Good afternoon and welcome to the Principal Financial Group, third quarter 2009 financial results conference call. There will be a question-and-answer period after the speakers have completed their remarks. (Operator Instructions)
I would now like to turn the conference over to Tom Graf, Senior Vice President of Investor Relations
Thank you. Good afternoon and welcome to the Principal Financial Group’s quarterly conference call. A couple of brief comments before moving on: First, we want to thank you for being flexible and accommodating the change in our call time.
I’d also remind you as we announced in October, we’ve selected December 3 to conduct a virtual Investor Day. We will announce details on how to access the webcast about two weeks prior to the event.
Moving back to the third quarter call, as always, if you don’t already have a copy, our earnings release, financial supplement and additional investment portfolio details can be found on our website at www.principal.com/investor.
Following a reading of the Safe Harbor provision, CEO Larry Zimpleman and CFO Terry Lillis will deliver some prepared remarks, then we’ll open up for questions. Others available for the Q-and-A are John Aschenbrenner, Life and Health Insurance; Dan Houston, U.S. Asset Accumulation; Jim McCaughan, Global Asset Management; Norman Sorensen, International Asset Management and Accumulation; and Julia Lawler, Chief Investment Officer.
Some of the comments made during this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. The company does not revise or update them to reflect new information, subsequent events or changes in strategy. Risks and uncertainties that could cause actual results to differ materially from those expressed or implied are discussed in the companies most recent Annual Report on Form 10-K and Quarterly Report on Form 10-Q filed by the company with the Securities and Exchange Commission. Larry.
Thanks Tom, and welcome to everyone on the call. With another quarter of strong sequential improvement in assets under management, operating earnings, net income, and book value per share, we were very pleased with the third quarter performance. Our operating results for the third quarter reflect not only improvement in the markets, but also our strong operational focus and disciplined expense management.
Our general account also delivered solid performance reflecting high quality and diversification of our portfolio, and our focus on risk controls. At $185 million, the third quarter 2009 was our best quarter of net income in two years, more than doubling from a year ago. Operating earnings were $239 million in the third quarter, a decline of 5% from a year ago, relative to a 21% drop in the S&P 500 daily average, and a 10% drop in our average assets under management.
Before going into more detailed comments on company performance, I want to highlight an announcement we made last week. The signing of a memorandum of understanding to renew our joint venture with Banco Brasil for an additional 23 years. BrasilPrev is a market leader in Brazil, in-part due to the strong distribution platform of Banco Brasil, the largest bank in Latin America.
While BrasilPrev has enjoyed remarkable growth over our prior 10 year relationship, including operating earnings of 25% on a compounded annual basis over the past five years, we believe the future opportunity is even greater, thanks to recent acquisitions by Banco that further expand their distribution presence, as well as their client base, which now stands at 40 million customers. The pending finalization of this transaction is a key piece of Principal International’s growth opportunity for the future.
Now let me turn back to company performance. I want to start by highlighting performance over the past four quarters, as these four quarters comprise the most challenging capital markets and economic environment in 75 years. Over the trailing four quarters, we delivered $780 million in operating earnings and $440 million of net income, at a time when a number of peers posted large losses.
Our operating earnings over this period are down only 28% from our highest 12 months on record, which speaks to the diversified nature of our businesses and steps we’ve taken to prudently manage through this environment. Here are some of the actions we’ve taken; reducing our dividend a year ago to conserve capital going into the crisis, reducing our expense run rate by 15% last November and making further expense adjustments in March, beginning a scale back of investment only in late 2008 in response to lower returns and to free up capital, increasing our position in cash and other liquid holdings, and repositioning our investment portfolio by reducing our commercial Real Estate, BBB and below investment grade holdings.
The Principal opened the equity markets for life insurers in 2009, with our successful equity raise in May, this lead to a successful debt raise with only a few public debt issuances in the life sector since the start of the financial crisis in September 2008. As we reflect on where we are today, it seems that capital markets aspect of the financial crisis is improving, significantly in many ways. It’s now an environment focused on the economic challenges facing businesses.
The recent recession is the worst since the 1930s. Employment at small and medium businesses has been affected more than in any other post war recession. It’s our belief that more normal economic growth will resume when unemployment has peaked, which we currently expect around the middle of 2010.
Longer term, we continue to believe we’re well positioned in the markets we serve, and that small and medium businesses will continue to be the main generators of new employment; however, until unemployment peaks, the recession will negatively impact participant count in all our benefit offerings, as well as impacting the behavior of large companies and institutional investors.
I want to spend the next few minutes covering Principal Global Investors, and full service accumulation, where the operating environment continues to present challenges. A key impact for Principal Global Investors is market volatility. Similar to the past few quarters, institutional investors continue to delay funding of awarded mandates. We’ve also seen a general slowdown in search activity.
US and international consultants are reporting a decline in search activity since the Lehman bankruptcy. We’re encouraged by some early signs that institutional search activity is beginning to pick up, and by the fact that we were able to generate more than $0.5 billion of non-affiliated flows in the third quarter. We’re also encouraged and that we’re seeing some of our awarded, yet unfunded mandates fund.
As an example, in October we received about $220 million of funding from the national pensions reserve fund of Ireland, for a mandate awarded more than 18 months ago. Through nine months, Principal Global Investors have received $10.8 billion of deposits from non-affiliated clients; solid flows of new money despite a difficult market.
These flows reflect Principal Global Investors continued success in building and strengthening relationships with potential and existing clients, and in increasing the number of capabilities we have on consultants recommended list. Excluding withdrawals from three distressed investors which we discussed in last quarters call, Principal Global Investors third party net cash flows exceed $2 billion year-to-date, or 3% of beginning of year assets under management.
The poor business climate is also exerting pressure on full service accumulation deposits and net cash flow. While flows were negative in the third quarter, a quarter that usually involves lesser sales activity, flows through nine months are at $2.9 billion. This is down from the same period for 2008, primarily due to lower sales and thus lower transfer deposits which are down $2.1 billion. Businesses remained focused on surviving the recession, rather than seeking a new retirement provider.
Full service accumulation withdrawals are down in total by 6% through nine months, which is a positive result, but as you would expect in a recession, we are seeing slightly higher levels of member level withdrawals and planned terminations. However, total withdrawals year-to-date are 12% of average account value, which is below the historical average; thanks to fewer employers moving their plan to another retirement provider.
