -- job a little bit easier and our opportunities a bit greater. And the placement of each of these markets within these accelerators helps determine and helps influence the top spin we place on our different strategies in those local markets, knowing the needs of the local market.

But the reality is, and it goes back to Larry's introductory comments, we do live in that era of personal responsibility and that's a global phenomenon. Individuals today know that their long-term savings retirement responsibility is individual and it's theirs. And the reason we're in emerging markets is because with the increase and the growth in the middle class, the opportunities for faster growth and a greater accumulation of assets exist.

And -- so our target market is the emerging market with the growing middle class who knows it's up to me. And for the most part, those individuals live in countries where the government has realized that they are inherently limited in their ability to finance the public sector pension programs and to learn from the examples of the developed markets and say, we have to find a way not to make the promises that as the future unfolds we're not sure we can keep.

And the inspired ones of those governments have realized the best way to do that is to provide tax advantaged savings program, encourage people to save. And the next step or the next realization being to encourage that savings, you need the involvement and the participation of the private sector in those pension plans because that's where you get innovation, that's where you get customer service, that's where you get the distribution capabilities for individual savings.

All of those go hand-in-hand with the increasing emergence of an realization by the individual that it's not savings I'm after, but rather long-term investing. And I need to develop a portfolio of assets and a portfolio of my own, which is recent, balanced, diversified and achieves my objectives.

And these accelerators of growth, which help propel the growth in retirement assets in the emerging markets are plentiful in Latin America and they're relatively well -- and they're quite well established in Latin America. And consequently, it has given us the opportunity to build out that retirement franchise within Latin America in all of our targeted businesses, from pensions to mutual funds asset accumulation and retirement income solutions.

We've checked the grid -- with the addition of Cuprum and Chile in the pension column, we've now checked the grid in Latin America. Not a surprise because the accelerators of growth had been there longer. Not a surprise because Principal Financial Group has been there longer and our investment has been greater. But we now have that pre -- a prominent franchise in Latin America the Principal Financial Group and Principal International has committed to expanding globally. And we spent a lot of time successfully and its fueled our organic growth to build up, what we believe, are the differentiators for us in being successful in this marketplace.

And it starts, if you go with the upper left hand corner and work clockwise through it, the global pension focus of the Principal Financial Group is a very distinguishing characteristic for us in Latin America. Pensions, long-term savings, it's our #1 job in what is our only job. And you contrast that with our biggest local competitors who are banks and who, if they offer pension programs, do it more as an accommodation to their customers than as a mainline business. And with any business, if you run it as your secondary job, then you get the secondary job results.

For us, pensions, 24/7. That's what we do, that's what our focus is. The fact that we are not a bank gives us competitive advantage in helping establish distribution agreements with banks as well. But the global pension focus of the Principal, combined with the fact that we bring to the table our global asset management expertise, and you can think of that on a couple of dimensions and they're both dimensions here today already. I mean, the first is we work very closely with Jim McCaughan's area in Principal Global Investors to bring cross-border products to our customers. We have the ability to bring in global asset management expertise and provide a distinguished and a different product lineup than our local competitors. But the dimension has also been referenced, but maybe not as obvious, is that Nora talked about the wonderful work that's been done in product development on the mutual fund platform here in the U.S. and for our retirement platform in the U.S. and we at Principal International make very heavy use of that. Euphemistically, we might say we leverage it, I suspect that Nora and Dan might suggest we often steal this. We steal that product innovation, we steal that product development and put it into our local markets, again getting us much different than the prospects with the ability through capabilities of our local competition.

The third differentiator we have in Latin America and globally is that we have a long track record of being a proven partnership -- a proven partner of developing mutually beneficial partnerships. Plus, the easiest one that you're familiar with -- to talk about and you're familiar with is the tremendous relationship we have with Banco de Brasil in Brazil. Two to 3 years ago, we signed up that partnership, which provides an exclusive distribution of pension products within the Banco de Brasil network. We resigned that up to 23 years.

And interestingly enough, just earlier this year, Banco de Brasil took its insurance and asset management subsidiaries and bundled them together into an IPO, which IPO-ed earlier this year, raised -- and it was fun for us. And actually, we were kind of -- we were quite proud because if you look at their roadshow materials and they did that IPO, prominent in that was an explanation of what has propelled their success in Brazil has been the partnership with Principal Financial Group, the pension expert to help with that growth. And we were thrilled that they were making that recognition. We certainly believe it, too, and then we benefit from their distribution capabilities. But we were even more pleased when we realized that IPO was priced and actually sold and this is a bit better than 17x earnings. So we think that's a good value for our franchise in Brazil as well. But we have proven partnerships. It extends in the equity side. It also extends into distribution. For example, about 2 years ago, we bought from HSBC Bank in Mexico their pension company because they, again, realized it was a secondary business for them and they were selling a few hundred cases a month and the mandatory pension business in Mexico and it just wasn't worth their time. They sold the business to us and also have said that for 5 years we want to partner with you to see if we can improve sales. And from a couple of hundred plans a month, we've now at a pace in the last 2, 3 months of over 10,000 sales each month from the HSBC Bank distribution, again, exclusive distribution agreement with them. So we have proven successful partnerships.

And lastly, I'll just mention we have strong distribution. We have, again, the juggernaut that is the Banco de Brasil in Brazil. In Mexico, we have a proprietary sales force very much focused on characteristics of customers, very similar to what Cuprum has done in terms of targeting the mid- to upper income people and staff and the mandatory. We've had multiple trips between Mexico and Chile and Cuprum and our operation in Chile to understand how to leverage that and how to better target market.

We've got, in Chile, a proprietary sales distribution of Cuprum, very strong on-the-ground distribution. And we've taken those competitive, distinguishing advantages and turn them in to what is now the second largest pension provider in Latin America. The Brazil number, the BrazilPrev, now about 37% market share. About 4 years ago, that was in the low 20s in terms of market share.

In the recent discombobulation in Brazil and all the excitement in Brazil, BrazilPrev was the only pension provider who took in net positive customer cash flow. It's a very, very strong franchise with a very deep partnership.

In Mexico, we're the fifth largest mandatory pension provider. Again, the recent success we've had with HSBC has allowed us to build our customer base quite rapidly. And we're now, given the focus we have on the higher net worth deposit -- or higher salary depositors, has pus us in #3 in terms of net AUM transfers in.

And in Chile, Luis talked about it and the opportunities there with Cuprum in now having the complete one-stop shop, just opens all the doors we needed in Chile. I mean, independently, if you talk about APV, which is the voluntary side of the house, which Luis referred to as the voluntary. The APV in Chile, Cuprum was at #1 for the mandatory pension providers, had #1 market share, if you look at those providers. The other segment of providers, which are the nonmandatory companies, the non-AFP companies, Principal had #1 market share. So of course, together we have #1 market share overall and now have the ability to leverage back and forth between them. So exciting opportunities.

So Latin America. Those accelerators of growth, quite prominent. Our organic growth, our partnerships, our differentiations have built that franchise for us. And our commitment is that we take that same learning, that same skill sets, adapt them, put the top spin on them to grow Asia, to be a dominant pension and long-term savings provider in Asia.

And if you look at where we are today within Asia, you'll see the emphasis is primarily in the mutual fund business. We've clearly established our -- put the flag in the ground there with the mutual fund businesses.

And if you look at pensions, there's a couple of holes. Recently, we've been able to fill that in Malaysia because just in the past 6 months, Malaysia, the government, has realized, I have to get private sector involvement in the defined contribution pension area. They started a new plan to supplement the mandatory program that's run by the government so as to get to the voluntary business that Luis talked about and get it through private industry rather than government promises.

But our lineup in Asia is focused now on the mutual fund, a little bit more retail and investor. And our absence of the pension fund offering is not for the lack of trying, but rather indicative of and a result of where those companies and countries are with regard to pension plan.

In Hong Kong, we've been there since day 1. They have a well-established mandatory defined contribution plan, the MPF program, we're there. We're a leadership. We're, again, the only company, the only company in Hong Kong amongst 20 providers, who is only a pension company. That's all we do.

Malaysia. With the recent addition of this new supplemental scheme, we're there in a very meaningful way. We were amongst the very first batch of a half dozen licenses that were granted. We are committed and are certain of retaining our leadership position in that market.

