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Executives

John Egan - Vice President of Investor Relations

Larry D. Zimpleman - Chairman, Chief Executive Officer, President, Chairman of Executive Committee, Chairman of The Principal Life and Chief Executive Officer of The Principal Life

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

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

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

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

Analysts

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

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Yaron Kinar - Deutsche Bank AG, Research Division

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

Erik James Bass - Citigroup Inc, Research Division

Seth Weiss - BofA Merrill Lynch, Research Division

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

Principal Financial Group (PFG) Q4 2013 Earnings Call February 4, 2014 10:30 AM ET

Operator

Good morning, and welcome to the Principal Financial Group Fourth Quarter 2013 Financial Results Conference Call. [Operator Instructions] I'd now like to turn the conference call over to John Egan, Vice President of Investor Relations.

John Egan

Thank you, and good morning. Welcome to the Principal Financial Group's fourth quarter and full year 2013 earnings conference call. As always, our earnings release, financial supplement and slides related to today's call are available on our website at www.principal.com/investor.

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

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

Now I'll turn the call over to Larry.

Larry D. Zimpleman

Thanks, John, and welcome to everyone on the call. As usual, I'll comment on 3 areas. First, I'll discuss fourth quarter and full year results. Second, I'll provide an update on the continued successful execution and long-term benefits of our strategy, and I'll close with some comments on capital management. As John mentioned, slides related to today's call are on our website.

Slide 4 outlines the themes for the call. Fourth quarter 2013 was a strong finish to a great year. Total company operating earnings were $286 million in the fourth quarter and full year total company operating earnings were a record at nearly $1.1 billion. The fact that we achieved record operating earnings while still facing the headwinds of low interest rates and emerging market volatility demonstrates strong business fundamentals and the power of our diversified business model. This also makes us optimistic for continued growth in operating earnings as economic conditions return to more normal trend patterns.

Our competitive position remains strong in the U.S. and is gaining momentum globally. We manage assets in more than 60 countries, and we've expanded our retirement leadership position to key countries in Latin America and Asia. We continue to deliver innovative investment retirement and protection solutions, such as Total Retirement Suite, life cycle funds and business owner and executive solutions that competitors are not able to match, and we export these ideas to markets outside of the U.S. to create long-term growth.

Total company full year net cash flows of $17.4 billion helped drive assets under management to a record $483.2 billion, following our key additional growth metrics that highlight our success in 2013. Full Service Accumulation full year sales of $10.3 billion, which was the second highest on record. Margins in this business continued to improve as we strike a better balance across all plan sizes.

Full year recurring deposits, an important growth metric for the business, were up 12% year-over-year. Principal Funds continued to deliver strong sales growth, with full year sales up 26% to a record $19.8 billion. This, along with strong market performance and solid net cash flows, produced record account values at year end. Principal Global Investors had record assets under management of $292.1 billion at the end of 2013, and full year net cash flows of $4.2 billion. Unaffiliated assets under management also ended the year at a record $109.4 billion. Principal International assets under management were $104.5 billion at year end despite an $11 billion negative currency impact. Net cash flows remained strong at $8.5 billion for the year or 12% of beginning of year assets under management. This is despite the emerging market volatility in the last half of 2013.

U.S. Insurance Solutions premiums and fees were a record $2.4 billion. Specific to Specialty Benefits, full year sales grew 5% over 2012 and the loss ratio for the year was favorable and at the low end of our projected range. Individual Life sales were down year-over-year, primarily due to an intentional slowdown of universal life with secondary guarantee sales. Individual Life sales, excluding universal life with secondary guarantee, are up 21% year-over-year. Our business market focus continues to be a differentiator for us with non-qualified deferred compensation and Business Owner and Executive Solutions making up 57% of full year sales.

Again, the fundamentals of our business remains strong. We continue to build a leadership position in the markets where we operate, providing continued momentum into 2014 and beyond.

Next, I'll comment on the continued execution and long-term benefits of our strategy. Our Investment Management Plus strategy has created a durable and globally diverse business model with a set of highly integrated businesses that is unique among our peers. With Global Investment Management at the core of our strategy, strong investment performance is crucial to our success. As Slide 5 outlines, the investment performance remains competitive and is the leading indicator of future sales and flows.

To be a global investment management leader, we must also attract top investment talent. During the fourth quarter, The Principal earned the top spot in its category in Pensions and Investments' annual survey of the best places to work in money management for the second year in a row. We view this as a significant accomplishment when it speaks to our ability to attract and retain top investment talent. Within Principal Global Investors, we've taken a unique approach to executing our multi-boutique strategy. We've acquired and built expertise across multiple investment strategies with particular focus on meeting increased demand for global equities, fixed income and alternative investments. We drive efficiencies in our boutique model through a shared access to a world-class distribution and operational platform. We'll continue to look for ways to increase scale and efficiencies while maintaining our leadership position across multiple investment categories.

Moving to Principal International. Cuprum was a meaningful contributor to bottom line 2013 results, better than our expectations when we completed the acquisition 1 year ago today. In addition to achieving strong financial results, Cuprum was once again ranked at the top for both investment performance and customer satisfaction as published by the Chilean pension regulator in December. Cuprum has topped all of its peers in customer satisfaction, 19 of the past 23 rankings. Maintaining these high scores is testament to the exceptional job the team did to ensure a smooth on-boarding of Cuprum. This successful acquisition will continue to provide long-term growth opportunities as the mandatory pension market continues to grow and we expand our focus on the voluntary market in Chile.

