John Egan - Vice President of Investor Relations Larry Donald Zimpleman - Chairman, Chief Executive Officer, President, Chairman of Executive Committee, Chairman of Principal Life, Chief Executive Officer of the Principal Life and President of Principal Life Terrance Lillis - Chief Financial Officer, Chief Accounting Officer and Senior Vice President Luis Valdez - Chairman of Principal International Inc., Chief Executive Officer of Principal International Inc.

and President of Principal International Inc. Daniel Houston - President of Retirement, Insurance & Financial Services James Patrick McCaughan - President of Global Asset Management.

Yaron Kinar – Deutsche Bank Ryan Krueger - Keefe, Bruyette & Woods Erik Bass - Citigroup Shawn Dargan - MacQuarie Seth Weiss - Bank of America Merrill Lynch Randy Benner - FBR Capital Markets Chris Giovanni - Goldman Sachs.

Good morning and welcome to the Principal Financial Group Second Quarter 2014 Financial Results Conference Call. There will be a question and answer period after the speakers have completed their prepared remarks. (Operator Instructions) I would now like to turn the call over to John Egan, Vice President of Investor Relations..

Thank you, and good morning. Welcome to the Principal Financial Group's Second Quarter 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 a reading of the Safe Harbor provision, CEO, Larry Zimpleman; and CFO, Terry Lillis, will deliver some prepared remarks. Then we will open up the call for questions. Others available for the Q&A are Dan Houston, Retirement and 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 them or update them to reflect new information, subsequent events or changes in strategy.

Risk 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.

Before we get to the prepared remarks, I'd like to announce that on the afternoon of September 12, we will host an investor event to provide an update on our Retirement Investor Services business. That will be held in New York City. We will provide more details in the next few weeks.

We are planning subsequent investor events including an update on our Asset Management Business in New York City, an update on Principal International that will be held in Santiago, Chile. We hope that many of you are able to attend these events. Now I will turn the call over to Larry..

Thanks, John, and welcome to everyone on the call. As usual, I'll comment on three areas. First, I'll discuss second quarter and year-to-date 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. As you can see on Slide 4, that Principal had another strong quarter resulting in record results and a great first half of the year. Total company operating earnings were a record $323 million in second quarter 2014, a 19% increase over the year ago quarter.

Year-to-date operating earnings of $640 million were up 27% over the same period last year. This continued earnings growth demonstrates the strength and sustainability of our diversified business model.

Our businesses face continued macroeconomic volatility, we remained focus on executing our strategy and maintaining expense discipline in order to capitalize on the momentum that’s been building for the last several years. Principal achieved a major milestone during the second quarter as assets under management surpassed $0.5 trillion.

Total company assets under management were a record at $518 billion at the end of the quarter as a result of total company net cash flows of $5.5 billion for the quarter and strong investment performance.

With multiple growth engines and an established track record as a global investment management leader, we look toward achieving $1 trillion in assets under management in five to seven years. Following our additional key growth metrics from the quarter, Full Service Accumulation sales were $1.4 billion in the second quarter.

Second quarter sales tend to be the lowest results for the year and we expect full year 2014 sales to be in line with 2013 levels. Principal Fund’s sales were $4.7 billion for the quarter. Net cash flows were strong at $1.8 billion, and as a percentage of our block continue to outpace the industry.

This is Principal Fund’s 18th straight quarter of positive net cash flows reflecting strong investment performance and our ability to offer solutions that financial advisors and retail investors seek.

Principal Global Investors ended the second quarter with record assets under management of $307 billion including record unaffiliated assets under management of $114 billion. Principal International had record assets under management of $119 billion at the end of the second quarter.

As a testament to the power of our emerging market strategy, assets under management in Latin America surpassed $100 billion in the quarter. Quarterly net cash flows for Principal International were a record $4.3 billion, driven primarily by improved investor sentiment and strong sales in Brazil.

Individual Life’s business market focus continues to be a differentiator for us with 55% of second quarter sales coming from non-qualified deferred compensation and business owner and executive solutions. Second quarter sales increased 11% over second quarter 2013 excluding the intentional slowdown of Universal Life with secondary guarantee sales.

Specialty benefits premium and fees increased 6% over second quarter 2013 as a result of $62 million in sales and strong persistency. Across the company, we continue to win and retain business as a result of our innovative products and services and through our diversified distribution platform.