We remain confident in our ability to compete for new business, and to achieve our 4% to 6% net cash flow target as the economic recovery builds. Total retirement suite continues to provide a significant differentiator in the marketplace, making up 65% of our sales year-to-date. Alliance sales have also held up well, down only 8% through nine months as we continue to expand and strengthen our distribution relationships.
There is solid evidence that full service accumulation is beginning to build some sales momentum going into 2010. September was our best month in 2009 for plans quoted up 30% from our low in January, albeit down 20% from a year ago. For fourth quarter 2009, we’d estimate around a billion dollars of full service accumulation sales, a nice rebound from our third quarter result, as we build back towards more normal sales volumes.
Let me close with a few thoughts on the future. We are seeing signs each week of an improving economy, but we know that the recovery is likely to be slow and choppy. We will continue to stay focused on fundamentals, disciplined pricing, risk management, operational and expense control, and prudent capital management. Our execution focus and improvement in the markets, is what gave our Board confidence in increasing our annual Common Stock dividend by 11% to $0.50 a share.
This ends my prepared remarks. Terry.
Thanks Larry. This afternoon I’ll cover total company and segment results compared to a year ago quarter, and provide an update on our investment portfolio. Before I start, a couple quick points that demonstrate how far we’ve come from the bottom in March.
Comparing September 2009 quarter to March 2009 quarter, assets under management are up $44 billion or 19% to $280 billion. Operating earnings are up $75 million or 46% to $239 million. Net income is up $72 million or 64% to $185 million, and book value per share up $13.82 or 172% to $21.85, reflecting a $6 billion pre-tax decline in net unrealized losses.
This rebound means we’re generating more free cash flow. It means our expense initiatives are accelerating improvement in our earnings as the market continues to recover. It means that we’re now positioned for double digit improvement in average assets under management in 2010 over 2009, assuming market performance of roughly 2% per quarter from September 30 levels. Importantly, it means a major shift is under way for us; one where our focus expands beyond dealing with the challenges of the economic crisis, to capitalizing on market opportunities.
Now to total company results compared to a year ago quarter. As Larry mentioned, operating earnings were down 5% or $13 million. As always, there are a number of items driving the variance in earnings between periods. Compared to a year ago, earnings were dampened by a number of factors including lower average AUM, higher cost for pension and other post-retirement benefits which we refer to as security benefits costs, unfavorable macroeconomic conditions in Latin America, lower investment income, and a slowdown in the real estate markets.
Earnings benefited from lower DAC amortization expense, which reflects the strong equity performance in the third quarter 2009 versus declines in the year ago quarter and from our decision to early redeem some medium term notes. Earnings also benefited from strong expense management.
Compared to a year ago quarter we reduced the fixed component of compensation and other expense by nearly $70 million, bringing our nine month total to $225 million, a 16% reduction. These efforts have softened the impact of market conditions and positioned us to manage through a temporary decline in deposits. We had originally forecasted approximately $2.5 billion for compensation and other expense in 2009. We’re now forecasting $350 million to $400 million below that run rate for the full year.
Moving to the segments; US Asset Accumulation earnings increased $18 million or 13% from a year ago quarter. Market related true-ups resulted in a $23 million after tax variance in DAC amortization expense between the periods, $36 million on a pre tax basis.
Strong market performance in the third quarter 2009 reduced expenses for the period by $18 million, and negative performance in the prior year quarter increased that period’s expenses by the same amount. Excluding market related DAC true-ups, operating earnings were down 4%, as expense management substantially offset the impact of a 9% drop in average account values and higher security benefit costs.
A couple of additional comments on DAC for the segment; the variance was split fairly evenly between full service accumulation and individual annuities. Excluding the market true-ups from both periods, individual annuity earnings were up about $8 million reflecting a 7% growth in average account values, lower GMDB costs, also due to a positive market performance and reduced expenses. For full service accumulation, excluding the market true-ups from both periods, earnings were down 7%, consistent with this decline in average account values.
Full service accumulation had some additional items running through DAC this quarter that we’re substantially offsetting. We had a $20 million after tax write up in the DAC asset, to adjust for excess amortization expense taken in prior periods. This was offset by write-downs of the asset, due to both assumption changes and updates for actual experience.
Global Asset Management earnings of $11 million in third quarter 2009 compared to $24 million a year ago. The decline primarily reflects a 12% drop in average AUM due to market conditions which had driven down investment management fees, as well as lower transaction fees due to slowdown in the real estate market.
Importantly, we continue to capture new institutional assets as Larry mentioned. We continue to align PGI’s expenses with revenues through active expense management. This is reflected in a 10% reduction in operating expenses compared to a year ago quarter, driven by a 16% reduction in compensation costs, excluding higher security benefits.
Given our credit bias which impacts both fixed income and asset allocation funds, we’ve seen a decline over the past year and a relative performance of the retirement plans separate accounts PGI manages. As of September 30, 39% were in the top two morning star quartiles for five year performance, versus 75% in the top half a year ago.
The recent improvement in credit spreads is driving a strong turnaround, with 67% of the fixed income and asset allocation funds in the top two quartiles for the three month performance, and 54% of the retirement plan separate accounts in the top half overall. We remain confident that our disciplined process and focus on fundamentals will prove highly competitive over the full market cycle.
Moving to Principal International; earnings were $33 million in the third quarter, a very strong result in the face of unfavorable macroeconomic conditions. A sharp decline in Latin American inflation resulted in an $11 million drop in earnings compared to a year ago quarter, and third quarter 2008 benefited by about $5 million after tax due to an unlocking for price changes in Brazil.
Unfavorable currency rate movements also masked the underlying growth of our businesses. Adjusting for these items, segment earnings growth was well above our long term growth target for this segment of 14% to 17%. Over the trailing 12 months, Principal International has delivered $2.6 billion of net cash flow, or 9% of beginning of period assets under management. This includes more than $600 million in the third quarter, driven by record pension deposits in Brazil.
Life and Health earnings were $68 million in the third quarter, compared to $74 million a year ago. Individual Life earnings improved $9 million, primarily due to lower DAC amortization resulting from improved equity market performance. Earnings from the Health and Specialty Benefits division were down from the strong results a year ago. Effective expense management and productivity gains for the division were more than offset by higher security benefit costs, lower investment income, and a reduction in membership and existing plans.
In thinking about fourth quarter 2009 results, we remind investors of the impact of health claim seasonality, and that third quarter results benefited from lower than normal DAC amortization expense, due to strong markets, as well as higher than normal earnings from medium term note redemptions.