Our combined operations in Chile, Brazil and Mexico make us the second largest pension provider in Latin America. Building additional scale and increasing our leadership position in these countries is a priority as middle-class growth continues at a rapid pace. The Principal is uniquely positioned to provide the long-term savings and retirement solutions this middle-class is seeking.

Principal International continues to build its leadership position in Asia as well. In Hong Kong, all 5 of Principal's MPF pension funds were winners of benchmark Fund of the Year Award in 2013, including one best-in-class fund. In Malaysia, during 2013, assets under management in our new PRS pension company grew tenfold and we now have the second largest market share. These accomplishments continue to position Principal International as a retirement leader as these markets mature. The Principal continues to be a leader in the U.S. retirement and employee benefits market as well.

In this highly competitive environment, we have the right mix of products and solutions to meet the needs of small and medium-sized businesses, their owners and their employees. Our ability to manage both qualified and non-qualified assets through Total Retirement Suite, and our competitive employer paid and voluntary employee benefits products make The Principal the right provider to help business owners attract and retain employees. In addition, our comprehensive business owner executive solutions are unique among our peers and complementary to our other businesses.

The Principal has been a leader in helping individuals prepare for and manage income and retirement for more than a decade. Our ability to win and retain clients has led to an increase of more than 700,000 eligible retirement participants since 2010. The growth opportunity in helping eligible participants in the plans we manage prepare for retirement is tremendous. Retirement readiness solutions, such as auto enroll and auto escalate features built into the plans, as well as continued work site efforts, will help drive further increases in recurring deposits and will allow The Principal to remain a leader in the retirement market as baby boomers enter retirement and millennials begin to save.

Principal Funds also plays a critical role in our long-term growth strategy. Our unique outcomes-based solutions and solid investment performance have led to strong sales and net cash flows for several years. As a result, Principal Funds continues to add market share and is now the 17th largest advisor sold mutual fund family in the U.S., up from 19th a year ago.

Advisor growth continues in our Funds business. We're now doing business with more than 50,000 advisors, yet this is still a fraction of the entire advisor universe. In addition, sales in our Defined Contribution Investment Only, or DCIO channel, have doubled since 2011 as we continue to successfully place our funds on other non-affiliated record-keeper platforms.

Finally, we announced at the end of December that the process to deregister the Principal Financial Group in our other holding companies, as savings and loan holding companies, was complete. As a result, we are no longer subject to supervision by the Federal Reserve Board. Principal Bank will continue to offer individual retirement accounts that complement our full lineup of retirement savings and income solutions to meet the needs of our clients.

I'll close with some comments on capital management. Last night, we announced the first quarter 2014 common stock dividend of $0.28, an 8% increase over the fourth quarter 2013 dividend, demonstrating continued confidence in our ability to grow fee-based earnings and generate higher percentages of deployable capital. We continue to focus on increasing our dividend payout ratio on a growing net income base. As we said on our outlook call, we expect to deploy $500 million to $700 million of capital in 2014. Our broad strategies for capital deployment will not change. As always, our capital deployment strategy is aimed at providing the best long-term value for shareholders.

In closing, we're very pleased with the strong results in 2013, especially in light of continued macroeconomic volatility. We remain confident in the strength of our business mix and fundamentals, our long-term opportunities for growth and our experienced teams' ability to continue to successfully execute on the things they can control. Terry?

Terrance J. Lillis

Thanks, Larry. The fourth quarter was another strong quarter, resulting in record full year operating earnings. Achieving these results in a volatile global economy demonstrates the strength of our businesses and our ability to execute. We are very excited about the continued momentum of our businesses. This morning, I'll focus my comments on: operating earnings for the quarter and full year; net income, including performance of the investment portfolio; and I'll close with an update on capital deployment.

Total company operating earnings for the quarter of $286 million were up 19% over reported fourth quarter 2012. When looking at full year results, operating earnings of nearly $1.1 billion were up 31% over reported 2012 results. Even after adjusting for the third quarter 2012 actuarial assumption review, earnings were up 19% for the full year.

Excluding the Corporate segment, 63% of the company's record operating earnings in 2013 were from fee-based businesses. This reflects our scaling back or exiting businesses that produce more than $150 million of spread and risk-based earnings, and replacing them with less capital-intensive, fee-based earnings. These fee-based earnings come from higher multiple businesses that put less pressure on our balance sheet. We strongly believe that our current business mix provides the right diversification for continued growth.

Fourth quarter 2013 operating earnings per share was $0.96, a 19% increase compared to the year-ago quarter. For the full year, earnings per share of $3.55 increased 20% over adjusted 2012 results. This is a strong result, especially in light of macroeconomic volatility in the quarter. Earnings per share growth for the year was higher than our expected 11% to 13% annual growth rate due to the addition of Cuprum, favorable equity markets and disciplined expense management.

Looking at Slide 6, you'll see that fourth quarter 2013 earnings were impacted by some normalizing items, which in total, had no impact on earnings per share.

In Principal International, the encaje returns in Chile benefited operating earnings for the quarter, but were essentially offset by a one-time impact of the change in Mexican tax law that we mentioned on our outlook call.