We remain confident about our competitive positioning across the globe and our ability to continue to grow our businesses into the future. Next, I’ll provide a few updates on the continued execution of our strategy.

The need for our products and services is greater than ever with an aging worldwide population, a growing number of people in the middle-class in emerging markets and a shortfall of retirement savings among workers. We remain committed to helping business owners, individuals and investors around the world, achieve financial security and success.

In full service accumulation, our key differentiators like Principal Total Retirement Suite and innovative plan design features such as Principal Plan Works which focuses on retirement readiness for each participant, continue to position us as a retirement leader in the US.

We have the ability to impact more than 4 million participants, for their employers and advisors to help them take action to secure their financial futures. The work we do is meaningful and is making a difference. It’s something we never lose sight of.

World-class customer satisfaction continues to be a differentiator as indicated by our US retirement customers in a recent Chatham Partners’ survey.

Overall satisfaction with the Principal continues to be strong with 97% of clients reporting satisfaction with their client service team and that they plan to maintain or increase their relationship with the Principal. While a lot of focus is given to sales results, in our view, retention is just as or even more important.

Retaining clients and account value where we have already incurred upfront installation expenses have an understanding of how much ongoing work is involved with the client and have built the relationship with key personnel is more beneficial to the bottom-line than new sales.

Just to put some numbers on this, our year-to-date client level retention in full-service accumulation is 98%, 100 basis points better than our average over the last five years. This translates to $1.6 billion of additional account value that we have retained this year.

This improved retention has a meaningful impact on our ability to grow operating earnings. As Slide 5 shows, investment performance remains very strong and is a leading indicator of growth for our retirement and investment management businesses.

The percent of Principal Funds in the top half of Morningstar rankings on a 1, 3 and 5 year basis are 79%, 88% and 89% respectively which is one of our most competitive performances ever. Principal Funds continues to gain market share as a result of strong investment performance in asset classes that are in demand.

60% of Principal Fund assets are in 4 and 5 stars Morningstar rated funds. This has helped Principal Funds become the 15th largest advisor sold fund family up four spots in the last 12 months.

In Principal International, our leading position in Latin America, not only allows us to reach millions of people needing our retirement expertise and product solutions, but also provides us an opportunity to have a seat at the table with policy makers.

Newly elected Chilean President, Michelle Bachelet recently visited the US and attended a Chamber of Commerce event in Washington DC. I was fortunate enough to be one of four CEOs to meet privately with Ms. Bachelet to discuss topics such as tax and pension reform in Chile.

In addition, Principal International’s senior management recently presented their recommendations to the Bravo Commission, a group of global pension experts appointed by the Chilean government to evaluate the current Chilean pension system.

We feel confident that any potential reform will help not hinder our efforts to further improve retirement security for the people of Chile. In addition to growth in the mandatory pension fund market in Chile, voluntary sales continue to gain traction and voluntary net cash flows were up three folds in Cuprum over the prior year quarter.

The Principal’s ability to offer both mandatory and voluntary solutions in Chile gives us a competitive advantage. Our partnership with Banco Brasil contributes to our leadership position in Latin America as well. As Brasilprev continues to be a focal point or Banco’s subsidiary public company BB Seguridade.

BB Seguridade provides an excellent way to understand the performance of our joint venture in Brazil. Banco’s powerful distribution channel combined with our retirement expertise will continue to drive our long-term leadership position in Latin America.

As an example, Brasilprev accounted for 65% of total net flows for the entire retirement industry over the past 12 months. We continue to gain traction and are in recognition in Asia as well.

CIMB Principal in Malaysia and Principal Trust Company in Hong Kong were both recognized as Country Asset Manger of The Year Winners in the 2014 asset AAA Investor and Fund Management Awards.

As the retirement industry continues to mature in Asia, Principal is already a recognized leader and in the top position to capitalize on opportunities in these select markets. As I mentioned, Principal Global Investors ended the quarter with record total assets under management of $307 billion and record unaffiliated assets of $114 billion.

However, it was disappointing to experience unaffiliated net outflows of $500 million during the quarter. The outflows were at post advisory group or due to a portfolio manager change we had net outflows of $2.3 billion for the quarter. However investment performance at post remains strong and we expect the outflows to improve quickly.