Moving to capital; with our second quarter raises we significantly strengthened our balance sheet. As of quarter end, we estimate our Life company risk based capital ratio to be in the range of 375% to 400%, with additional financial flexibility from substantial cash at the holding company. Relative to a 350 RBC ratio, we had $1.5 billion of total excess capital as of September 30, after paying off $441 million of long term debt in August.
A couple of key points in terms of repositioning the portfolio; during the third quarter, we again took advantage of market opportunities to reduce our exposure to ratings drift risk and to certain names in the industry. We sold or tendered more than $1.1 billion of securities for a net after tax gain of $12 million, reflecting a significant improvement in average pricing from 84 in December to 102 at the time of sale. These sales emphasized reducing BBB and below investment grade bond holdings, where we believe the risk of down grade or potential default had significantly increased.
In addition to putting this $1.1 billion of cash proceeds to use, we reduced cash and cash equivalents by another $1.1 billion from mid year 2009, repaying our August debt maturity, increasing our position in government backed securities by more than $800 million, and investing in some longer term, higher yielding strategies.
We expect to further scale back our cash position over the next several quarters, while continuing to maintain strong liquidity. We’ve also reduced our exposure to commercial real estate, which is down from 28% a year ago to 24% of US invested assets and cash as of September 30, 2009.
Turning to net realized capital losses, we recognized $54 million in third quarter 2009, which compared to $50 million of losses in the second quarter 2009, and $156 million of losses in the prior year quarter. Adherence to our internal credit exposure guidelines has continued to help us limit losses during this recession. Importantly, credit related losses are on the decline, down $61 million compared to the third quarter 2008, and down $22 million on a sequential basis.
Given investor interest, we continue to provide quarterly updates to investment detail on our website. I’ll discuss the updates related to our commercial mortgage and CMBS holdings in our general account as of September 30. Starting with commercial mortgages, our portfolio characteristics remain strong and essentially unchanged from last quarter, with 1.8 times debt service coverage, 88% occupancy, an average 67% loan to current value.
More than 80% of the $333 million of commercial mortgages that matured during the third quarter, either were financed externally or were retained by us, meeting our current and more conservative underwriting standards. Roughly half of the total financed externally, demonstrating continued market demand for the types of loans in which we have historically invested; loans with strong borrowers, high occupancy, low loan to value, and high debt service coverage, primarily in the $5 million to $20 million range.
Of the loans we retained during the quarter, more than two-thirds met our current underwriting standards. These loans have an average loan to value of 52%, and an average debt service coverage ratio of 1.8 times. The commercial mortgage loans in our portfolio that we believe present the greatest risk of loss are those exceeding 80% loan to value, with debt service coverage of less than one-times.
Our 43 such loans totaled $541 million, represent a net increase from June 30 of $21 million in two loans, with 11 loans exiting and 13 loans entering this category. The primary reason loans exited was improvement in occupancy or pay off of the loan. Even if all these loans were to default over the next couple of years, with an average loss of 30%, this would generate total losses of only $105 million after tax, over a multi-year period; again, very manageable.
Regarding CMBS, all of the bonds we’re paying interest has scheduled as of the end of October. The CMBS portfolio did experience ratings drift during the third quarter. As of September 30, 2009, about $1 billion or 20% of the portfolio were in vintages after 2005 that were rated below A, which compares to about $530 million or 10% at mid year.
Importantly, despite the drift in ratings, our stress test continues to demonstrate that even under severe stress, losses would be manageable, occurring later in the cycle, and over a multi-year period. Our latest internal severe stress scenario resulted in $379 million of cumulative after tax losses, with a vast majority occurring more than three years out. Running our portfolio through two different third party models again validate our results from our internal models.
In closing, we continue to see signs that some of the environmental headwinds may be easing, and that the recession maybe nearing an end. That said, we believe the signs of a true recovery such as job growth and strong consumer spending won’t occur overnight. In the meantime, we continue to control the things we can and to position The Principal to deliver sustainable profitable growth.
This concludes our prepared remarks. Operator, please open the call to questions.
(Operator Instructions) Your first question comes from Jeff Shuman with KBW.
Jeff Schuman – KBW
I think you mentioned a couple times, that you had gains related to buying in some medium term notes. I’m not sure I caught the numbers, that the first question is what was the gain and did that run through the investment only segment?
I’ll let Terry cover that.
It ran through the investment only line, and had about a $10 million after tax impact in this quarter.
Jeff Schuman – KBW
And what’s the outlook to continue to buy in some more of that gain?
It’s based upon what our own credit spread is, and as it narrows there’s less demand for this, so it doesn’t look like there’s a lot of demand in the future for this.
Jeff Schuman – KBW
And maybe I’ll sneak in one minor detail; do your excess capital estimates include the cash of the holding company and how much is the cash there?
This is Larry, Jeff. They do include cash at the holding company; it’s about $1.2 billion at the holding company.
Your next question comes from Jimmy Bhuler – JP Morgan.
Jimmy Buhler - JP Morgan
Larry, I just had a question on your comments on the outlook for the FSA business. You mentioned that you’re building momentum, but you also indicated you don’t expect results like sales inflows to improve until mid 2010. So if you could just elaborate on that and just give us an idea on how the environment is, what needs to happen for your flows to improve and your sales to pick up?
Then secondly, maybe Terry or someone else can answer. I think you quantified in your press release that there’s a lower DAC in the annuity business of about $7 million. The reported number is $36 million, so it implies a run rate of about $29 million for the annuity business which is a lot higher than what it’s been in the past. So I wanted to see if there’s something else in there that you could quantify that might be non-recurring, either lower GMDB expense or something else. That’s it.
Okay, let me comment on the first one, while I think Terry will look for the variable annuity DAC question. In terms of FSA, as I said in my comments, I mean there is an economic recession going on and I think its impacting different parts of the economy at different times.
We’re now seeing that the stress and strain on the SMB sector is real. The credit is slowest to flow into the SMB sector, so certainly, their focus is as I said in my comments, more on survival than it is about trying to evaluate whether this is the time to move the retirement plan.
However having said that, there are some signs starting in about September, that things are picking up and again, that was our best month in terms of quotes added to the pipeline. So I think where we sit today, the pipeline is around 20% or so less than it would have been about this time a year ago, and that will not only build back toward a neutral position, but we’ll obviously be quoting more plans as time goes forward, just because of some of the new relationships that we have coming on stream.