Higher-than-expected pre-payments and Individual Annuities and better-than-expected operating earnings in Individual Life due, in part, to improved mortality were offset by one-time negative items in Corporate.

Now I'll discuss business unit results. Starting with the Accumulation businesses within the Retirement and Investor Services, operating earnings were $153 million, an increase of 15% over the year-ago quarter. As shown in Slide 7, net revenue was up 14% over the year-ago quarter. Trailing 12-month pretax return on net revenue improved at 32%. Quarterly operating earnings for Full Service Accumulation at $93 million were up 15% from the year-ago quarter. Net revenue was also up 15% due to growth in the business and strong equity market performance. The trailing 12-month pretax return on net revenue for the business unit was 31%.

Sales, at $3 billion for the quarter, were strong as we continue to focus on striking an appropriate balance of growth and profitability. Net cash flows for Full Service Accumulation were $143 million for the quarter. Increases in the equity market impact withdrawals more than deposits, as recurring deposits are not directly correlated to market returns.

Principal Funds operating earnings were $22 million for the quarter, a 63% increase from the year-ago quarter, as the strong sales over the last several years are now translating into bottom line results. On a trailing 12-month basis, revenue was up 24% and operating margins have continued to improve due to increased scale in the business. For the quarter, retail mutual fund sales were $4.1 billion, leading to $550 million of net cash flow. While down from a year-ago quarter, these results were solid relative to the industry.

Individual Annuities fourth quarter operating earnings were $32 million. The segment benefited from higher-than-expected prepayments in the quarter. This more than offset the spread compression due to the low interest rate environment.

Bank and trust operating earnings for the quarter were $6 million. With the repositioning of the bank as part of the deregistration process, this is a new quarterly run rate for earnings.

Slide 8 covers guaranteed businesses within Retirement and Investor Services. Fourth quarter operating earnings of $26 million were up 37% over the year-ago quarter. On a trailing 12-month basis, pretax return on net revenue was 81%. Investment-only operating earnings improved 33% from the prior year quarter to $15 million as increasing spreads more than offset a decrease in account value. New business continues to be more profitable than business rolling off. We continue to approach this business opportunistically, and we'll write business when market conditions generate attractive returns.

Full service payout operating earnings were $11 million for the quarter, a 44% increase over the year-ago quarter, and sales were $205 million. We believe that the rising interest rate environment will allow us to add small to mid-sized pension closeout business at attractive returns.

Slide 9 shows Principal Global Investors' operating earnings were $30 million, up 15% from the year-ago quarter. Fourth quarter revenues grew 41% over prior year quarters, driven largely by stronger-than-normal performance fees in the current quarter. The performance fees were generated by boutiques, where we do not have full ownership, therefore, the impact of revenue is larger than the impact of after-tax earnings. The full year pretax margin for Principal Global Investors of 24% is 150 basis point improvement compared to 2012. The margin is down sequentially due to the higher performance fees in the fourth quarter. The very strong performance fees in the quarter will also impact the revenue growth rates that we laid out on our outlook call.

We now expect 2014 revenues to be similar to 2013, with pretax margins improving to the 26% to 28% range previously disclosed.

Unaffiliated assets under management were $109 billion at year end. Unaffiliated net cash flow for the quarter was $1.1 billion. There's continued demand for our diversified investment product portfolio as we move into 2014.

Slide 10 shows fourth quarter 2013 operating earnings for Principal International of $62 million. Encaje returns for the quarter were better-than-expected in Chile. That benefit was largely offset by the one-time impact of the tax change in Mexico. When compared to the prior year quarter, results this quarter were also negatively impacted by the prospective change to the amortization pattern of the intangible assets in Brazil, as discussed in our outlook call in December.

In addition, operating earnings growth from the year ago was suppressed by 11% due to continued strengthening of the U.S. dollar. Quarterly net cash flows for the segment were a record $2.7 billion, helped by a return to normal cash flows in Brazil. Principal International ended the quarter with $105 billion of assets under management despite the strengthening U.S. dollar. U.S. Insurance Solutions operating earnings were $60 million for the quarter. These results were flat with the year-ago quarter, but the mix between the underlying businesses shifted slightly.

As shown on Slide 11, reported Individual Life operating earnings were up 17% from the year-ago quarter to a strong $33 million. Results in the quarter benefited from improved mortality. On a trailing 12-month basis, pretax operating margin was 14% compared to the 15% to 17% communicated for the year. Higher-than-expected mortality in the early part of the year was the main reason for the variance.

As shown on Slide 12, Specialty Benefits operating earnings of $27 million were down $5 million from a very strong year-ago quarter. Both quarters benefited from favorable loss ratios. The decline in the current quarter was primarily driven by several one-time expenses. We continue to expect our quarterly loss ratios to be in the 65% to 71% range, with fourth quarter at the favorable end of the range due to seasonality of claims. Trailing 12-month pretax operating margins of 11% was slightly above our expectations due to favorable claims experienced for the year.

The Corporate segment reported an operating loss for the quarter of $45 million, higher than our forecasted range of $35 million to $40 million of operating losses. Results this quarter were negatively impacted by higher expenses, as well as tax adjustments that are housed in the Corporate segment. Full year losses in Corporate of $149 million are at the lower end of the range we laid out at the beginning of the year. Expectations for losses in 2014 are $130 million to $150 million.