Without the outflows at post, Principal Global Investors had unaffiliated net inflows of $1.8 billion, a good result in a highly competitive market. The strength and diversity of our multi-boutique investment platform combined with strong performance continues to position Principal Global Investors as a leading global asset manager.

I’ll close with some comments on capital management. With record operating earnings and net income, we remain well positioned to increase shareholder value through a variety of capital deployment options. In the second quarter, we paid a $0.32 per share common stock dividend and bought back more than $60 million of shares.

Additionally, last night, we announced a $0.34 per share common stock dividend, payable in the third quarter 2014, a 6% increase over the prior dividend and the fourth increase in the last five quarters. We remained focused on increasing our dividend payout ratio over time to our target of 40% on a growing net income base.

The announced dividend brings our year-to-date capital deployment to $575 million and we expect to end the year at or above the top end of our $500 million to $700 million stated range. Finally, the merger and acquisition pipeline remains active and includes opportunities to further enhance our global investment management platform.

Our fee-based business model allows us to generate free cash flow and strategically deploy it to create long-term value for shareholders in addition to company growth. Before I close, I want to mention one other important recognition.

The Principal Financial Group was recently named to the Computer World 2014 List of 100 best places to work in information technology for the 13th straight time. The Principal is one of only four companies in all industries to be ranked in the top 50 for the last 11 years.

We are consistently recognizing the technology leader and offering innovative solutions to our customers as an important part of our strategy. In closing, we are confident that our momentum will continue, our strong results are sustainable and we will continue to build shareholder value over the long-term.

Terry?.

Thanks, Larry. The second quarter results displayed a continuation of our proven ability to execute. Revenue growth is strong and margins continued to improve across our businesses.

This morning I’ll focus my comments on, operating earnings for the quarter, net income, including performance of the investment portfolio; and an update on capital deployment. Total company operating earnings of $323 million for the quarter were up 19% over second quarter 2013 results.

Net revenue increased 6% over the year ago quarter while operating expenses increased only 1%. This led to strong earnings growth and margin expansion. At quarter end, our return on equity excluding AOCI improved to 13.3%. This is a 290 basis point improvement from a year ago.

Organic growth contributed 130 basis of that increase, above our expectations of 50 to 80 basis points of annual expansion. We achieved this result by both growing operating earnings to nearly $1.2 billion on a trailing 12 month basis and managing the growth of our equity.

This demonstrates our ability to increase return on equity to capital management and more importantly by increasing operating earnings. On a reported basis, second quarter 2014 operating earnings per share were $1.08, a 19% increase over the year ago quarter. This is a strong result considering our average weighted share count was up slightly.

Looking at Slide 6 we normalized second quarter 2014 earnings for three items. First, within retirement and investor services, full-service accumulation in investment-only results each benefited by $3 million after-tax from higher than expected prepayments.

In addition, a legal fee reimbursement benefit of full-service accumulation earnings by $3 million. Finally, the encaje return in Principal International was $5.5 million better than expected. This is consistent with the information on encaje returns available through the websites that we provided in the past.

On a normalized basis, earnings per share of $1.03 were up 12% over the normalized year ago quarter. Now I’ll discuss business unit results starting with the accumulation businesses within the Retirement and Investor Services, operating earnings were $181 million, an increase of 26% over the year ago quarter.

This is the seventh consecutive quarter of double-digit earnings growth in this business. And as shown on Slide 7, revenue was up 10% over second quarter 2013 and up 12% on a trailing 12 month basis. Trailing 12-month pretax return on net revenue remains stable at 33% for.

Quarterly operating earnings for full-service accumulation had a $117 million or up 29% from the year ago quarter. Earnings were helped by $6 million from the two non-recurring items I mentioned earlier.

Good revenue growth along with expense discipline resulted in an improvement in the trailing 12 month pre-tax return on net revenue to 34%, a 350 basis point improvement in the past 12 months.

Net cash flows for full-service accumulation were flat for the quarter due to seasonally lower second quarter sales of $1.4 billion and despite strong retention results, the dollars of withdrawals increasing with improved account values.