For example, we mentioned in March that we’re bringing on the B of A Merrill Lynch relationship, and that’s going to add significantly to our potential for FSA. So again, all we’re suggesting here is it’s just going to take time. Let me just turn and ask Dan if he wants to add anything to that and then we’ll have Terry answer the other question.
Maybe just to emphasize, that if we look at our alliance partnerships those sales are roughly down 8%, so we’re doing quite well with the most significant part of our distribution channel, which is the alliances and again it’s probably the insurance brokers where they’re focusing on other parts of their business, as opposed to going out and promoting retirement plans. With that I’ll turn it over to Terry.
Jimmy Buhler - JP Morgan
Just a follow-up on that; if I look at the results of the other companies in the 401 (k) business have reported, it seems like flows for them are actually getting a little bit more stable, yours are getting worse. So I’m not sure if the reason for that is the mix of business or anything else. I want to see if you have any views.
Well again, I can’t really address anyone else’s. I think one of the things that could be in-play, and some of the others are much smaller blocks of business than ours are. They may be fishing in different waters. I mean I would emphasize what Dan said before and I’ve said this in many, many calls in the past. If you really want to judge what our long term potential around the FSA business, just watch what happens with our alliance partners, because those are those key distribution relationships that can really drive multibillion dollars of sales over annual periods.
When we look at our alliance relationships, and I could tell you we’ve been out to visit many of them recently, I can assure you those relationships are strong, and has those actions to where they’re now creating even bigger distribution platforms, so things like Wells Fargo, Wachovia, BofA, Merrill Lynch, and as we begin to mine the opportunity there, I’m convinced we’ll be able to grow the FSA business as we have in years past. With that I’ll have Terry cover annuity.
Jimmy this is Terry Lillis. You’re absolutely right. We had a strong equity market performance that benefited the annuity line by about $7 million this quarter, so backing it off from the $36 million gets you to the $29 million. We also had just strong fundamental growth in the business too, so although the run rate is probably a little bit higher than what we’ve seen in the past in that $26 million range, it’s not too far out of line with the growth in the account value.
Jimmy Buhler - JP Morgan
Was there a release in GMDB reserves also this quarter?
We had some benefit from the GMDB because of the improvement in the equity markets as well, and that accounted for a couple million dollars. Now that could go away depending on what happens in the market, but it could improve as well.
Your next question comes from Eric Berg - Barclays Capital.
Eric Berg - Barclays Capital
Dan or Larry, I’d like to sharpen my understanding. Maybe this is a review of exactly what we mean by quotes in the pipeline. The reason I ask the question is, if you are extending quotes unsolicitedly, which I’m sure you do in order to get business, that’s one thing, but it’s certainly not the same as customers saying “Yes, we’re interested in moving.” It costs you nothing to go out and bid on business. So what exactly do we mean by a high level of quote activity, and what do we mean by the pipeline being down 20%? What exactly do those terms mean in your vernacular?
You bet Eric. Good to hear from you. I’ll have Dan cover that.
Yes Eric, its Dan. At the most basic level, historically whether it’s an alliance partner or traditional employee benefit broker, they are working on behalf of their clients soliciting quotes from providers such as Principal, and right now when we say that the gross pipeline is down by approximately 20%, it tells me that there’s 20% fewer small to medium size employers that are currently looking for a replacement to their existing retirement plans, services provider.
There’s very little that’s unsolicited; it’s all solicited business on the part of the independent insurance agent or RIA or broker, and the pipeline in years past has evolved from a definite number of different angles.
One could be whether or not they want the total retirement suite; others is if they are just looking for a lower price, and right now there seems to be more interest on the part of employers, on standalone 401 (k) looking to lower some of their prices, and I would say generally, TRS continues to be very viable for a lot of employers, and that’s where most of our sales activity and that’s where most of our quoting activity resides today. Does that help?
Eric Berg - Barclays Capital
It does, thank you. One follow-up separate question, and then I’ll give it to the next questioner. Larry, it doesn’t seem like we’re really settling down in the Life and Health area. As I look at the number of covered members, the number of people whom you are insuring in medical insurance and in the specialty benefits area, it looks like we continue to slide. What is your latest thinking on that business? Thank you.
Yes, I would say Eric, in terms of the Life and Health covered members, first of all, that is primarily due to what we would call in planned shrink and again, we go through a fairly deep analysis of that population month-by-month as the census data comes in, and again most of that is the result of the rising unemployment that we all see and read about every day.
So if you neutralize for that, or if you assume at some point that will start to turn, and again what I would say is we noticed that in August and September that shrink has started to be reduced a bit. I think you have to take account of that.
In terms of specialty benefits, let me just say that basically most of the activity that’s there today is in the voluntary area. Our voluntary sales this year are up about 26%, and the employer sales are down slightly, I think they are down about 5%.
Again that goes back to the point Dan was making, to the extent that small and medium businesses are changing providers today, the primary reason they are changing providers is for a particular cost advantage. So that’s again why you see benefits moving from employer provided to voluntary, but again, most of this is shrink rather than -- it’s a reduction but it’s not necessarily like cases are going away. It’s more of an in group shrink. So I hope that helps.
Your next question comes from Steven Schwartz - Raymond James.
Steven Schwartz - Raymond James
Going back to the FSA activity Larry, it would seem to me that maybe your alliance partners are helping bring quoting activity from cases that currently exist, and I realize that’s mostly the case, but can you give us an idea about maybe what’s going on; on a macro scale in terms of plans being terminated, employers not doing a match, maybe employers going back to doing the match, things like that?
Sure. I’ll make a few high level comments, and Dan will probably want to add to that. I would say that we’re seeing same trend Steven that we’ve talked about in prior calls, so let me review what that is.
In terms of what I would call member level behavior, in other words, are there members dropping out of plans, are there members who are cutting back substantially on their 401 (k) contributions, I think that still remains a pretty healthy situation. In large scale and large measure there are not participants withdrawing from 401 (k)’s, and in general they are not reducing their 401 (k) contribution, or if you find one who is, you can almost as easily find one who is increasing it. So participant behavior is staying fairly healthy.
There was a period early in 2009 where some of the employer match was being eliminated and again, there were a number of headline stories, but that was real. I think in our case, I can’t remember, I think somewhere around 10% of our employers suspended their match for some reason in 2009. Now, we’re starting again to sort of see that come back, and I think that will come back to something fairly close to certainly where it was prior to the economic recession.