For the quarter, total company net income was $233 million. Realized capital losses for the quarter were $52 million, with credit-related losses making up $25 million of the total. Full year credit-related losses were $84 million, a 24% improvement from the previous year and were better than our pricing assumptions.

Our return on equity, excluding AOCI, was 12.1% at year end, a strong result improvement year-over-year, even taking into account the impact from the actuarial assumption review in 2012. Full year earnings grew 19% over the adjusted prior year, while average equity excluding AOCI increased just 5%. As I mentioned at Investor Day, growing operating earnings 10% to 12% while managing the equity growth will deliver a 50 to 80 basis point annual increase in return on equity.

Looking now at capital adequacy. We estimate our year-end risk-based capital ratio to be 430% to 435%. This allows us to redeem a $100 million surplus note in the first quarter 2014 and still manage to our targeted RBC ratio of 415% to 425%.

As outlined on Slide 13, we announced plans to deploy more than $480 million of capital in 2013, in line with our guidance for the year. This included a record full year common stock dividend of $0.98, which was a 26% increase over the dividend paid in 2012. Our dividend payout ratio for the year improved to 33% on an increasing net income base. As we move to 2014, we expect to deploy $500 million to $700 million of capital in the year, and over the long term, we expect to deploy 65% to 70% of our net income with volatility in any given year.

In closing, we're extremely pleased with the strong results in the quarter and the full year. We feel that we're well positioned for future growth across all of our businesses, and that our diversified business mix will generate successful results across various economic environments. This concludes our prepared remarks. Operator, please open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of John Nadel from Sterne Agee.

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

I was hoping we could talk about capital markets relative to the assumptions you had built into your 2014 outlook. And really, I'm thinking about both -- or I guess, the combination of global equity market weakness, long-term interest rates or lower foreign currency pressures have actually increased. So I'm just wondering, when you combine these factors, can you give us an estimate as to how much pressure on a combined basis this is placing on your outlook, relative to that original guidance provided in early December? And then I'd also like to look at the flip side of that. As a result of some of these pressures and dislocations, are you seeing any increased opportunities, especially on the acquisition side?

Larry D. Zimpleman

John, this is Larry. On the -- on your first question, John, as you know, we did our outlook call in early December, and we don't really update or comment on it after that point. Now you went through in your comments or in your question, a number of factors that certainly would -- the world might look a little bit different today than it did back in early December. But having said all of that, I guess I would make a couple of points. One is that the companies in the local markets outside the U.S. for Principal International continue to grow at double-digit rates. While there has been some noise in terms of the currencies, the actual local economies continue to do quite well, okay? So those companies continue to grow at roughly double-digit rates. Some of them grow faster than that. So for example, Brazil has historically grown at something closer to 20% to 25%. But the main point is that the local companies continue to grow at double-digit rates. The -- I would say that the currencies in January, the currencies have probably added another couple of percent headwind. So from what it was in December, we would have reflected some modest headwind when we made that call, that headwind might be a little bit tougher today. But I think if you net everything out and you think about our capital deployment, I would say, as I said in my comments, we still expect to see growth in operating earnings, growth in EPS during 2013. And I would emphasize again, the fundamentals of the business remain very, very strong. Now in terms of M&A, I think your question is an interesting one because for every challenge, there is an opportunity. And it could be that with the capital flexibility we have, with a more fee-based business model, that there could be opportunities for M&A, and we're aware of some that have come up and it's potentially likely that others may become more attractive in time.

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

And then if I could just follow up on that. So if we assume that you -- that Principal did not issue any equity to do a deal, but rather use existing cash resources or capital resources, and I guess there's some modest debt capacity, can you give us a sense of about how much that, in total, would get to?

Larry D. Zimpleman

I'm not quite sure that I understand your question, John.

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

Well, if you had -- how big a deal could you do, I guess, without raising equity?

Larry D. Zimpleman

Well, again, I would say that the deal that we could do without raising equity would probably be in the sort of $500 million to $1 billion range. But I guess, I would look at this sort of net -- M&A for us, I would say, John, we'll look net-net on an accretive basis. In other words, we would only do things that we were confident we could execute on, first of all, because they have to be consistent with the strategy. And #2, I would say, they have to be accretive, and they have to be more than accretive with other uses of capital within a kind of 3 to 5-year period. Now, we all know the way M&A works, is it tends to be sort of accounting unfriendly, that is the reality so you're not going to necessarily getting the accretion versus other uses of capital in year 1. But we would want to build an acquisition plan we could execute on so that by 3 to 5 years, we are seeing accretion as compared to other uses of that capital. Regardless of how we finance it, that's how we think about it.

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

Yes, that's entirely consistent.

Operator

Your next question comes from the line of Christopher Giovanni from Goldman Sachs.

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

I wanted to focus again on kind of the emerging markets. And obviously, there's been a lot of focus and not going to change your long-term approach, I think, but obviously, if you could comment some around, maybe a bit more on what you're hearing or seeing on the ground, and would be particularly interested in Jim's thoughts around what you guys are hearing, maybe from your emerging markets, specialist boutique, kind of like Finisterre?