Mainland China. You've heard us talk about the enterprise annuity opportunity. Enterprise annuity is China's first effort to get into defined contribution business in a big way, trying to move some of the pension obligations off the government books. It's currently the -- it's been introduced and then taken out over the last few years. It's not been as fast as the Chinese government might like, in large part, we believe because there's not enough tax and no meaningful tax incentives for the people to participate. But the good news is the frustration of the take-up and the slow take-up was one of the many factors that led to a request from the Chinese government to us, the Principal Financial Group, that could we conduct some research about what is best-in-class pension products globally and how might that apply to the Chinese market.

We hired the distinguished faculty from Peking University to do a global survey of pension programs and has delivered that information now to the government, which, not surprisingly, talks about some of those accelerators of growth. You have to recognize and send people to participate in the DC market. So Mainland China is on that evolution of improving that DC pension plan.

In India, much rhetoric to date about trying to do DC pension. But at this point, bottom line, there's very little incentives, no incentives for the private sector to either develop the infrastructure to support any kind of plan or to market the plan aggressively and that's because there are some artificial price controls in some of the initiatives within India.

So that's the state of the evolution of the market. But it's the fact that they are evolving that gives us the great opportunity and the great hope for Asia to build that pension franchise going further. And in the meantime, we can -- are building and have established and will continue to grow our mutual fund platform and our understandings in those markets, so that we're uniquely positioned to be a fast mover when pension reform does come. But we're not waiting for that. We continue to focus on the differentiators within Asia that give us competitive advantage.

And you'll notice that there's a large overlap with Latin America with the one exception of advisory-based selling. We've realized in Asia the conventional wisdom is that the market is largely driven by short term-focused investing on the retail front side or even the pension side, people chasing IPO, the newly issued funds, take cash and short-term gains and then moving onto the next new issue. We didn't think that made a lot sense to us. And we actually have commissioned research in both China and in India to see if that is the reality in terms of investor needs and wants or whether there's opportunity for us to go with more advisory-based selling. And the research we did concluded that there are meaningful cohorts of people in the China and India who want, need and would pay for advisory-based mutual fund sales.

So it gets back to some of those same concepts Nora talked about. We have to get to outcome-based solutions for investing and for the funds that we offer. And we believe there's opportunity there that makes us unique in the marketplace rather than simply changing -- chasing those recent hot IPO.

So we use to have -- there's in India with our Principal Retirement Advisors. We're making investments there to build out the first advisory platform in India for retirement-based advice, arming our 4,000 agents in Malaysia to provide better financial counseling to their customers, or our bank partners China Construction Bank so that they go out and don't just sell today's fund but rather the right fund. We're making considerable investments to distinguish ourselves in the case of advisory-based selling all, alongside, building up the other competencies of global asset management and solid partnerships and strong distribution.

And it's worth noting that in Asia, 3 out of the 4 of our operations are partnerships with local banks, very strong local banks, Hong Kong the exemption. Hong Kong is 100% owned company of the Principal Financial Group. In Malaysia, our strong partnership with CIMB has allowed -- has helped facilitate the partnerships that Jim McCaughan's group has in the Islamic space with them, has also been our entry into Thailand, Indonesia and Singapore. And now, the second-largest asset management company within Malaysia, and as Larry announced earlier today, for the fourth consecutive year, viewed as the best investment asset management house within the ASEAN region.

Hong Kong. We continue to be a prominent player in the pension world with the MPF. At the same time, we're renewing and revitalizing our investments and energies in the mutual fund business in Hong Kong, not only for the sake of that business alone, but also we see great opportunity for the Principal Financial Group as the flows and cross-border flows between Hong Kong and Mainland China become easier. Much discussion there by the Mainland Chinese government about mutual recognition, easier flow of capital between Hong Kong and the Mainland, including, if you are Mainland Chinese person being able to buy funds marketed in Hong Kong and vice versa. So we believe the opportunity for us, along with PGI, in tapping and exploiting some of those opportunities is well served by building out and strengthening our operation in Hong Kong.

China. China Construction Bank, again, a marketing juggernaut. Our expectation and our track record would say went in partnership. We issue a fund or our funds will always gather hundreds and millions of dollars in that IPO process. They are marketing machine, 13,000 branches covering all of China.

Then as I mentioned, in India, we have a partnership with Punjab National Bank. And our focus in India is to really leverage and be the first mover in the advisory space within India because we believe the opportunity is there, the market demands it and our large of Principal Retirement Advisors very late last year has demonstrated that there is a market out there for advice that people are searching for the long-term planning.

So the foundation is clearly laid in Asia. We feel very comfortable that the opportunities within our existing businesses are great. We'll continue to provide growth. And at the same time, the evolving pension markets will help multiply that growth manyfold over.

So we continue to be actively focusing on strengthening our business, participating in the discussion about the pension reforms and we will continue to build the momentum, all of which gives us and Principal International the confidence to affirm or to -- as we look out for those 5-year outlook to talk about what do we see the opportunities for Principal International. The metrics you see here are similar -- or are identical, in fact, to the ones I believe we shared last year. We see the opportunity great. Certainly, these are long-term outlooks. There's going to be macroeconomic volatility and there's certainly been some of that in the emerging markets recently that we'll change them if you look quarter-to-quarter or year-to-year, but over the long term, the kind of growth rates and opportunities we see in Principal International have been the ones that we've been able to replicate in prior years.

And with that, I turn it back to Luis for some closing comments.

Luis E. Valdés

Many thanks, Ned. Very quickly in order to allow you to go with some Q&As for us. Very quickly, we certainly believe in what we promised. I mean, that is our statement here, very quickly. We're going to continue to focus on our strategy in Principal International. We believe that is the right strategy, we're in the -- with the right strategy and right timing in the right place. And certainly, we have proven credentials in order to manage the right balance between organic and inorganic growth in Principal International, and certainly, Cuprum is one of these examples and cases. We have had many of these ones before, HSBC and other acquisitions in different markets. But all in all, we believe in what we've promised and we're going to continue delivering our promises going forward in Principal International.

So having said that, we have kind of a couple of questions. Yes, we have time for some questions.

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

Randy Binner from FBR Capital Markets. I guess, just on the 5-year outlook slide, I had a quick question just on the -- for the 5-year outlook for net cash flows. That kind of decelerates a little bit going out versus where it's been more recently and can you just provide some color on how you see that changing going forward?

Luis E. Valdés

Okay. That is a very good observation. Two things. It's about -- you have to be -- it's about the quality of those net customer cash flows and essentially about those net customer cash flows coming from Asia. Most of these current customer cash flows, and if you're looking mainly 2011 and '12, we're kind of money market, essentially, money market, short-term fixed income and some corporate money -- short-term corporate money. We are shifting our years in Asia going after long-term savings and after -- that's sticky money. So you could see those number, but the quality of those net customer cash flows are going to be completely different from a profitability standpoint of view.

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

And just kind of a related follow-up, which is on FX. FX, despite significant movements in Latin America has not really been an issue for the bottom line this year. And I think that has to do with kind of natural offsets in hedging. But as you continue to grow this business, I mean, do we have to think about that differently? Do you have to ramp up a hedging program? Or is it -- are there natural offsets? And would all that be reflected in these guidance numbers?

Luis E. Valdés

Yes, let me -- it's a great question, and let me put this question under a kind of perspective. Since May when we had some people making comments, the emerging markets are becoming extremely volatile mainly because there's a use outflow of money out of those. But the truth is, if you're thinking longer-term view about currencies in Latin America, and if you're taking look to the Brazilian real, probably, which is the one that is keeping everyone a little bit nervous about it does have a kind of 11%, 12% depreciation in the last period of time. But is at -- today, the Brazilian real is running at BRL 2.3 per $1. It used to be BRL 4, used to be BRL 4. So even if at the -- trying to hedge your capital and trying to hedge your equity, if you want, that could be one of your proposition. For the emerging market, Asia and Latin America, for the last 10 years, that was a money-losing proposition for everyone. For everyone. Now, having said that, from an operational standpoint of view, we hedge all our flows, dividends. All our flows are being hedged all the time. So we think that the right way to go for hedging our equity and capital longer term is having the right basket of currencies and the right allocation of our capital and to have that kind of a hedge, as you have said. But we have to keep this under perspective. And even if you look at the Chilean peso today, which is being traded at 400 -- CLP 504 pesos, used to be CLP 700 ten years ago. So all these currency they had a tremendous appreciation in the last 10 to 11 year. And we think that these markets are going to continue growing at 4%, 5% on average. So we don't see a real, real menace about it, kind of a systematic depreciation for this currency longer-term speaking. One more. There is one more.