The final point I’ll make before I ask Dan to comment is that, just again now in the last kind of calendar quarter, we are seeing some of the very smallest employers, perhaps those say under $10 million. I said before, there is still some pain out there in the small, medium business sector, and so we are seeing a slightly higher level of plan terminations in that very small employer area, over what we saw two and three and four quarters ago.
Again in terms of the overall flow, that’s not a significant item, but it is something that we’re watching and it does give witness to the comment I made earlier, that there continues to be still a substantial challenge out there for small and medium business owner. Now I’ll ask Dan to comment.
Yes, sure. To that specific point, you’ve got about 2% of the participants who either stopped or reduced their contributions. You’ve got another 3% that have actually increased their contributions.
You might find this interesting, but if we looked at our employer groups with more than a thousand employees, we actually saw 13 of the 18 that shrank in this period of time; they got smaller as an organization, period. They went down to the next lowest category, and in that same period of time we had four grow up into that segment.
There were two of those that actually terminated the plan, so these were thousand life employers that terminated their plan and there were actually seven contract terms, and they were medium sized plans. In most of those situations they were shopping for significantly lower price and fewer services, but all in all as Larry described, it’s still very much a recovering cycle for small to medium size employers.
Steven Schwartz - Raymond James
If I may, just to follow-up, because I’m not quite clear what you mean by terminated plan. Were these 40(k) plans; were these DB plans, and terminating with you and going to somebody else or actually terminating the plan?
In those seven that I mentioned the contract terms are with us, they were all 401 (k) plans. In this case, one was an ESOP plan, but the others were all 401 (k) standalone plans.
And typically again, these might be moving for price as we were talking about before. These are typically again where they just feel a need to have to scale back in some form or fashion.
Steven Schwartz - Raymond James
So I’m just trying to get a handle here. These plans ended, they closed or they just moved?
They moved. Those seven that I just mentioned moved. Two of them terminated the plan, which means the plan no longer existed, it didn’t move any place, and it’ll distribute the funds.
Your next question comes from Colin Devine - Citigroup.
Colin Devine – Citigroup
I want to focus on two things, and the first just to explore a little bit more of what’s going on in FSA. From the day you’ve IPO’d, you’ve focused everybody on net flows. They went negative I believe now for the first time in the companies history as withdrawals continue to increase.
Quoting is down, but withdrawal is not withstanding the impact of markets on account balances seem to be continuing to accelerate, and if you say quoting activity is picking up, then it seems to me withdrawal activity would pick up as well, and maybe that’s just the terminations you talked about, but why is this ratio continuing to get worse?
Then the other question is really a high level one for Larry. You’ve had a chance to step back after last year, you raised the capital, Principal has been through an awful lot, what has changed and what have you learned, and what are you going to change about how the company is running going forward versus in the past?
Okay. I’ll comment a little bit on the net cash flow question but again, have Dan probably add to that and your other ones are very good questions. I’ll come back to that.
In terms of the net cash flow, again what I would start with is first of all focusing you on year-to-date results, because again, I think there can be a tendency many times to get too focused on calendar quarters and miss the other trends that are going on. So we still stand at net cash flow at $2.9 billion year-to-date for full service accumulation. That’s 3.6 of beginning account value, and that’s not going to be too far by the time the year closes out, that’s not going to be too far off that 4% to 6%, beginning account value that we have talked about, that sort of underlies the long term growth potential for Principal.
Remember again, that is in the face of an economic recession, that is the worst in 75 years, so if there was ever a time that we were battle testing, sort of the net cash flow and the ability of this business to pick up deposits over time, I think we’re seeing it and I’d still argue at $2.9 billion and 3.6% of account value over the course of nine months, that represents still a healthy business, albeit not what it was in 2005, 2006, or 2007.
So in terms of withdrawals, again withdrawals are actually down 6%, and that’s as compared to 2008 which was actually a very, very good year for retention or said another way, 2008 is a tough comparison year for withdrawals. So again, we don’t see that withdrawals are necessarily an issue, but the biggest issue again is just the lack of transfer deposits.
Transfer deposits are off about $2.1 billion versus where they were a year ago, and that’s why you see the big difference in net cash flow. So as the sales pipeline picks up, as the sales once again resume you’ll see net cash flow go back to those historical standards.
Colin Devine – Citigroup
Okay, Larry but if transfer deposits because sales go up, why wouldn’t we presume that withdrawals would go up as well, because I assume unfortunately you’re going to win some cases and lose some others.
Withdrawals are actually down, Colin. That’s what I’m saying; withdrawals are down 6% over a year ago.
Colin Devine - Citigroup
No, but what you’re saying Larry is you expect transfer deposits to pick up markedly. Wouldn’t the same be true for withdrawals going forward? That’s what I was trying to ask.
No. I don’t necessarily believe that would be the case, Colin. Again what it really is, is it’s just a lack of business in the pipeline and while I think we have a very strong position in the 401 (k) business, we have about a 7% or 8% market share. So we’re going after the 92% or 93% that’s still out there to get, so it doesn’t necessarily mean that we’re going to see higher withdrawals out of our block.
We also recognize that. Some of that withdrawal up-tick is due to individual planned participants who are withdrawing to use the funds in some other means. So again, some of those withdrawals are separate apart from the plan sponsor making any decision, to move their plan but rather an individual using the funds, because someone in the family perhaps lost a job or they just simply need to cash out.
Colin Devine – Citigroup
Well that’s what we’re trying to get. The color is to understand is that, are you seeing borrowing activity up substantially or just surrenders?
No, we’re not seeing borrowing up, hardship withdrawals are up a tiny bit, but when I say a tiny bit Colin, I’m talking tens of millions of dollars, so I’m not talking about anything that’s substantial.
Let me move on and talk about your second question; in terms of we and other peer companies have come through a lot, so there’s always a question about what we’ve learned. I think probably the number one lesson Colin that I have learned, is that liabilities make a difference, and I think that the reality of that has been proven out very, very much over the last four quarters.
I would again go back as I said earlier at $780 million of operating earnings and $440 million of net income; I would say that’s a record that I would put up against any peer company, and a lot of the reason for that difference is because we have been a very disciplined risk oriented company, in terms of the liabilities that we put on to our balance sheet. So I think I’d start with that one, and I’d say the importance of that discipline around liabilities has been reinforced in our mind many, many times.
Second thing of course is that you have to look at details. You have to understand what happens out into the far end of those distributions, and again fortunately, we have had a long history of very rigorous enterprise risk management, and I think it has paid significant dividends.