On a trailing 12 month basis, net cash flows of $3.1 billion are around the mid-point of the long-term range of 1% to 3% of account values that we previously discussed. We expect full year sales to be in line with last year’s totals. Principal Fund’s operating earnings were $26 million for the quarter, a 49% increase from the year-ago quarter.

On a trailing 12-month basis, revenue was up 17% and operating margins continued to improve due to the scale-based nature of the business. For the quarter, Principal Fund sales were $4.7 billion, contributing to $1.6 billion of net cash flows. We expect full year sales to be comparable to 2013 sales.

Individual Annuities second quarter operating earnings were $33 million, up 12% from the year ago quarter. The increased fee revenue on our variable annuity business due to market appreciation continues to offset spread compression in our fixed deferred block of business.

Slide 8 covers the guaranteed businesses within Retirement and Investor Services. Quarterly operating earnings of $31 million were up 10% over the year ago quarter aided by prepayments in the current quarter. On a trailing 12 month basis, net revenue was up 15% and pre-tax return on net revenue improved 82%.

Slide 9 Principal Global Investors operating earnings for the quarter were $27 million. This is down slightly from the year ago quarter on a reported basis due to a $4 million benefit from a once-every three year performance fee. On an adjusted basis, operating earnings were up 10%. Trailing 12 months pretax margin was 25%.

This was negatively impacted by approximately 100 basis points from large performance fees in the fourth quarter 2013. Long-term, we still anticipate a trend to 30% pre-tax margin. We expect 2014 revenue in this business to remain in line with 2013 levels. Management fees will grow year-over-year, but performance fees are unlikely to reach 2013 levels.

Total net cash flows for the segment were $500 million for the quarter with a strong investment performance leading to good affiliated flows. Assets under management increased 13% over the prior year quarter to a record $307 billion. Unaffiliated assets under management ended the quarter at $114 billion a 13% increase over the year-ago quarter.

Slide 10 shows quarterly operating earnings for Principal International of a record $68 million, a 17% increase on a reported basis. Results in the current quarter were helped by encaje returns that were higher than expected. The Principal International businesses in our select emerging markets continue to perform well on a local level.

On a local currency basis, operating earnings were up 13% over prior year quarter after adjusting for normalizing items. The outlook for Principal International remains strong with record assets under management driven by record net cash flows.

The strong fundamentals of these businesses, the team’s proven ability to execute and our relationship with premier partners allows us to weather short-term volatility including foreign currency movements to achieve long-term growth. Slide 11 displays Individual Life’s operating earnings of $20 million for the quarter.

Results in the quarter were negatively impacted by elevated claim severity compared to the year-ago quarter. We have reviewed our block of business and believe that the claims are normal fluctuations and not a trend. Expectations are that claim severity will even out over time.

As shown on Slide 12, Specialty Benefits’ operating earnings of $29 million were up 13% from the year ago quarter. Premium entities in the quarter were up 6% due to strong persistency in sales. The loss ratio for the quarter was favorable at 66% and at the low end of our targeted range.

For the quarter, total company net income was a record $306 million, a 38% increase over the prior year quarter. This quarter we had realized capital gains of $31 million as we benefited from gains on real estate sales.

Net credit-related losses remained lower than our pricing assumptions at $14 million for the quarter, down 42% from the year ago quarter. Net income was negatively impacted by $48 million as a result of the court ruling on some uncertain tax positions.

We paid the taxes in the previous year; the adjustment made this quarter was to a receivable booked when we filed for a refund several years ago. This is a non-cash item that does not impact our capital deployment plans.

Turning now to capital deployment, as outlined on Slide 13, we’ve announced plans to deploy more than $575 million of capital so far in 2014. This includes the $0.34 common stock dividend we announced last night. The fourth common stock dividend increase in the past five quarters.

The 2014 dividend through three quarters is 31% higher from the dividend over the same timeframe a year ago. As of this week, we spent a $155 million on share repurchases this year leaving approximately $100 million of our current Board authorization.

Our capital deployment strategy is flexible with multiple options including dividends, share repurchases, and acquisition opportunities, all aimed at increasing shareholder value. We believe that we will end the year at or above the top end of the $500 million to $700 million capital deployment range that we discussed on our outlook call.

In closing, we are extremely pleased with the continued momentum of our businesses and feel that our diversified business model is well positioned for future growth in various economic environments. This concludes our prepared remarks. Operator, please open the call for questions..