Ryan Krueger - Dowling & Partners Securities, LLC

Ryan Krueger with Dowling. At Cuprum, what percentage of your revenue is currently derived from voluntary contributions? And in a 5-year outlook, how do you see that changing?

Luis E. Valdés

Okay, that's a very good question. Today, it's -- we're going to go to -- let me go back to Chile. Let me go back to Chile, that is going to give you kind of good idea. We manage $40 billion today in total AUMs. We are considering accumulation, the accumulation of all our business. Just a little more than $2.5 billion are part of our voluntary business. But let me give you some kind of outlook. That market is growing at 25% in the last 10 years. The volunteer market has grown at 25% year-over-year. Our projections for that market is that it's going to grow between 15% up to 20% for the next 10 years. And our projection indicates that the voluntary industry is going to produce, in 2025, exactly the same amount of revenues than currently the mandatory industry is pursuing today. That is our outlook in general terms.

John Egan

We have overstated our welcome a bit. We do indulge if it's 30 more seconds? Again, hopefully, it sets the excitement that we have for Cuprum and hopefully some of that excitement comes through on...

Luis E. Valdés

Yes, and one minor comment for you. This is part of our on-boarding process with Cuprum because we went with all these governance and legal issues that kind of likes them, whatever. But also, part of our on-boarding process is to tell all those customer that right now Cuprum is owned by Principal Financial Group and that we're building this one-stop shop in Chile. And we -- and that's what we are doing. So as a part of our on-boarding process, we're putting an advertising campaign in Chile for Cuprum, in particular, with a brand new logo. And certainly, we overlap that campaign with our corporate campaign for Principal Financial Group. So essentially, we try to principalize all our customer in one single advertising campaign that would run in parallel our corporate campaign for Principal Financial Group and certainly for Cuprum. One issue that is going to be interesting for what you're going to see right now, the spokesman person, the spokesperson that you will see here, his name is Manuel Pellegrini. He's been the spokesman person for Cuprum for many years, and we renew his contract for 2 more years. But what is interesting thing here, Manuel Pellegrini is right now a very famous football coach, real football. Football. And right now, he's been very famous. Cuprum, they made a very wise decision like 7 years ago to start working with Manuel. And Manuel right now, he is probably at the summit of his career. He is the brand new current coach for Manchester City. So having said that, you can run the tape.


John Egan

We're going to have lunch now, so you can help yourself. It's in the back of the room. We will come back at 12:25, so it gives you about 15, 20 minutes. Certainly, introduce yourselves to management. And we'll get started once again in about 12:25. Thank you.


John Egan

So we're going to get started here. If everybody could find their seats. So it's my pleasure to introduce Tim Dunbar, he's our Chief Investment Officer. Like I said, a new face to maybe some of you, but a very seasoned veteran of Principal. And he'll tell you a little more about his background. But here's Tim.

Timothy Mark Dunbar

Thank you. Well, the new guy gets the dreaded after-lunch spot. So here we go. I'm going to try to keep you guys awake. Now some of you know my predecessor, Julia Lawler, and some of you I know are very disappointed. Julia is self-proclaimed forward-fashion -- fashion-forward, I don't know what the term really is. I don't really know what it means. It has something to do with great shoes and big jewelry, and unfortunately, that's just not me. So that is one change that you'll see in the Chief Investment Officer role.

Other things that are going on there, really, are a lot the same. What you'll see is that the portfolio continues to be very high quality. It's a very well-diversified, largely fixed income portfolio. And our losses remain as expected, which means that those losses are really well within our long-term pricing assumptions.

Few other things that have not changed in the portfolio, our strategy, our philosophy is really the same. The assets we invest in are driven by the products we sell, the liabilities that we bring on the book. Asset/liability management is a core focus and function of The Principal Financial Group. It's what really keeps this portfolio together, and takes the risk out of it. We'll talk more about that in just a minute.

As well, the resources that we have on the portfolio, the investment asset portfolio, generally are the same. We utilize Principal Global Investors to manage most of our assets, predominantly, the bond fixed-income portfolio and the commercial real estate portfolio. You heard Rafa, you heard Jim talk about Finisterre. We use them as well, and we always look to use our boutique structure as best we can.

So the resources are roughly the same. When we talk about global assets under management, there, we're talking about Principal International as well. We have some assets in Chile, Brazil, Hong Kong and Mexico. We provide oversight where we think it's appropriate. That means that we ensure that there is appropriate investment policies in place, in line with the liabilities that they're taking on in those locations. We provide sharing of best practices. We help them build capabilities when we can. We share resources across and we'll talk about a couple of examples of that going forward.

But at the end of the day, those investment professionals in each one of those locations are investing assets largely locally, and they remain responsible for those investments and for the performance of those investments.

So let's take a look at Principal Financial Group invested assets overall. Really, not a lot have changed in the major allocations there. You'd see a little bit of a decline in assets under management from the end of the year. That's largely because of the interest rate increases. But other than that, mostly, the allocations are pretty much as you would have seen back then.

The portfolio itself is made up of 2 components: U.S. invested assets and the Principal International invested assets. A couple of comments about the bottom part of the slide, Principal International, clearly, the smaller piece, about $6.2 billion. That's remained fairly stable from the end of the year. Main reason for that is the acquisition of Cuprum. The Cuprum encaje, that one-person investment we make in the fund closing to the Other category, largely because it's mostly equity-focused.

A couple of other things. The direct finance leasing, 11%. That's one of the examples I'd point to as a great collaboration. In Chile, that would be their version of commercial mortgage loans. Todd Everett and his group have worked very closely, not only to build that capability, but to build the portfolio and to monitor it on an ongoing basis.

Most of the assets here are in Chile, about $4.6 billion. I mentioned the Other markets that they're invested in, but that's really the bulk of them. If you look at the U.S. invested assets, you would see that cash is down from the end of the year. We had built that cash to prepare for the closing of Cuprum. That obviously occurred February 4. So now we're back in line with our more long-term allocation to cash. You'd see commercial mortgage loans percentage go up just a little bit. You'd also see that corporate private bond portfolio allocation has gone up a little bit. That's largely because that's what we've been finding the best relative value as we go forward.

One of the things I mentioned earlier was our focus on asset/liability management. We spend an awful lot of time modeling how we think those assets and liabilities are going to perform, and then going back and testing that with what really happened. If you look at this chart, which I think you've seen before going back to the crisis, you'd see a very similar pattern. I'd comment to you that if you look out another 18 months, you're going to continue to see the very similar pattern. That's important and a very important point to drive home to this group because it means that in stressed situations, we're not forced sellers of assets.

To explain that a little bit more, I wanted to talk specifically about commercial mortgage-backed Securities. That's a capability that we have on the commercial real estate side. Again, very strong, long-standing capabilities in commercial real estate. All of the groups within commercial real estate coordinate with each other and share information. Commercial mortgage-backed securities have provided great relative value for us.

You can see during the crisis, during those stressed situations, had we been forced sellers, we'd have taken a great deal of losses at that point in time. Being able to hold those assets because they're matched with our liabilities means that we're able to see a great performance. So over a 7-year cycle, the yield on this portfolio would be somewhere about 6.5% to 7%. Very attractive yield, provides very attractive spreads for us. We think it will do that going forward.

Now that's not to say we haven't been seeing losses. We have seen some losses in this portfolio because the underlying assets, our commercial mortgages, they're a little lumpy. So they created some volatility on the losses. But we still think this is a good asset class for us, and we've continued to allocate. We plan to keep the percentage of commercial mortgage-backed securities in our portfolio about where it is today. Right now, we're seeing a lot of opportunity in the interest-only tranches of the AAAs. I think that's a very good area for us to be participating in, and we'll continue to do that.

All of that means that the credit losses, as I've said before, remain in check, remain close to our projections. This is a slide that we only update once a year. We'll be doing that at the end of the year. We think it's representative of where we should come out in 2013 and for the next few years.

A little bit more about the portfolio. Fixed income portfolio, obviously, the biggest component of it. You can see, as you march through time that, that portfolio has continued to be very high quality, even gotten a little bit better over the last few years. Say, there's been a tailwind, we've seen positive credit drip. I'm sure all of you are aware of that. And that positive credit drip has meant that the portfolio investment grade has gotten better, and that the below investment grade has shrunk just a little bit as we move forward.

Also, earlier in the year, we felt spreads were very tied on high yield, and so we allocated away from that asset class a little bit. That's part of what's going on with this portfolio. But again, everything in this portfolio looks pretty good, very high-quality.