Probably the final one I’ll comment on, would be that I do think that for some period of time, and I don’t know what that is, but for some period of time measured in several years, I think there are going to be higher levels of capital that organizations are going to feel the need to have, and boards of directors are going to feel the need to have as compared to what they have before.
I heard an enlightened analyst a couple weeks ago was talking about this Colin and they said that 12% is the new 15%, so I think that probably says it the best I can think of, relative to the reality that managements and boards are going to be requiring higher levels of capital. So those would be the three things I would go to.
Colin Devine - Citigroup
Is 12% the new 15% for The Principal?
No, I don’t think 12% is the new 15% for The Principal, because the difference for us, Colin is we have inherently higher ROEs in our underlying businesses, but I think if your business is primarily tied up in variable annuities and you have a large block of life insurance, I think 12% might be about as far as you could go with it, but that certainly wouldn’t be the case for this organization.
Your next question comes from Suneet Kamath - Sanford Bernstein.
Suneet Kamath - Sanford Bernstein
I just wanted to follow-up briefly on Eric’s question about terminology in terms of quote activity and pipeline. You’ve given us some percent changes; quote activity is up 30% or whatever the number is, but I guess what I’d like to know is what the underlying assets under management or account values are that we’re talking about here, because that would be a lot better, a lot easier for us to incorporate into our models, sort of a quick numbers question there.
My second question maybe for Larry; longer term is, I think during this quarter I saw one of the most negative articles on 401 (k)’s that I’ve probably ever seen in Time Magazine. I realize that there have been some issues in terms of what that article focused on, but I guess my question for you is, do you think that this 401 (k) product needs to structurally change, particularly as individuals approach retirement?
Are there things that need to be done to protect folks, given that this has been such a big part of their retirement savings, and what are you looking at in terms of structural changes that might give you a competitive advantage in competing for this business? Thanks.
Okay, again I’ll just make a comment or two, and let Dan talk a bit about quote volume, but I just want to maybe overcome any misimpression that might be out there. When we talk about quote volume, we’re talking about situations where an advisor or a broker comes to us with what we would deem to be a qualified prospect. So this is not a business of somehow going out, and if you will sort of manufacturing quotes or hoping on quotes.
We do have a much more sophisticated scoring process where again we evaluate through different levels of the sales pipeline, and in rough terms today, that pipeline is running about $40 billion of assets in there, so that gives you some sense of that.
Yes, that’s exactly right. $42 billion is the current size pipeline, and that’s as we just mentioned, 20% less than what it was a year ago, and that’s created pipeline, so that is what as Larry was mentioning, a feel that we’ve got it relatively well qualified and that is opposed to gross pipeline which we don’t take the stuff that’s over 12 months out of that calculation. So this is probably the best one to use for the sake of having a number to run off of.
Suneet Kamath - Sanford Bernstein
Just one quick follow-up if I could, Larry. Just on the quote number. So, if we say that the quote percentage is up 30% and it’s since January through September, and I know that the market equity market is up say 17%, does that mean, is that 17% market appreciation factored into the 30% number, which means that number could be smaller? Or if the markets give back some of their performance or is that a pure sort of planned number without an asset under management component to it?
There is an attempt to go in there and try to adjust it to reflect the increase in the market performance, but that’s not necessarily a rigorous process. So really if it was put in there in January the chances are that number that I just quoted does not fully reflect a significant change in the market performance.
If it’s getting close, in other words it’s a higher probability of closing, we will go in there and manually make that adjustment to reflect the higher or the smaller account balances based on the market performance, but again, we stratified those into about four different buckets to determine their probability of closing.
I guess just to deal with your other question around 401(k)s and there have been some articles, you referenced the cover story of Time that I think don’t necessarily serve us well. We have the opportunity to also go around and look at other pension systems in other countries and I think I can tell you without exception based on everything I’ve seen in my sort of 30 years in this business that the 401(k) system is the most successful retirement system that’s operating anywhere in the world.
Now having said that, there is no retirement system is perfect and so, I think it’s always the time to sort of sit back and perhaps evaluate whether there are ways to improve what we’re doing. As we’ve said in general, for example, around transparency. We’re a big believer in transparency and so we support a reasonable transparency and I hope to heavens that doesn’t mean that we’re all going to get a prospectus if we’re a 401(k) member, because I don’t think that’s only the kind of transparency that’s helpful or meaningful, but transparency is one element.
Another I think where 401(k)s perhaps take a little bit of a beating and it’s not really the case is that somehow, there’s a perception that there’s no safe option, and of course as an example, we own Morley Capital Management, which is one of the largest stable value providers. Again it’s just really a matter of employers offering those kind of options and participants being educated around those options that I think we just need more of that rather than kind of the some of the horror stories and headline stories we’ve been seeing.
I guess, the last thing I’d comment on is, I do think we’re going to have an interesting discussion over the next couple of years involving some policy makers in Washington as well as the 401(k) provider community, to see how we can do a better job of finding solutions during the retirement or the pay out phase. As you know, only about 2% of 401(k) assets get annuitized and we’re going to have to do a lot better around that particular point I think going forward if the 401(k) system is going to be truly successful, not just in accumulating assets, but ultimately being a system that can provide a secured retirement income.
So that’s probably the area that I’m mostly focused on to see how we can improve in that area. In terms of principal, I’m very comfortable, I’m very confident about our competitive position not only because of the skills of Principal Global Investors, but I’d also say our total retirement suite just continues to be a very, very unique differentiator.
Larry, if I could just a couple of comments on that Time story, going off memory here. That story profiled three male individuals: one was 61, one was 63 and one was 68 and the story was more about the lack of having defined benefit plans as much as it was around 401(k). So you had two of the three individuals that were not even eligible yet for retirement, who took early retirement without having significant savings.
One of the challenges the industry faces is to making sure to qualify those stories and we did responded both as an industry as a company to say that the story was frankly very inadequate in trying to articulate the challenges of 401(k) and the fact, if you’re going to compete globally the probability is this country doesn’t have a lot of defined benefit plans going forward.
Your next question comes from Randy Binner - FBR Capital Markets.
Randy Binner - FBR Capital Markets
I’m just trying to get into a core number on the quarter. I think I’ve grossed up all the DAC positives and negatives to about $0.04, but could you quantify the FX and pension costs in the quarter as well?
Sure, Randy, I’ll have Terry cover that.
At $0.74 is where we were, if you adjust for those DACs, it’s about a $15 million positive impact this quarter so that’s about a $0.05 off of that. There are a few other items that probably net out to maybe $0.01. We talked about earlier the discretionary medium term note buybacks, the Chilean deflation, higher cash balance and that probably has another $0.01 or so, probably $0.70 is probably a pretty good run rate for this quarter.