Larry D. Zimpleman

Yes. This is Larry, Chris. I'll start that and Jim may want to make some comments, Luis may want to comment. I would start by saying, first of all, that we are in very carefully selected emerging markets. We're not a broad emerging markets company, we are not out there in 40 or 50 sort of emerging markets. We are in very, very selected emerging markets. So we take a very, very hard look at the economies and frankly, the political systems that are in place before we would use our capital to invest in these companies. So for example, Argentina was a country we exited, as an example. So we believe that we are in emerging markets but we are in the stronger economies within the emerging markets. So I think that's an important kind of distinction to recognize. Second point is the one that I said in relationship to John's question which is that, this sort of emerging market kind of hiccup is an interesting one and it's a bit different in sense that there has not been disruption in the performance of the local economies. It's a capital flow issue, not a local economy issue. In other words, the local economies continue to sort of trend -- growth trend continues to be sort of give or take what it was before. So for example, the Chilean economy -- even the Brazilian economy, still in that 2% to 3% growth mode. So the local economies continue to be strong and that's really what our expectation is for 2014. We don't see anything on the horizon that would indicate that the local economies are going to struggle to meet the growth targets that we put into our outlook for 2014. So with that, maybe I'll have Jim talk about what he hears from his analyst.

James P. McCaughan

Yes, thank you. To Larry's point about selected emerging markets, I'd also add the diversification point. So if I look at, for example, Finisterre, whom you mentioned, they're long short, and that actually means they can do quite well in up markets and down markets. And in fact, they had, not a great but quite a good 2013 if you research their investment performance. It was mostly around the double digits mark which, for an emerging specialist, in dollar terms, was actually pretty credible. And the reason of that was so was the long short part of it, are other emerging bond capabilities at Principal Global Fixed Income has actually focused on dollar-based emerging market debt and so has been spared a lot of the worst stuff. And I think that highlights the selectivity point that Larry made. And also, I think it illustrates the diversification point I'm making.

If you look at emerging equities, it's been interesting to see at Origin, who have a quantitive approach, very strong performance record, which is actually leading to some interest by clients which is maybe counter-intuitive because it's at a time when most emerging market fund was seeing outflows. So, really, that would be my main point about, to add to Larry, the markets is the diversification. If you talk to our equity analyst, it's really the point that the underlying economies continue to do fine but they're worried about financial squeeze, credit cycle, currency stability.

The other point I'd make though, and this relates to how we are placed to defend against the ups and downs of markets, is -- and this applies to Principal Global Investors and also to Principal International, by and large, our revenues in emerging markets or in international currencies are broadly matched by costs in those markets. So it's actually a matter here of translation rather than of a mismatch, which is something that happens with many companies in emerging markets. So we feel we're managing the risks. They're likely to stay volatile but I think that with selectivity and the diversification we've talked about and also the structure of our businesses, we are managing the risks quite effectively in a temporarily tough time.

Larry D. Zimpleman

Does that help, Chris?

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Very helpful. And then just one last quick one on capital, recognizing your long-term philosophy around capital management. Curious, as the recent weakness in your stock causes you to change maybe the near-term approach, entice you to maybe look at buybacks more, is that still kind of too shortsighted?

Larry D. Zimpleman

Yes. I'll make a couple of -- this is Larry. I'm going to make a couple of comments. I mean, again, we've thought about kind of share repurchase, and again, a sort of a 2-bucket approach. The first bucket would be to make sure that we're managing share count and therefore, repurchasing shares relative to any kind of newly issued equity, primarily as a result of deferred compensation. So that piece we would do as kind of a standard part of our capital management. The second bucket would then be that more opportunistic bucket. And I think to your point, Chris, while we haven't made any final decisions on that, I think to your point, we've always maintained a zone or a range of sort of intrinsic value of the company. And we're obviously coming closer to that range of intrinsic value. I think it's one of the real items of capital flexibility that we now have. As Terry said in his comments, we're a much more balance sheet-light organization and able to deploy much higher levels of free cash flow for capital management. So we think that gives us a lot more flexibility, and certainly, we recognize that there's perhaps been a little bit of overbaked nature to the emerging market concerned that may give us opportunity. We'll see what happens going forward for some opportunistic share repurchase as well.

Operator

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

Yaron Kinar - Deutsche Bank AG, Research Division

I have a couple of sensitivity questions. One is on encaje. Should Central Bank actually start raising interest rates to combat the decline in currencies? What kind of -- can you give us some sort of sensitivity as to what impact on EPS that may have on overall results?

Larry D. Zimpleman

Yes. Yaron, I'll have -- this is Larry. I'll have Luis comment. Just as a broad reminder kind of going to Luis' comments in Chile, the encaje is a more, somewhat more diversified portfolio. So it includes both equities and fixed income and it even has a dab of sort of global equities in it. In Mexico, the encaje, which is smaller, but that encaje is primarily a fixed income kind of sovereign investment there, so that would be impacted by rates. But Luis, do you want to comment?

Luis E. Valdés

Yes, certainly. This is a pretty interesting question because in the country that were pretty much more exposed to the encaje is Chile, as Larry said, and the main debate that you could see in Chile right now is when the Central Bank is going to lower the interest rate instead of to raise the interest rate in Chile. And that's precisely in order to be a little bit anti-cyclic above the financial turmoil that emerging markets are living in. So we don't really see a very important risk about interest rates going up in Chile.