Commercial mortgage-backed -- commercial mortgage loan portfolio, also improving. Look at the key factors that we look at. The loan-to-value continuing to move down, with the fundamentals of the marketplace continuing to improve. Probably at the trough, we were 35% below peak value. We've come up about halfway back. We're still 15% below, on a U.S. basis, so we think there's still some more room to move up on some of these valuations.

Debt service coverage ratio is continuing to improve. And then the loans that we're concerned about, those above 80% loan-to-value and below 1.0 debt service coverage, that portfolio, that piece of the portfolio is continuing to shrink. So very good story here as it relates to commercial mortgages.

So one of the things that we've been facing, like all of our brethren in the life insurance world, is the low interest rate environment. Fortunately for us, or at least we think fortunately for us, the duration of our portfolio -- and again, largely because of the liabilities, is shorter than a lot our peers' would be. That's kind of a tailwind for us as we move into an interest rate increasing environment, partly because it doesn't have as big of an impact on the existing portfolio, but also because we're able to invest in those higher-yielding assets as we move forward a little bit more quickly than some of our competitors. So we think that's a good thing.

Still, like everybody else, I'm sure you've heard a lot about alternative asset classes. We've been looking more at alternative asset classes, that was part of our allocation to Finisterre at the end of 2012. Other areas we focus on, private equity real estate, again, real estate expertise, real estate group, like it a lot. The other areas, infrastructure, we've allocated to mid-market loans, we've allocated a little bit to. This is the area that if we use outside capabilities, it's where we'll likely do it. Principal Global Investors doesn't have expertise in some of those areas, at least not today, so that's why we've used outside managers for that.

So we continue to invest our assets the way we have. The strategy has not changed. High-quality portfolio. And if you haven't figured it out yet, we like real estate, commercial real estate.

So with that, I'm going to turn it over to fleet of foot, Terry Lillis. I'd ask Terry -- he did meet -- Larry challenged last year, and I'd ask him, if I were you, what his time was? I'm not sure you couldn't beat them, Larry, with your sore foot.

Terrance J. Lillis

Thanks, Tim. Actually, I did meet his challenge. Tim, Larry, still has to meet your challenge. And by the way, just to set the record straight, I did set record time for my 5k last year. It was the only 5k I've ever run, but I did set record time. Okay.

Well, I want to thank you, all, for taking the time out of your busy schedule to come to learn more about The Principal. Hopefully, you've heard more about the investment management plus strategy and the opportunities that we have ahead of us.

We've got some pretty exciting things that you've already heard about. I want to take a few minutes this afternoon and talk about the impact that this evolving strategy is having on our shareholders. I also want to talk a little bit about our thoughts about our capital deployment strategy and set some expectations for future earnings, as well as revenue and margin growth.

But before I do that, I'd be remiss if I didn't say thanks to John Egan and his team for doing a wonderful job of getting this all together. It's kind of like recruiting cats [ph], and they've done a pretty good job of putting it together -- not a pretty good job, but a great job. Thanks, John.

So as Larry said, we have the right strategy, and we're executing on that strategy. He talked about 1 growth engine back in 2001, and 3 aspirational businesses. Well, those businesses combined generated about 30% fee-based earnings out of the total operations back in 2001. And you can see, as we've moved forward, that's now over 60% of our earnings are fee-based. Now that's not to say that the risk and the spread businesses haven't grown because they actually have grown. Despite some scaling back, despite some exiting some of those businesses, they have continued to grow.

And we have that expectation into the future that they'll continue that solid, stable growth into the future. And you can see that going from 60% to 70% over the next 5 years, that the fee-based businesses are going to be growing faster than those risk- and spread-based businesses.

Now for your convenience in future financial supplements, we'll provide a table that will summarize what we perceive would be the fee-based businesses, the spread-based businesses, as well as the risk-based businesses, and looking at revenues, margins, as well as earnings. And on Page 95 in your booklet, there's a sample of what we'll provide in future supplements and that's based upon the 6/30/2013 numbers.

Okay? So what does this mean for our shareholders? It means that fast-growing fee-based businesses are going to generate more capital that we can deploy to enhance shareholder value. And we'll also see that will increase return on equity. So let's start with return on equity.

Larry talked about this in a great amount of detail. I just provided bigger numbers on my chart. But what he said was that we have been at a 16% plus ROE in the past, and we're going to increase that ROE in the future. 15% has kind of been a bogey that's been thrown out there, and so we're using that as kind of a benchmark. But that's, by no means, where we think we'll ultimately end up.

So as you look at those earnings, as he said, "We're back to pre-crisis levels in terms of operating earnings." Now keep in mind that we have made some tough decisions during that period of time to reduce some of our -- or exit some of our businesses, scale back where it didn't make sense economically. We made those tough decisions, and they probably hurt us in terms of an ROE calculation because we didn't replace them with fee-based businesses quick enough.

However, on a go-forward basis, we should be changing the trajectory that we will see in terms of ROE. He also mentioned that we had $6.5 billion of mean equity in 2007, $8.5 billion in 2013, is what we're estimating. That's over 30% increase, where we've gone to less risky fee-based businesses. So what does that mean? Why do we think that we can improve ROE into the future? Why do we think that we can increase it 50 to 80 basis points annually?

Well, let's look at it because we have options ahead of us. The first option is, let's focus on the numerator, growing earnings. We think that the long-term growth rate is in that at 10% to 12%. Now that's under normal macroeconomic conditions. Now what does that mean? Well, the equity market. We're not going to see a 30% decline or a 30% increase. We may actually see that, but we're not planning for that. We look at a long-term total return of about 8% annually.

So that's not unreasonable. You look at the interest rate environment. We expect a slightly increasing interest rate environment. We're not expecting the declining interest rate environment that we saw in the last few years or the level interest environment out into the future, nor are we expecting spikes into the future. These all have implications. And we're also expecting some stability in the currency. We're not really expecting to see the strengthening of the dollar as we did in the last couple of years. So more of a long-term view. Now you can adjust that accordingly with your thoughts, but that's all underlying thoughts in terms of macroeconomic conditions.

Now that does have an impact on the term -- the growth of our earnings, we think at 4% to 6%, because of market performance. We also think that there will be 4% to 5% due to the growth of the businesses that you just heard about. Strong sales, strong net cash flows leads to increasing assets under management and increasing revenues into the future.

And we expect that in both the growth of the fee-based businesses, as well as the spread in risk-based businesses. But we also look at the growth of our expenses with respect to the growth of our revenues. We make sure that we align them so that they're not growing faster, but at the same -- faster the revenue, but at the same time, we're going to invest in our businesses in the future.

All that to say is we think we can get 10% to 12% increase in the operating earnings. We've got options. We've got more than one growth engine.

We also have the opportunity to manage the growth of the denominator or the amount of capital supporting the business. We talked about this movement to a fee-based model. Fee-based does not need as much earnings to support the organic growth of that. And so what you'll see is this model will slow down the growth, as well as any capital deployment that we choose to return to our shareholder in the form of a dividend or a buyback, and we'll talk about that in a few moments.

Over the past few years, you've seen a relatively modest growth in the equity, the mean equity of our organization. Now in 2011 and 2012, this was held down a little bit because of increased share buyback programs during that period of time because of the capital that we built up in 2009 and 2010. It looks like we're seeing a significant jump in our equity in 2013, part of which is due to the Cuprum acquisition. Another part of which is due to fewer share buybacks that we had in 2013. We think, on the long term, that 4% to 6% growth in mean equity should be a pretty reasonable estimate.

So let's put it together now. We believe that we can get to a 15% ROE in the next -- within the next 5 years. How? A combination of those 2 things: growth in the numerator and managing the growth in the denominator. So a 10% to 12% growth rate, looking at a 5% to 6.5% -- that's kind of in line with that 4% to 6% that I talked about before, should get us to a 15% ROE in the near future. That's 50 to 80 basis points out in the future, annually. So we have options as to how we can get there. And as we've said before, this is not necessarily where we're going to peak. This is just the direction that we're moving and the speed at which we're expecting to move.

Now let's change to capital deployment and discuss that a little bit. You've seen this chart, but it's a little bit different than what you've seen in the past. What isn't different, though, is the amount of earnings that it takes to support our organic growth. Because as we move to this less capital-intensive, fee-based businesses that are growing faster and faster, you'll see that the amount of our earnings that needs to support this business moved from 50% of our earnings in 2007 to where we're currently about a 1/3, and moving to 25% to 30% in the future.

Now what has changed on this chart is our focus on the dividend. Now we've isolated the common stock dividend, and you recall in 2012, we moved from an annual dividend in 2011 to a quarterly dividend in 2012. It's an indication of our view of the sustainable growth of earnings into the future.