Does that help?
Randy Binner - FBR Capital Markets
Yes, I mean just the foreign exchange was one of those $0.01 items?
Foreign exchange, I didn’t bring that into it. That will fluctuate from quarter-to-quarter and year-to-year and I didn’t include that. Although right now, you’re starting to see some Latin American currency strengthen against the dollar, which should be a potential tailwinds for us.
Randy Binner - FBR Capital Markets
Just another quick one on FSA, I think in the past you all have talked about a 30 to 32 basis point ROA goal in that segment. Is that still something we should look to when we’re modeling that out?
Sure, I’ll have Dan comment on that Randy.
On a long term basis, I’d still say that’s certainly what we’re shooting for. Again this can be somewhat cyclical and when you’ve had a market sell off as much as it has in the past year that’s very difficult, but over the long periods of time that close to 32 basis points so where we’re still targeting.
Your next question comes from Ed Spehar - Bank of America.
Ed Spehar - Bank of America
Just a couple quick ones on FSA, the tax rate is I know it’s always very low in that segment, but it is actually the highest I think it’s been since you’ve been public. So I’m wondering if there’s any tax rate how should be think about that? Then on the capital on RBC, Larry or Terry I was wondering if you could give just roughly what the numerator and denominators are for the RBC and what the cash is for holding company, I thought you said $1.2 billion, or I just want to make sure I heard that correctly?
I’ll work backwards. Yes, it was $1.2 billion, at the holding company in cash, so I apologize if that wasn’t clear foreign there’s about $300 million in excess capital at the Life company so that’s the $1.5. In terms of the FSA tax rate and the RBC, I’ll have Terry cover those, but I assume that the tax rate has to do with the dividend received deduction, but Terry?
The difference between a federal tax rate of about 35% and the effective tax rate for the FSA line is predominantly due to two things. One is, the dividend received deduction, and the second is tax payer investments. Predominantly though, you could calculate the difference between the 35% and the effective tax rate as dividend received deduction.
Now that’s been going down in the last couple of years because of a couple things: One is the less dividends are being paid right now there’s more investments in fixed income investments as well as international funds and what you’re also seeing is, products or investment options that are more mutual fund like and so they don’t have the dividend received.
In terms of the RBC, there’s a lot of moving parts in the RBC calculation and right now, we’re estimating it to be around 375 to 400 for the quarter. Let’s see, there’s a couple things that came into play there that we had a 440 RBC at the end of the year and we reduced it by about 65 percentage points due to a dividend that we paid up to the holding company in March.
We also had a capital infusion in May right after our equity rise of about $500 million, which improved the RBC by about $50 million. We have had some credit drift this quarter and the year-to-date of about $850 million and that had about an 85 basis point impact on RBC, but it was offset by some of the sales that were generated this last quarter that generated $1.1 billion that I mentioned in my earlier comments.
There is also some statutory earnings and other gains of about 20%, plus there is a potential impact of the MEF as well, but in terms of numerator and denominator, let me give you one estimate on a statutory total, let’s see, total available capital. That is about $5 billion at the end of the third quarter.
Your next question comes from Dan Johnson - Citadel.
Dan Johnson - Citadel
Most of the questions have been asked and answered, so just two quick ones. In terms of looking at the investment portfolio, just curious if you have a ballpark estimate as to what you think realized credit losses will look like over maybe the next four quarters? Then a second question on maybe another sort of political flush regulatory one, I was surprised to see the Senate Committee on aging sort of having a hearing that was sort of moderately negative on target date funds, which is the first I have seen.
I’m not sure how well they were informed on all the issues, but you guys are more informed on it than I am, so can you talk a little bit about what’s going on in Washington around target date funds? I think there was a lot of complaints about sort of lack of choice than other things that again didn’t seem all that well researched on their end, but your thoughts would be appreciated.
I’ll have Julia take the first question and Dan Houston can handle the second one.
For the losses projected, we would expect that as we’ve been saying corporate credit losses are going to decline substantially going into the next several quarters as we’ve seen historically. We’d expect to see structured securities start to increase in losses that would be impairments on CMBS and RMBS, and commercial mortgage reserves increasing. So you might anticipate 2010 to be, about the same or less than this year, but it’s just made up very differently.
Dan Johnson - Citadel
On the mortgages itself they had held reasonably flat on a sequential basis, but you’ll look out and you’re just assuming to sort of just the economic drag taking their toll on the different properties eventually.
You would anticipate as we’ve said, from second quarter to third quarter we saw similar losses. Again, the real estate markets, the fundamentals continue to deteriorate, although our portfolio continues to holdup quite well. We’d expect to see losses in 2010 probably greater than we saw in 2009, but not much. You expect to see CMBS losses impairments I should say, continue to increase. Again, my expectation is, the next four quarters will be less than what we have had in 2009.
Dan Johnson - Citadel
When you look at either from an asset class or a geography, where do you think that the pick up on the mortgage losses comes from strongest?
Where we’ve seen is as I’ve said, multi-family has led us into this and we’ve continued to see the greatest stress on multi-family largely, because again the leases are shorter. I’m interestingly enough, we would likely see that turn around quicker, but it continues to see the most stress. As we get in further into the cycle, we’ll start to see more of that come from office and less from multi-family.
Our retail portfolio and industrial portfolio continue to holdup quite well. The geography probably won’t change substantially. We’ve seen the most stress in the markets you would anticipate and that would be the Southern Markets that got the most overbuilt, if you will, and had the highest unemployment, that would be states like Florida and Arizona.
While you’ve heard a lot about California, our California portfolio upheld through all of this quite well, largely because it’s mostly industrial and well located, so even though you’ve heard a lot about California our portfolio has done very well in California.
Okay and I’ll have Dan talk about target dates.
Target date funds got a lot of attention from both the DOL as well as the SEC, but the root of all of this it really gets down to the glide path and the question becomes, is the glide path to get you to retirement and through retirement. Our model has always been to get you through retirement. So some of the discussions they’re having right now is whether or not the naming convention of the fund is adequate, so better disclosure to the planned participants and planned sponsors on what it’s intended to do to or through retirement.
Another one is around the establishment of asset allocation glide path ranges and disclosing that and others around having a benchmark to compare it to. There’s some additional discussion on how participant distribution behavior should, the communications around participant behavior. Another one just has to do with whether or not there should be any off the shelf solutions or whether or not these should be custom targeted plans.