And in fact, the Central Bank last week, they made decision in order to keep the interest rate as it was and probably in their outlook is whether -- saying is that probably they're -- they have a much more stronger opinion in order probably to lower the interest rate going forward. In Mexico, the solution's a little bit different. And also, we don't see that the Mexican Central Bank is going to raise the interest rate, and that's our opinion. We were able to see some interest rate going up in Mexico during January but nothing in comparison with what happened in May and in June of last year that went up like 130 basis points in 2 weeks. So, it's being in a kind of mild movement in comparison with what happened in the very first part of -- or last part of the second quarter in 2013.

Larry D. Zimpleman

Does that help you, Yaron?

Yaron Kinar - Deutsche Bank AG, Research Division

Yes, it does, thank you. And then, Larry, could you talk a little bit about the new legislation that was proposed by Senator Harkin on private pensions and what impact that may have on Principal?

Larry D. Zimpleman

Sure, sure. So I think last Thursday, Yaron, Senator Harkin introduced -- actually dropped the bill. He had been talking about this, maybe almost a better part 2 years. He dropped the bill. I think, broadly, it's sort of called the USA Accounts, and the USA stands for the 3 words, I can't quite remember, I think it's like Universal Secure and Adaptable or something like that. The essence of, I think, the Senator's proposal is that he would mandate contributions among all employers, if you will, into a defined contribution plan. If you're a small employer that didn't already have a plan in place, you would effectively go to the, I guess, the government-sponsored plan. The government-sponsored plan will then be managed by the private sector, so that's a little bit different than the myRA proposal that President Obama had talked about in his State of the Union. We, Principal, obviously, Senator Harkin's a Chairman of the HELP Committee. He's, obviously, the -- he's a junior senator from Iowa despite the fact he's been in the Senate for a very long time, we obviously work very closely with his office, and I talk with the senator on a regular basis. I think his primary purpose in dropping the bill was to continue, which I view as a positive, to put some emphasis on the fact that Americans need to save more for their own retirement. I mean, that's the bottom line, I think, the bottom line message that the Senator is trying to make. Now whether this particular approach of mandating contributions is one that will see the light of day, I think even the Senator might be a little bit skeptical about that. But I think his purpose is to stimulate the conversation, and we think simply stimulating the conversation is going to be helpful for our businesses because the reality is, we do all need to save more for retirement, whether that's mandated or whether that's just on a voluntary basis. So we actually think net-net, it helps to put the focus and spotlight on this issue, and it will perhaps cause people to redouble their efforts to make sure they're saving at the rate they need to do for their own retirement.

Operator

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

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

My first question of 2 relates to your guaranteed area. When -- if my memory serves me correctly, when you announced several years ago that you were going to limit your exposure to guaranteed investment contracts, I think you sort of -- you left impression that this would be a business with shrinking earnings. Well, this morning, we're reporting sharply higher earnings and your crediting improved net interest margins in contrast to what's going on with your Life Insurance business, where interest rates are actually pressuring your business. Two-part question. One, why the difference between the effect of interest rates on the Life business and from the Guarantee business effect? And should we expect that this business, this Guaranteed business, perspectively, to be a growing business in terms of earnings rather than the shrinking business that it had been for some time?

Larry D. Zimpleman

Thanks, Eric. This is Larry. Yes, it's a -- your questions are kind of interesting. Actually, what we've been trying to sort of manage within the context of what you called the guaranteed business, which another term, for those maybe not quite as familiar, that we apply to this business is the investment-only business. So Eric is talking about investment-only business as compared to the Individual Life business. What we've talked about managing in the Investment-only businesses is the account value of that business relative to the general account. So our general account, what we talked about is managing the Investment-only to be roughly 18% to 20% of the total value of our general account. And that's still our kind of best guess. It's sort of within that range now, and it's probably at the lower end of that range, and we would expect to sort of stay within that range. Now as the general account grows, that means that we'll grow that Investment-only account value, and it also means that earnings will grow, albeit they'll grow at something as closer to a mid-single digit rate. So, 4% to 6% or something like that. Now, the Life business -- the Life business on the other hand, again, as we said, we're making a little bit of a transition into Life business, sort of a way from UL's secondary guarantees toward more toward term products, toward more variable Life products. And so we have absolutely have plans to continue to grow that business, again, focused primarily on business owner and executive solutions. So I think, Eric, what you should expect going forward would be that sort of low -- or excuse me, that sort of mid single-digit growth rate in operating earnings. Actually, in commenting on fourth quarter here, you would note, or you should have noted, that the Individual Life business also had very nice improvement in operating earnings, albeit it was more from mortality than the spread. Whereas in Investment-only, it was more from the spread.

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

And if I could just ask my second and final question regarding Chile. Why is there, I mean, and this obviously could be an extended response so you'll need to give me an abbreviated one, but why is there a voluntary opportunity? And how should we think of the size of this opportunity and the potential earnings from it?

Larry D. Zimpleman

Okay. This is Larry, I'll make a few comments. The -- just quickly on the side, and then I'll let Luis talk about why the government decided to have a voluntary layer rather than just extend the mandatory. But just to give you a sense of the voluntary opportunity, basically, the mandatory system stops at a salary level that's about USD $38,000. So you're required to contribute roughly 10% of your salary up to the first USD $38,000 of your compensation. So again, if you make $75,000, you're only contributing on half. So that's where the cutoff between mandatory and voluntary occurs, is at that $38,000 of income level in U.S. dollar terms. Now, I'll ask Luis to talk quickly about why the government decided to go voluntary rather than mandatory on that upper income fees.