You'll also note on this chart that we're increasing as a percent of the earnings. And notice what also is depicted in this is, is that earnings are increasing. So we're expecting dividends to not only increase in terms of absolute dollars but as a percentage of our net income. Okay? We feel 40% is kind of a good target at this point in time, and we'll revisit that as we get closer to that 40%.

The other component of it is what's available for M&A or acquisitions, as well as share buybacks? Okay? We have a very active pipeline for acquisitions. But as you can imagine, that's pretty lumpy. They come periodically. So we'll use the buybacks as the rheostat to adjust that capital deployment as well. And we'll do it what we believe is an appropriate manner.

Now as Larry mentioned, we've been out on our front foot. We've been executing on a strategy, and it's been a lot more fun lately. But I remember 4 and 5 years ago where I was told, "You don't have enough capital to survive." We disagreed at that point in time. And we've -- at the same time, we made some very hard decisions to exit some legacy business because of scale. We've also dialed back some businesses on our spread-based business because it didn't make economic sense to do it. And in some cases, that spread-based business simply went away from us.

But what we've then done is taken that acquisition -- or excuse me, that extra capital and actually executed on our global strategy by doing acquisitions, as well as paying dividends and increasing dividends, as Larry mentioned before.

Now let's talk a little bit about our rationale for acquisitions. Now every company, and you're very well in the discussions as you have, you have to make a balance between: do you acquire businesses to increase shareholder value or do you simply return the capital to the shareholder? And that's a decision that we have to make just like everybody else does. But we think we have options. We have opportunities to enhance shareholder value for the long term by making some acquisitions. But the way that we look at it is, first off, we expect them to be strategic. It has to be a strategic fit. It has to add to scale or to capabilities or into a niche market that fits our long-term global strategy.

We also think we have to have the ability to on-board it, i.e., we have to be able to integrate it quickly and effectively. Now you heard about some of the recent ones, Finisterre, Cuprum, Edge, just to name a few. We've done an excellent job of this, and we've learned how to do this effectively, efficiently and quickly.

And then, obviously, pricing has always had an impact on it. It impacts all the decisions. And when we look at pricing, we look at the internal rate of return. We have an expectation that it's going to meet a certain benchmark. But at the same time, we don't want that to take us 20 to 25 years to recognize the value of that. We need to have it upfront. So we also compare that acquisition to a share buyback program, and expect the same level of accretion over a 3- to 5-year period. Now some of our acquisitions have been accretive immediately. Luis mentioned HSBC AFORE earlier. That was accretive immediately compared to a share buyback program.

Some of the acquisitions that we've done have been more in that range, at 3 to 5, yet it is returning value to the organization. But not always do you see the value of the organization through that one particular entity. Finisterre is a prime example of that. We saw enhanced earnings in our retail annuity in the fourth quarter, and we called that out. That's where the earnings showed up. So there is value there as well.

So acquisitions are going to continue to be a very significant part of our capital deployment strategy. Now how have we done so far this year? Well, as you are well aware, we estimated at the beginning of the year we'd have $400 million to $600 million of capital to deploy on dividends, share buybacks and acquisitions. And to date, we're just a little over $400 million. And with the anticipated dividend in the fourth quarter, we expect to be middle part of that range. Now where will we be for the rest of the year? I'd say that the second half of the year, we'll focus on buybacks that will be more in the anti-dilutive nature. However, we are going to also look at opportunistic buybacks in the second half of the year, but that will be based upon the regulatory environment and our risk assessment of what's going on in the environment as we get closer to the end of the year.

One of the other macroeconomic conditions that is generating a lot of interest is the interest rate environment. You know you've heard us comment in the past that we are not -- we, Principal, are not as impacted by a declining or a level interest rate environment than some of our insurance peers because of the mix of 60% to 65% of our businesses are fee-based, as well as the strong asset/liability management that we talked -- that Tim talked about earlier, as well as our risk and our spread-based businesses aren't growing as fast as those fee-based businesses.

So in a rising interest rate environment, we would expect the same thing to occur. We probably aren't going to be as benefited as much as maybe some of our insurance peers because you'd look at a couple of places where you would expect to see it, net investment income. Our general account is not growing dramatically. And because of that, you won't see net investment income going up. And because of the strong asset/liability management, it matched up with our crediting rates.

We'd also say that one area you will see is when you start to reflect the expenses of security benefits. What we call security benefits is pension and other post-retirement benefits. And as that discount rate increases, you'll see less expense. Those have been 2 -- for the last 2 years, that has been significant headwinds. This -- next year, depending on what happens with interest rates, you should expect to see a tailwind in that expense.

And the other area that I think a rising interest rate environment that might benefit us is in the potential full-service payout business. That's the terminal funding of Defined Benefit plans, which we have been very good, and we think we'll have some pricing power in it. And as the interest rates increase, you'll see more of that coming to the market. And we think we can compete in that. Bottom line is we're going to benefit from a rising interest rate environment.

You heard the presidents talk about their particular businesses and the growth rates that they have in place. Now this hasn't changed from a year ago. What has changed, though, is the base at which it's applied and maybe the pattern that it's going to move out into the future.

But what this is not, this is not guidance for 2014. We're going to wait until later in 2014 -- 2013, as the year unfolds and as we have a better view of what we think 2014 will be like, and then, we'll talk about guidance at a call later this year.

But this should generate 10% to 12% growth in operating earnings into the future. Now the other part is these are longer-term trends, and we're all very well aware of what is going to happen in the marketplace. There's going to be volatility in macroeconomic environment, there's seasonality of earnings, as well as -- you know what? There's going to be recognition of sales-related costs that will vary by different products that we bring on the books.

And finally, my key takeaway from all this is what I stated before. Faster-growing, fee-based earnings is going to generate more capital that we can deploy to enhance shareholder value.

Well, that concludes our prepared remarks. What I'm going to do now is invite my colleagues to come up to the table. Give us 2 minutes to get set up for questions-and-answers, and we'll go from there. Thank you.

John Egan

Okay. So we actually believe, at Principal, that Q&A and is a team sport. It's not an individual sport, it's a team sport. So not only is this the team but we're very happy to kind of enlist and engage others on the team who are out here at the table. So that's sort of the queue for all of you guys to get ready. So heads up. So who's going to go first? Seth Weiss, okay.

Seth Weiss - BofA Merrill Lynch, Research Division

Seth Weiss, Bank of America Merrill Lynch. My question is on capital deployment, and Terry, you mentioned the opportunity for opportunistic buyback in the second half of the year depending on the regulatory environment. So a, just curious what specifically you're looking for that could make you flip the switch in terms of being comfortable on ramping up buyback a little bit more in second half of the year? And then more broadly, in previous years, you've given guidelines for the next year out. So for 2014, in terms of the potential total capital deployment, curious on what your thoughts would be for 2014, combining M&A, dividends and buyback?

Larry D. Zimpleman

Okay. So the way this is going to work is I'm going to comment first and then, they'll probably comment -- probably, somebody else will comment. But let me just make one comment, Seth, on your first part of your question around opportunistic share buyback. And we sort of put that phrase in there, "opportunistic," which if you heard us talk in 2005 or 2004 or 2006, you wouldn't necessarily have heard that. I think as a management team and I think as a board, we now understand perhaps, better than ever, that share buyback is not a -- you can't buy shares back to success. It doesn't work that way. There are times when share buybacks make a lot of sense. And there are other times when there are more effective ways to deploy capital. And so I would describe that as a migration in our thinking as a management team, and to some degree, in the thinking of the board when they make decisions around capital deployment. So we don't have a bright line around that. I mean, if you say, "Okay, Larry, so tell me what's opportunistic and what's not." I don't have a bright line around that. But if I could go back and rewind the clock, I mean, buying back shares when I'm at 2.2x booked, that's probably not an effective use of capital, right? So we're not in that environment today, and I don't want to sort of -- we're not trying to send any signals to anything else other than to say, generally and sort of generically, we have begun to sort of change our thinking around that. And it's not just such an automatic. Now I also say that because, again, as you've heard today, we have a lot of opportunities to grow our business. We're in a lot of interesting places doing a lot of interesting things. And I would say, Asia isn't yet at a point where there are as many properties for acquisition as there have been in Latin America or there have been in the U.S. or that there have been in the asset management space. So we'll have to see how all that develops over time. But with that, I will hand to Mr. Lillis.