By that I mean, not only would you have a target date planned for 2025 or 2030, but that would have an overlay of the risk that I am willing to accept as an investor in the fund and those are the issues getting really mulled over by the House, the Senate as well as the DOL and the SEC.
The only thing I’d add is that, none of that. Those are all, what I would think of as refinements to how we do target date funds today as compared to some attempt to roll back what I think has been again on average one of the real success stories around Pension Protection Act, which is the whole introduction of auto enrollment, and things like in auto election so things like target date funds is now where I think about 35% of our plant assets go into and by and large and overtime, that’s a very healthy event.
In that part of loan, but as the market has recovered you’ve seen less and less vocalization on the topic, there seems to be some rationalization that market performance is proving out on the upside as well.
Dan Johnson - Citadel
You don’t see much pressure on the internal management aspect that seemed to get the attention as well?
There tends to be two models, one that is 100% proprietary and the other is a model that embraces both internal as well as sub-advisors, outside the organization are lifetime funds include both PGI as well as non-affiliated managers.
Dan Johnson - Citadel
Last question just what’s your mix there since you brought it up?
It would vary by fund. I don’t know, Jim if you have any comments.
It’s around 60% proprietary, around 60% PGI and the others would be various sub advisors.
Your next question comes from the line of John Nadel - Sterne Agee.
John Nadel - Sterne Agee
I think you’ll tell by the couple questions I have left after everybody, I’m running out. On the commercial whole loan portfolio, could you just update on somewhere the loan loss reserves stood at Q3 and how much that changed from Q2?
Okay, I’ll have Julia cover that.
The reserve at third quarter was $107 million, but compares to about $97 million last quarter.
John Nadel - Sterne Agee
You give us a disclosure in the investment supplement that talks about $1.7 billion of commercial whole loans where the LTV is over 80%. You also make a comment I guess it’s earlier in that page that more current estimates on property values were loans that experienced a material change. Now there was clearly no material change in your greater than 80% of LTV bucket, I think it was essentially unchanged sequentially. Is that category, does that category all together use more current valuations or not? Is that sort of Q1 ‘09 valuations, or is it something more recent?
It would depend. We do our full portfolio. We touch every loan in our portfolio twice a year. The last time that we did a full blown review of every single deal in our portfolio was first quarter. However, we tend to touch about 40% of our each of our loans each quarter basically, because some things occurred on the loan, something happened.
Occupancy changed or we’ve gotten some information on the portfolio so we update that as we touch it the next time we will review the entire portfolio will be next quarter.
By relative standards do you want to think about that as a current value.
It’s as good as given the size of this portfolio the number of loans is as good as you can do, but we’ll definitely touch every loan next quarter too.
John Nadel - Sterne Agee
Last one just a quick one following up on Randy’s question, can you give us a sense how much in dollar amounts higher are your pension and retirement benefit costs, maybe year-to-date in 2009 versus the first nine months of ‘08, or maybe even third quarter versus last years third quarter? Just want to get a sense for how much the markets drag has impacted those costs.
I think these will be kind of rough orders of magnitude, but I would say, Randy, that our pension expense for home office employees is probably up somewhere, the increase is probably somewhere around $150 million for ‘09 over ‘08.
John Nadel - Sterne Agee
One last quick one, on risk-based capital was there any, I noticed the $375 million to $400 million. No change from where you were last quarter. Fair to assume, I don’t think you highlight it, but fair to assume that there was no additional cash taken down from the holding company to the insurance sub to maintain that $375 million to $400 million?
Yes, you’re absolutely correct. There’s nothing moved down at this point in time.
Your next question comes from Andrew Kligerman - UBS.
Andrew Kligerman - UBS
Just one easy one, your International Asset Management and Accumulation segment, I noticed that there were really a negative $0.2 million of taxes paid and not really boosted up the income number and I don’t think that I heard anything about that in the commentary. Could you give a little color on that tax rate and what the run rate might be?
I’ll just say a couple of words Andrew, thanks and then perhaps Terry will want to add some questions, but the tax rate typically for international is impacted by our equity accounting subsidiary so Brazil, China, Malaysia where minority holders, we’re not a majority there. All of the income comes in through investment income and so the taxes are built into that already.
So what you see is you’ve already prepaid the tax and those come into an investment income line and that’s basically the explanation.
The last part I’d add to it is there is a foreign tax credit that goes through the tax line which actually makes it even a little bit lower effective tax rate.
Your next question comes from Mark Finkelstein - FPK.
Mark Finkelstein - FPK
A couple quick ones sorry if you addressed this, you talked about in the press release liquid assets at $7.3 billion. I’m just curious, what would you characterize as your target level? Assuming that’s above what you would characterize as your target level what would be the timeframe over, which you would expect that to be deployed?
I’ll have Julia comment on that question.
Well I think what we’re really targeting, about the liquid assets, because we’re going to maintain a fairly liquid portfolio in our investment strategy, but what we’re really talking about is lowering our cash and cash equivalents down from the level they’ve been at obviously for good reasons. So you would expect at least a billion dollars of being invested out of cash and cash equivalents into longer term investments over the next three to six months.
Mark Finkelstein - FPK
So, $1 billion over the next three to six months?
Mark Finkelstein - FPK
Then just on international, number of geographies, number of businesses, can you just maybe give a little bit of color on the underlying flows that you’re seeing and the composition of those in the international business?
Sure. It varies, but generally the Latin American units are more mature than the Asian units and so what we typically have seen is stronger flows coming from the Latin American units. Brazil is a particularly large contributor of flows as was mentioned earlier about $600 million in the quarter of cash flows. Chile, Mexico and then we’ve had of course, our newer subsidiaries, affiliates in Asia growing a little bit faster, but they’re smaller.
I think that’s the last call. So I’ll just make my closing comments and again thanks everybody for joining us today. This was again a little out of pattern and at least facing everything we know right now. We’re going to expect our earnings call for Q4 to be back at the normal time. As we’ve discussed, we are seeing some early signs of economic recovery and we’re heartened by that. We’ll continue with the same approach that served us well in prior quarters.
We’re going to align expenses and revenues, we’re going to continue focusing on capital management and liquidity and most importantly we’re going to focus on serving the needs of our customers and advisors who serve all of them. So thanks for the interest in principal. We look forward to visiting with you at our Investor Day and Tom has been talking to you about that. We hope to see many of you on board in the coming months. Thanks very much.
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