Luis E. Valdés

Yes, Eric, this is mainly because going -- in trying to raise the bar in the compulsory system. It has implied a lot of political pain, if you want. You have a lot of resistance about the employees and employer to go in that direction, so the Chilean government is pretty much more keen in order to go after a voluntary solution, compulsory solution, and that's the -- where they're, I think, adding more incentives in order to develop that market. Having said that, they are putting in -- they're moving these limits that Larry mentioned a little bit but very much more timid. They put a law in 2008 that is moving those limits. But I'm saying those moves are very timid and the need for having a very strong voluntary market in Chile remains as it was, since the beginning of this decade. So that might answer why the Chilean government is pretty much more clear in order to put forward a voluntary market rather than a compulsory one.

Operator

Your next question comes from the line of Erik Bass from Citi.

Erik James Bass - Citigroup Inc, Research Division

I was just hoping you could comment a little bit more on what you're seeing in terms of activity in the U.S. 401(k) market, I guess, particularly around recurring deposits and RFP activity.

Larry D. Zimpleman

Yes, sure, Eric. This is Larry. I'll have Dan comment. I would just say broadly, we are, finally, I think 2013, to some extent, was the year of the rebound as it relates to recurring deposits. On a trailing 12 months, we've seen those that in fourth quarter, they are up about 12%, but I'll let Dan give you some color.

Daniel J. Houston

Yes. 2013, Erik, was really a solid year if you look at it from an operating earnings perspective, but more importantly, just that mix of business of small, medium and large plans. You may have noticed that we wrote a net new 1,900 plans on a full year basis, of plans of less than 1,000 employees and on plans with more than 1,000 employees. We actually increased that by 8%, and we -- on a trailing 12-month basis, improve our return on net revenue. Your primary questions around what's the outlook or 2014, and it's not that different than other years where we had a lot of volatility in the equity markets. And when we see volatility, we see the actual pipeline get smaller, less -- fewer plans going out to bid when the equity markets are performing exceedingly well or if they're incredibly volatile. So they're down slightly. So I would anticipate we could have a light first quarter sales year. But we'll have to see.

Erik James Bass - Citigroup Inc, Research Division

Okay. And then, any comments you could make on the competitive trends? And I guess any changes in strategy or pricing you're seeing from either other life insurers or the asset managers in the market?

Daniel J. Houston

I don't think there's been a significant change. As I think about the latter half of '13 and the first part of '14, the traditional players by each of the 3 market segments. One of the advantages we have is just really strong investment managed performance, getting our fair share of the slots for active asset management that serves us very well, and Jim and his team has just done a superb job giving us a good product to sell, whether it's in the DCIO space or the full service. You'll note that our results for '13, over $10 billion, that's our second best year ever. The other number I break out for you is we did another $4 billion in DCIO. So over $14 billion to that core SMB space between full service and DCIO mutual fund sales.

Operator

Your next question comes from the line of Seth Weiss from Bank of America.

Seth Weiss - BofA Merrill Lynch, Research Division

And maybe just to follow-up on Erik Bass' question, get a little bit more granular on the recurring deposits. 2013 was pretty strong year in terms of recurring deposit growth. I believe some of this was from the return of company matches. Could you just sort of talk about that dynamic, maybe on a year-on-year basis, full year, in terms of how much company net just came back and how much more room there is for runway for recurring deposit growth going into 2014?

Daniel J. Houston

Yes, good question. So...

Larry D. Zimpleman

I'll just make a quick opening comment, if I could, Seth. One of the -- and I commented on it briefly in the opening comments, but I think to your point, there is a real opportunity to see some meaningful growth in recurring deposits, primarily focused around this initiative that we broadly call retirement readiness, which is to say, in responding to the question earlier around Senator Harkin's proposal, the reality is, is that many, many -- the majority of our participants are not saving at the level they need to. And we, as a retirement provider, need to engage much more actively with each and every one of those participants, often in the workplace, in order to get their contributions up to a level that is needed. Again broadly, what you'd say is if you're not saving in kind of the double-digit range with your own contributions, you may not have a sort of retirement lifestyle that you're seeking. So today, participant deferrals are sort of in that 7.25% range, so we need to get that closer to 10%. That's going to take a lot of work. It's going to happen over time. But that gives you some sense of where that recurring deposit stream could go if you had every participant at 10% instead of a 7.25%. And then maybe with that, I'll pass to Dan for his comment.

Daniel J. Houston

Yes, just a couple of additional things to add to that, Seth. And the first one would be, just remember that we're starting to finally see some employment growth. And if we looked at the Deanna's business, which they have tracked that very closely on our group benefits business, we saw a trailing 12-month basis of a growth of about 1%. Remember, at the worst, that was shrinking. And so we're starting to see growth there, we're starting to see job ads. To Larry's point, it's about plan design as opposed to trying to continue down this path of just education, and so requiring, if you will, plan designs that would have auto enroll and auto escalate which will lead to the results that Larry described. I do anticipate that profit-sharing contributions start coming back, we saw good profits by small to medium-sized business. To your specific question about matching, we think that maybe we're about 80% back from the -- from where we were originally, from employers having a stated match in their plans. And so maybe a little bit more upside on the matching contributions. Hopefully that helps.