Terrance J. Lillis

Yes. Thanks for the question, Seth. One of the things that I talked about with the regulatory environment is the NAIC has standards at which we based our capital decisions on. The amount of capital we have available is based upon anything at the light company in excess of 350% RBC, and any cash that we actually have at the holding company that's not earmarked for deployment. With the movement of what we're seeing within the NAIC in terms of regulatory capital, collateral requirements, et cetera, we'll keep a fresh set of eyes on that. 350% RBC is what we have talked about in the past. I think as you move into the future, we think right now a 420% to 425% RBC is probably a pretty good level for us at this point in time, albeit I think we're going to see that moving down over a period of time. We've seen some other insurance peers also talk about that. I think it makes a lot of sense, particularly given our liability structure, I feel that if we get to that 400% level, that will also free up a certain amount of capital. And then the other part of it is the total capital reserve that we have or the cushion that we're keeping. We're doing much more work on that, looking at our own internal model, looking at the risk, taking into consideration the environment, what we're seeing. And because of that, there may be opportunities for opportunistic or buybacks based upon the intrinsic value of the organization, as Larry alluded to. So we're not eliminating them at this point in time, but we're just going to keep a very watchful eye.

Larry D. Zimpleman

Any comments on capital deployment for 2014 or stay tuned for the call is probably...

Terrance J. Lillis

I'd say stay tuned for the call. We'll take a look at that. And in '14, we'll -- later in this year, we'll have a much better view of what we're seeing in terms of acquisition activity, much better view of the regulatory environment, the risk assessment of our business, what kind of sales growth, et cetera. So stay tuned.

Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division

Jeff Shuman from KBW. You had to raise capital in the last downturn, which this could be a little bit differently than other companies that think of themselves principally as an investment management-type companies. You've talked about a number of changes since then. You've reengineered the business mix, you've derisked in certain ways. You have more capital, a number of changes. I guess, the question is have you reengineered enough to position yourself the way want to be positioned the next time we have a credit or a real estate downturn? I mean, you do still have a material balance sheet. So have you done enough or you're contemplating maybe things a little more drastic than the kind of natural evolution of the business mix?

Larry D. Zimpleman

Right. So a couple of comments around the last financial crisis. And I will first just say that if nothing else, Jim McCaughan serves a very valuable role for all of us because I think he reminds us every Friday, when we have an investment committee, that it must not be too much longer before we have the next financial crisis. And I'm actually somewhat serious when I say that. I mean, we're not living in a naive world. So Jeff, we do think a lot about that. However, I would have a slightly different interpretation of the sort of '08, '09 period and the particular pressure that was extracted on Principal, as well as kind of all companies in our sector. In our case, actually, I think it was more of a unique circumstance relative to a $450 million senior debt refinancing that we had coming up in August 2009. And I think that was what was particularly sort of troublesome by many, to Terry's point earlier, when he said, "Do you have enough capital?" It's probably less about capital. It was are you going to generate the liquidity? If you can't go to market to do the refinance of the $450 million senior debt, are you really going to have the liquidity? And I think again what was demonstrated when we were the first, really the one -- first one in our sector to go to the markets initially for equity, subsequently for senior debt, I think actually what that shows is something that's really, really important, which is that there is a significant number of buy-side investors who actually understand, value and are willing to support the long-term strategy that you've seen us talk about here today, right? They really get it, and we value -- and some of them are here in this room. And we truly value the fact that they really understand that. So I would say we are very mindful -- I'm actually more mindful of the liquidity issue than I am really the capital adequacy issue. I feel very confident around the capital adequacy issue. And I don't have exactly the numbers, but Terry will have them in a minute. But I don't think we have a debt maturity coming until 2019. So other comments?

Terrance J. Lillis

No, I think it's absolutely right. And Jeff, it's a good observation on your part, too. But one of the things that Tim commented on today and I've commented on in the past is the characteristics of our assets and liability. And we have done an excellent job over the years and will continue to do so in future of matching the assets and liabilities. What I think we've kind of moved back to during the financial crisis, was that liquidity at the holding company. So to your -- what are we doing differently now? We've got our Treasurer, Teri Button, in here, and we are talking constantly in terms of having the liquidity at the holding company that we need to satisfy our requirements out in the future and making sure that, that is well in place. And as we get closer to those debt maturities, albeit they're a ways off, that there's some opportunities to actually to deleverage ourself over the next couple of years, we'll take those -- we'll make it an advantage -- to our own advantage to do that. So we'll look at the liquidity at the holding company in addition to the liquidity at the life company.

Larry D. Zimpleman

I think actually, our next opportunity, Jeff, I think there's around $100 million of preferreds, relatively high coupon, that we're able to potentially repay in early 2014.

Terrance J. Lillis

Well, in 2014, it's surplus note. Later in 2014, early '15 is the preferreds.

Larry D. Zimpleman

So that's partly why the question about what capital are you going to have to deploy in 2014 is partly attached to how we sort of view the opportunity to potentially call in surplus note, given it is about an 8% -- I think it's about an 8% coupon. Yes, go ahead.

Erik James Bass - Citigroup Inc, Research Division

Erik Bass with Citigroup. I was just hoping you could comment a little bit more on the ROE outlook for International. I know that some of the reason the returns have been held down, there's obviously investments in the business, as well as goodwill. But kind of when do you see that ROE starting to trend higher?

Larry D. Zimpleman

Luis, the question had to do with ROE for Principal International?

Luis E. Valdés

Okay. Operation is -- after the acquisition of Cuprum, certainly we're having a different trend for our ROE. We expect to have the ROE for PI at the end of the year in around 8.8%, close to 9%, certainly business as usual. And having the macroeconomic conditions in the kind of normal trend, we're going to that path. We are looking for 2015 to have a solid double-digit ROE for PI in the range of 12%, 15%. That is kind of prediction that we have. Any...

Larry D. Zimpleman

I think, John, question?

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

Yes. John Nadel from Sterne Agee. I guess, sort of a follow-up on the 350% versus a 420% or 425% RBC. I mean, I think one of the things we always -- well, I say -- I'll speak for myself. One of the things I always felt a little bit more comfortable about your RBC target at 350% as opposed to some of the others who continue to raise them was your underlying business mix on a relative basis. And there's obviously been a lot of focus on that, not just today but over the last couple of years, your mix shift fee-based, et cetera. So I guess, I'm trying to understand why now in 2013 with the S&P at all-time highs, with rates higher, maybe not going much higher from here but higher, with no real growth of your variable annuity business, with all those kinds of things behind us, why now does the risk-based capital ratio maybe get reset higher by 75 points? And if you could just remind us also what does that 75 points translate to in dollars?

Larry D. Zimpleman

Sure. So I just want to -- I think we may have given a slight misimpression that the reason we talked about 350% historically is not because that's where we wanted to necessarily run the RBC ratio for the life company at. We did it because it was just sort of a measuring stick for excess capital, right? And as Terry said, we've maintained a what we call a TCR. I apologize, we use a lot -- we throw a lot of kind of initials around. It stands for a target of capital reserve, which was an extra amount beyond the 350% RBC that reflected our view of the capital that we needed to manage the business. It was not an RBC view, it was our view. And historically, that has been around $1 billion of capital beyond the 350% that reflected our view of what we needed for the risks of our business. So if you go back and look at the RBC of the life company, it's been anywhere from sort of 420% to 450%, okay, broadly speaking over the last couple of years. I think what Terry is saying is we probably now today think of having that more at 420% than 450%. I don't think any of us are intending to say that we would bring it down to 350%. So hopefully, that helps a little bit on the kind of on the RBC question. So we're going to try to hold it more in that 420%, 425% range. I know I missed one of your questions, John.

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

Well, I think you've got it. It was $1 billion.

Larry D. Zimpleman

Okay. Yes. And so that's the TCR. Because again we understand that regulators, particularly in an environment coming out of a financial crisis like we've been in the last 4, 5 years, regulators are going to impose new thinking about what are the proper levels of capital. And we also understand that imposing that new level of thinking, they're not going to be thinking less, they're going to be thinking more. And so that's where when you read about one regulator does this, does that, whatever, remember that's not necessarily a dollar-for-dollar impact on The Principal Financial Group because quite frankly, we've been holding some level of capital above that to begin with. So to some degree, when regulators change the level of regulatory capital -- and again I don't want to imply dollar-for-dollar. But what that does is it brings down, in our thinking, as we hold the capital we think we truly need, it may bring down that TCR in a somewhat corresponding fashion, if that makes sense. Am I communicating that?