Seth Weiss - BofA Merrill Lynch, Research Division

That's great. And maybe just one follow-up on that 7.25% deferral rate. Is there any difference by plan size in terms of the contributions? Do you see small or medium size contributing less than large size or is it all pretty stable across?

Daniel J. Houston

It has more to do with actual plan designs itself. If you have an employer matching contribution, strong employer endorsements and support, you're going to get a better result, whether that's a small, medium or large plan, which, again, is why we get pretty selective and disciplined about the pricing of these plans. We've got to have the attention of the employer to support meaningful employee engagement and profit-sharing contributions, matching contributions. And then of course, sector, retail is pretty difficult, that's where you see the plan designs that aren't quite as advantageous for the plan participant. I would just call out, we continue to see growth in that not-for-profit sector. We have a large business around hospitals. Hospitals generally have pretty generous benefits and so, we again see good engagement, the high participation, high salary deferral and nice employer contributions.

Operator

Your last question will come from the line of Mark Finkelstein from Evercore.

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

A couple follow-ups. I guess, one of the comments made, I think in a couple of questions earlier, was on the first quarter of sales outlook being a little bit light. I think it was Dan, you made that comment. What is that attributable to, do you think?

Daniel J. Houston

I think it's, a large part, just the equity market we're very strong and so there's fewer RFPs out. Now the corollary to that is we'll likely retain a lot of business because we don't see our plans being put out to bed either. So we've seen that in other periods, it's a halo effect of strong investment performance for a plan. They're probably less likely to put that out to bids, therefore the pipeline gets a little smaller. So better retention, and perhaps, a little bit lighter pipeline.

Larry D. Zimpleman

Yes. Mark, this is Larry. What I would say on that is if you go back look at prior calendar years, you'll see a very definite trend towards -- if you divide the year into 2 pieces, first half, second half, you see definite trends towards years where sales are lumped toward the front end or sales that are lumped toward the back end. I would say to Dan's point, I think -- we think, because of just the kind of the psychology of most plan sponsors given the strong market in 2013, we will see growth in sales at 2014, it's more likely to come in the back half of the year.

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

Okay. And then maybe just following on. And I think, Larry, in your opening remarks, you talked about the objective of having a better balance across all plan sizes in the U.S. and you talked about in the context of margins and sales. And I guess, sitting where we're sitting, like what should we expect to see as you somewhat remix that business? I assume in the kind of small and medium, but what should we actually see?

Larry D. Zimpleman

Actually, I'll go ahead and let Dan. I'll just say that, again, we think about this again with sort of there's a kind of a small, medium, large component. Small is what we call emerging, now the medium is what we call dynamic, the large is what we call institutional. So there's different ways to look at it. You can look at it by revenue, you can look at it by AUM, so -- but I'll let Dan give you sort of what we would like to have for the breakdowns.

Daniel J. Houston

Yes. So clearly, if we can put 1/3 at each bucket, small, medium and large, we'd be satisfied with that result. But not all plans are created equal, so on those very large plans, again, it depends upon what the employers support is and what they're looking for from Principal. And I'll give you an example. Larry cited better plan design. Well, we use Retire Secure as a way to engage that plan sponsor and plan participant to improve the outcomes of the plan. We have seen some withdrawals this year from plan sponsors that flat out wouldn't support a better plan design. And if we have to adjust the pricing, there might -- they may very well leave Principal. So again, maintaining pricing discipline, encouraging the use of Retire Secure, better plan designs, and then I would tell you again, our strong investment platform allows us to garner a larger percentage of the Principal brand funds on those platforms, and that's what's going to lead to profitable growth. We gave you a -- on the guidance call, that 27% to 29% returns, and I wouldn't alter that at this point in time. We still feel good about that as being our long-term objective.

Larry D. Zimpleman

Yes. One of the really positive points, Mark, about the performance of our block is that we continue to have about 2/3 of the assets and about 2/3 of deposits going into what we would call proprietary options. So that's a very, very high number, higher than, I think, needless to say, any competitor. And that's really a key to driving the kind of revenue growth and profitability that we need out of that business.

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

Okay. One very quick final question. You talked about the voluntary opportunity in Chile. And I'm just curious, do you have the permissions and have you started marketing that to the Cuprum customers at this point? Or are we still trying to get that all...

Larry D. Zimpleman

I'll let Luis comment on that. Luis?

Luis E. Valdés

The answer is certainly, yes. We can market voluntary probably to our Cuprum customers. You see right now the voluntary price which is being manufactured by Cuprum. What we are looking for right now is being able to offer and to extend that offering, offering part of our products which are being manufactured by our mutual fund platform in Chile and adding some life insurance policies as well. So the answer is, yes, that we're willing to see and we're working in order to see how we can extend and expand that offering.

Operator

There are no further questions at this time.

Larry D. Zimpleman

Well, this is Larry. I'll make just a closing comment. Thanks to everybody for joining us on the call today. We're very, very pleased with our fourth quarter results as well as our full year 2013 results. And we think that our strategy is clearly working. I would just note, while 2014 has started off with some renewed volatility, I would remind you that we start 2014 with an asset base that's 20% above where it was 1 year ago. And we believe that our higher asset base is going to continue to drive increased revenue and operating earnings for the company during 2014. So with that, thanks, everybody for joining us. I look forward to seeing many of you on the road in the coming months. Have a great day.

Operator

This concludes today's conference call. You may now disconnect.

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