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

I think so. I get the concept. I guess, I'd be a little bit remiss, given the news of the past 24 or 48 hours, if I didn't sort of parlay this discussion, if you will, into your thoughts or reactions to the New York regulator commentary or reports about SGUL and AG 38.

Larry D. Zimpleman

Right. So a few comments. First of all, I give Dan and Deanna and the team a lot of credit in the sense that we've been working to recognize -- we've been working to make SGUL a smaller and smaller part of our new sales activity. So today, SGUL is sort of in that 40% approximately of new sales range, Deanna? Yes, she's nodding head. So sort of in that range. And as an alternative actually, we've been ramping up EVUL sales, variable universal life sales. That's often used in our nonqualified deferred comp. And we've been ramping up in a significant way our term sales as well. And you've seen that over the last kind of 2, 3 quarters. My comment really is it's a general one, and I've said this in 1 or 2 other places, so this isn't really the first time. I mean, I think that any regulator has a really difficult job because I think they have to balance 3 very important things. They have to balance the capital requirements that they're going to impose on the companies they regulate, one. Number two, that influences the supply of competitors in the marketplace because the regulator has a responsibility to have sort of a robust active marketplace for consumers to choose from. And number three, it's influenced by the price that consumers are going to pay for that particular product, which in this case is life insurance. So if you push too hard on the capital lever -- these are all interrelated. If you push too hard on the capital lever, what's going to happen to the supply of competitors? It's not going to go up. It may stay the same or it may go down. And if you push on the capital lever, what happens to the price that consumers are going to pay for insurance? It's going to go up. Because you require higher capital, companies are going to reprice products. For example, as interest rates in the marketplace have come down over the course of the Fed's 0 interest rate policy, I think we've repriced our universal life with secondary guarantee policies, something like 9x in the last 4 to 5 years. So if you impose higher capital requirements, you're going to see price of insurance go up. The problem, in my view, is that the insurance commissioners, in imposing higher capital is one thing, but who's going to be the consumer who's going to stand up and say, "I don't really want to see my price of insurance raised 25% or 30% because you, the regulator, are imposing higher capital standards." When in fact, there hasn't been an insolvency and there's never been anyone who's lost a penny on UL with secondary guarantee policies, right? So the point is that, at the moment, this kind of this obsession with capital. And at some point, there's going to be a recognition that, that's going to result in higher prices -- will result in higher prices. And somebody, the regulators, are going to have to decide, is that appropriate to see prices go up by 20%, 25%, 30% just so insurance companies are required to hold higher capital? We won't make that decision. Somebody will make that decision. So Eric?

Yaron Kinar - Deutsche Bank AG, Research Division

Yaron Kinar from Deutsche Bank again. Larry and Terry, you've, I think, pretty consistently communicated the idea that as we move into less and less capital-intensive businesses, your ability to improve capital deployment would grow or you just have improved capital deployment. And if I look at the year-over-year presentations here, and maybe I'm nitpicking here and I apologize for that, but it seems like your overall capital deployment here between dividends, M&A and buybacks has actually decreased slightly from your 5-year target a year ago to your 5-year target this year from 75% to 70%. So that was just, well, counterintuitive to me, and I just want to hear your thoughts on that.

Larry D. Zimpleman

Yes, the way I would -- I'll have Terry comment in a minute. The way I think about that is that we build up substantial amounts of capital in the '08, '09 period. It was partly through sort of not doing any share repurchase. It was partly through raising $1 billion of common equity. And so we really -- we accumulated that excess capital in 2008 and 2009. When we then started to deploy that in 2010, 2011, if you just kind of sit back and think about it in a general way, we were sort of, if you will, at that point deploying net income plus some portion of the excess, excess that we've built up during '08, '09 period. As Terry said, we don't know if $8.5 billion is exactly the right number on which -- of equity on which we want to run the company. But the point is we don't necessarily have an obvious excess amount to deploy that we did, say, in 2010 or 2011. So sort of what's happening is we're kind of like glide-pathing into that level of capital deployment that will be the annual sort of percentage of earnings or net income that we have to deploy year after year after year. I don't know if I'm communicating that well. Does it make sense? What I'm saying is effectively it is coming down a little bit only because -- not because of change of mix of business but because we've gotten rid of most of the excess, the excess capital, because we had been hoarding that capital during the '08, '09 period.

Terrance J. Lillis

Yes. And I'd add, Larry, that as we acquired Cuprum, which was a tremendous acquisition for us and fit right into our strategy, helped to really enhance us as a global leader in retirement and long-term savings businesses, we acquired a certain amount of debt in order to do that. And as a result of that, 3 of the rating agencies put us on a negative outlook. They wanted to see how we were -- how the integration was going, what kind of earnings were we going to get, what kind of coverage ratios would we have. And you can see that one of them, S&P, actually moved us from a negative outlook to a stable outlook. The 2 others, Fitch and Moody's, are in the process of reviewing it right now. And the ratings are -- relative ratings are important to us. And to simply come out and to buy back a bunch of shares at this point in time may not necessarily sit as well in terms of relative ratings. And I do think that we are executing on the Cuprum acquisition. It is doing, just as you've heard earlier, just as we thought. But there is a concern there that we have to continue to watch out for. But as Larry said, we have been continuing to deploy capital. We see it as it as an increasing percentage of our net income in the future. Our increasing of the dividend is a way of deploying capital. And share buybacks are not the only way that we will deploy capital in the future, but it's part of our balanced strategy.

Yaron Kinar - Deutsche Bank AG, Research Division

Sure. If I may, one follow-up. So when we look at that 2018 target, the 5-year ahead target of roughly 70%, does that still incorporate some excess release? Or is that a good run rate for us to think about going forward?

Larry D. Zimpleman

Yes, I think we're really getting into the zone where we're essentially at the run rate. Eric?

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

Eric Berg from RBC Capital Markets. And my question, too, is directed either to you, Larry, or to Terry. I think that one of the issues that persists in investors' minds, one of things that investors continue to struggle to get their minds around is the significant difference in profitability as measured by ROE between Principal, on the one hand, and companies that they perceive to be comparable on the other. Now I realize that you're probably not going -- you're not in a position to talk about the economics of or the accounting of Prudential or an Ameriprise. But it's a matter of fact rather than of opinion that these companies are also in the asset management business. They're also in the insurance business. Fact rather opinion, they are also in international. And yet these guys are running at dramatically higher ROEs. So as we sit here today, what is the biggest reason for the significant difference in ROE between whatever competitors you think of as your closest comparable companies and the 10.5% or whatever the precise number is that you're at?

Larry D. Zimpleman

Yes, I think those are really good questions, Eric. And I can't speak to Ameriprise or Prudential. I just don't know the particulars of that. I can say that we could -- if we decide as a management team and a board that we were just going to focus on ROE over the next couple of years, we would develop a strategy to do that. And I think it would be the wrong strategy in the long term because it would be a strategy more focused on share repurchase, it would be a strategy less focused on M&A, it would be a strategy less focused on increasing cash dividends to shareholders. And I just happen to believe that's not the right path to go. So I think the right path to go is a balanced strategy that Terry was describing, where we have to be thoughtful around the times that we use the share repurchase. We want to be consistent in moving up our payout ratio. And we want to be consistent in moving up our cash dividend over a period of time to be -- have a dividend yield that, in my view, is probably in excess of what you might see with at least the Prudential. Again, I can't speak to Ameriprise quite as much. So I think as investors, you'd expect us to have perhaps a little higher dividend yield than a Prudential would have, a little higher payout ratio than a Prudential would have. And that really reflects the difference in our businesses, more fee-based businesses for Principal, more spread- and risk-based businesses for Prudential.

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Chris Giovanni, Goldman Sachs. I guess, Terry, one follow-up with you on the interest rate commentary. In the past, you've given us sort of the headwinds for longer rates being sort of a 4% to 9% drag through, I think, '13 to '18. So just wondering how much of that has sort of abated as rates have moved higher.

Larry D. Zimpleman

Yes, go ahead.

Terrance J. Lillis

Yes, we talked about the impact of the low interest rate environment a year ago. And the way we talked about it was the impact on the growth rate out into the future. And we said that, that 10% to 12% growth rate, that would have been reduced by that 1% to 2% per year. And as you point out, as you go out, that accumulates into that 4% to 9%. That probably has started to bottom out. However, even with the rising interest rate environment, the portfolio rate will still probably come down because the portfolio rate that we have is a little bit higher than the new money rate that we're bringing on at this point in time. So there could be a little bit of a drag in the near future. But we think over the next couple of years, that will bottom out, and then start to rise into the future. So I guess, I would say, Chris, to answer your question here, the rising interest rate environment, just as we saw in the declining interest rate environment, we'll have a little bit of a drag. You'll start to see a little bit of a pickup but not over the near term. Where you'll see more of a pickup is, as I mentioned before, is in the expense side as the security benefits and that recognition of those benefits.

Larry D. Zimpleman

Dan, did you want comment on new money rates portfolio?

Daniel J. Houston

Sure. The new money rate for the last quarter would have been a little above 3%, about 3.1%. And the portfolio yield is in that 4.4%, 4.5% range. So as you can see, we're a little behind the portfolio yield. So depending on what you think about the trajectory of interest rates moving up will determine when you see that sort of crossover, where that portfolio rate and the new money yield kind of equal to each other, and then you start to move the other direction. We view that to be 2, 2.5 years out, somewhere in that neighborhood.

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Okay. And then just one follow-up question. I think you guys have made it clear that quarter-to-quarter, there could be volatility over an extended period. You feel comfortable with the growth trajectories. So if we look at kind of the CAGR that you guys have showed from an earnings trajectory from 2001 until today, it's been 7.5% CAGR. Will you expect it to then grow to 10% to 12%? So just wondering given that you're in a bigger base today, how do you achieve 200 to 400 basis points of...

Larry D. Zimpleman

Yes, that's completely tied to the U.S. -- that's essentially tied to equity returns, Chris. In other words, when we sort of talk about that 10% to 12%, that has -- and Terry mentioned it. But that has kind of an implied assumption for sort of an 8% or a 9% kind of equity total return, okay? And what you saw from the charts, what you've seen here, during that 2001 to sort of 2013 period, that's about a 3% CAGR. And again I'm not -- if you want to, just take our 7% and adjust it by 5% because 3% becomes 8% and so forth. So that's all I'm saying. It's really the lower CAGR for that period is tied to the fact that the U.S. equity market did not growth at our long-term kind of economic assumption.

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

And is that the way to think of the sensitivity, if you only had 3% growth, you'd be at 7.5% over...

Larry D. Zimpleman

Yes. Joanne?

Joanne A. Smith - Scotiabank Global Banking and Markets, Research Division

Joanne Smith, Scotia Capital. You said that the 10% to 12% EPS growth target is a function of organic growth than the market growth, as well as 1% to 2% from operating efficiencies. Yet I haven't heard anything about a stated efficiency initiative. So where you expect them to get those 1% to 2% in operating efficiencies? What businesses would that come from? And is there a formal program?

Larry D. Zimpleman

Yes. That's a really good question. Maybe it's a chance to sort of let Dan and Luis and Jim sort of comment from their own business unit perspective. So Dan?

Daniel J. Houston

Yes. And one of the outcomes of the recession was clearly the strong push to make sure that we had very efficient operations. And if I just looked at Full Service Accumulation from the period of time from 2007 to where we're at today, just within the Full Service Accumulation, we're down about 500 people, 500 employees. And yet during that same period of time, we were servicing far more plan participants and far more plan sponsors. We always have a long string of initiatives in place to improve operational effectiveness. We also want to make sure that we're providing the same level of customer service. I'm pleased to say that during the same period of time, customer service scores have actually improved and we've had very positive feedback on employee opinion surveys. So we don't try to well the ocean with one large program. We'd rather have a series of programs, whether it's in life or specialty benefits or within the mutual fund and retirement area. Now having said that, I would tell you that we are also just as passionate to make sure that we're making investments in those businesses and leveraging technology, making sure we've got good mobile technology, making sure that we have a workplace environment that supports our employees. So it's two-edged sword. And what we're trying to do is to spill out those activities that don't add value or no perception of value on the part of our customers. And so again no mega program but certainly lots of initiatives. Luis?

Luis E. Valdés

Yes. Very interesting question, particularly in the international arena, where you have 10 different operations and you have probably 10 different locations and overheads and so forth. So yes, we are paying a lot of attention over to sort of integrating many of our operations and not trying to manage our countries like kind of a standalone silos. We're trying to lever some resources in from a regional standpoint of view. And while we're talking about that, our one-stop shop also is another program in order to get expense synergies out of that kind of proposition. The same model that we're putting in Chile is the same model that we're putting in Mexico, for example, and is exactly is a model that we are trying to go after with those in Asia. Also in Southeast Asia, just for giving you an example, about to lever our resources in to get additional synergies. We are going through a kind of regional kind of design for Southeast Asia. We had a kind of 4 different kind of silos in Singapore, Malaysia, Indonesia, Thailand. Right now, we are putting together a kind of much more regional structure in order to manage those operations. All in all, because of our story, we haven't had any kind of luxury with expenses before. So we are a very, very efficient company. But at the same time, we are paying a lot of attention about our expenses and paying a lot of attention about all the kind of source of expense synergies there can be possible, including IT solutions also. We're being able to export and to use the same kind of platforms in different countries. And that has given us a very important advantage. Certainly, economies of scales are helping us. And I talked to you about that also. Jim?

James P. McCaughan

2 or 3 other themes. I mean, this isn't a major initiative that we suddenly come in and pushed. This is an ongoing process, where we've been pretty parsimonious about spending for many years. We have, as I showed you, tried to complex investment structure. And it's not complex because it's how we are. It's complex because client demands have become more complex. So how do we handle that in terms of efficiency? One of the things that's become more and more important in the last 2 or 3 years is better use of outsourced providers. And we are making more extensive use of outsourced providers on things like securities operations, transfer agency, client reporting even. And that's a measurable impact. A second issue that I've mentioned is it's not only that the clients and the investment products have become more complicated, so has the trading environment. And that could be expensive. And what we've done is had a pretty rigorous effort in terms of developing preferred trading systems and implementing them in different of our trading rooms, different of our boutiques. So there's another example where you can both reduce the error rate and increase the efficiency by thoughtful use of systems. And that's the recurring theme. I'd also say that we do benchmark ourselves for efficiency pretty rigorously. And on the latest.

McKinsey benchmarking, we are one of the most efficient active managers across a diversified platform. So we do measure this and take it very seriously.

Larry D. Zimpleman

Okay. I think we're going to take one more question, if there is one that usually cuts a lot of question. Okay. John is going to ask one more. Here we go. We'll give John a bonus question today.

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

John Nadel from Sterne Agee. The question on, I guess, the Chilean pension market, but Cuprum maybe a little bit more specifically. So over a longer-term period of time, I believe, Luis mentioned earlier maybe over the next 20, 25 years that the size of the voluntary market by AUM would equal roughly the size of the mandatory market. So can you give us a sense for the differential in the margins on those businesses? If we were to think that Principal is the leader of that market today, right, 25% market share, I believe it was. So if that market is going to grow like that, I suspect that the leader would grow with it at least. How should we think about the long-term impact on, I guess, your Chilean margins, but I'll call it Cuprum?

Larry D. Zimpleman

Yes, Luis, do you want to comment? Go ahead.

Luis E. Valdés

Yes, sure. What I said is our operation indicates that about the year 2025, the voluntary industry is going to produce exactly the same amount of revenues that the current pension industry is producing today. Why is that? Because honestly, we have to have the same amount of AUMs. And this is part of our growth strategy. The compulsory system today on average is charging an equivalent of 60 basis points over AUMs. That is more or less. The truth is I'm saying equivalent because the compulsory system is charging on flows. But if you're doing the math, the average system is charging you 60 basis points over AUMs. But the point is the ASPs and the compulsory -- the ASPs basically, they can manufacture just 5 different funds, just 5, highly regulated. So when I have a customer and he or she -- they have to save more money, the problem that we have with my ASP, that the ASP can offer to me just exactly the same flavor where I can put my compulsory money. So that is where our platform is coming. Our mutual fund platform and our life insurance company is coming with different solutions and with different products. Those products, in particular with more value added, you can charge if not something around 120 basis points. So the margin in theory or at least the revenues you can charge, at least 2x more than the compulsory system. So in theory, our numbers are saying with half of the total AUMs in that industry, you're going to be able to produce the same amount of revenues going forward. That I give you...

Larry D. Zimpleman

Okay. We're now in overtime, so I'm going to call a halt to the Q&A for this portion. Anyone who can, we'd love to have you all stay. We're going to do a reception here just in the back of the room. I guess, on the other side of the wall back there. And certainly, we'll all be available for some period of time. So thank you, all, for coming, really appreciate your interest. And again look forward to seeing many of you here at the reception. Thank you very much.

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