(Operator Instructions) Your first question comes from the line of Yaron Kinar with Deutsche Bank..

Thanks for taking my questions. So, I have one and then a follow-up, if I could. First on - I am thinking of the normalized earnings rate, I think last quarter you had guided or talked about roughly a buck per share per quarter, and yet this quarter comes a little bit higher than that, that was $1.03.

Can you help us think about what drove the differences and maybe how we should think about the remaining – the remainder of the year?.

Good morning, Yaron, this is Larry. I’ll make a few comments and then ask Terry to comment as well. I mean, we think – I think actually the quarter – the sequential quarters from Q1 to Q2 would have played out, I think about as you would have expected for us.

I mean, in normal times, again we think that we grow our businesses around, somewhere around 10% to 12% annually which if you convert that to quarterly, you sort of get down to that 2% to 3% level.

So, the dollar sort of a earnings, normalized earnings in Q1 would normally have been say, $1.2 or maybe $1.3 if you take into account both, I would say the momentum of the businesses and sort of market performance during that time.

So, I think the key here is that, things are operating very, very consistently with what we would expect our business model to produce. So I’ll see if Terry wants to add anything..

Yes, Larry. I’d agree, as you look at that last quarter, we called out three different items and then added back one item and there was true-ups from prior year dividend receipt deduction, large prepayments that we have had in the guarantee businesses and then we added back a bit for the life insurance.

But as Larry mentioned, if you look on a normalized growth basis, in terms of the increase in the net revenue continued expense management we saw margins increase as well quarter-over-quarter. So that’s what’s basically driving it.

So, I‘d say on a normalized basis, moving from the dollar that we had in last quarter to a $1.3 this quarter was right in line with our long-term growth expectations. .

Okay, and then, going back to a question I asked on the last call, with regards to recurring deposits in FSA.

I think, back then, you had talked about kind of a 10-ish percent growth rate year-over-year and it seems like the last two quarters have been lower, last quarter you talked about some difficult year-over-year comps given in the M&A, I think for one of the accounts in 1Q 2013. That’s now behind us clearly not reflected in the year-over-year results.

So what’s leading those recurring deposits, it’s still be lower relative to kind of at 10% number and do you still think that 10% is the correct way to think of it?.

Yes, Yaron, this is Larry. I would say, and again we’ve done a lot of modeling. We also of course have a lot of history that you can look at around this in our financial supplement. I think the way to kind of think about this in a normalized environment which is sort of where we are getting to now, and I’ll comment on that in just a second.

But, being that a mid to high single-digit range. So let’s just say sort of 5% to 8% growth in recurring deposits.

The reason it has been a little bit higher than that over the last year or two is because of the financial crisis that that number was negative for a while as participants were getting laid off and matches were getting either reduced or completely eliminated, and so when that thing went negative in the 2008, 2009 period, it builds itself back.

You are going to sort of come at the high end of that range. I would say at this point, while we are not completely back, we are sort of 90% of the way back. So you are going to see that growth in recurring deposits kind of trend from that double-digit rate 10% sort of down to that 5% to 8%.

Anything you want to add Dan?.

Yes, just maybe one detail. If you look at that 5% growth in recurring deposits and dissect that, you will find out that actually the fine contribution of recurring deposits were up 6.5% because defined benefit deposits were down about 8.5%. Again, lot of that funding would have happened in the first quarter.

The other way to look at that Larry is to look at over the course of last trailing 12 months, it was up 7% and again, if you break out defined contribution from defined benefit, you will find out the DC growth over the trailing 12 months is up about 8.5%. So right on the – kind of that high single-digit space that we would talk about.

So again I feel really good about the recurring deposits for FSA. .

Great, thanks. That's very helpful. I'll re-queue..

Okay, thank you Yaron. .

Your next question comes from the line of Ryan Kruger with KBW. .

Hey, good morning..

Hi, Ryan..

First, could you quantify what the net flows have been at Post Advisory thus far in July?.

I’ll ask Jim to comment on that..

Thus far in July the net flows are close to – slightly closer to but not really large. I think the number I was given when I was there earlier this week was about $200 million or $300 million. The outflow in the second quarter was $2.3 billion which against a post advisory in the order of $10 billion is obviously a big number.

It’s happened because of two things one after the other. There was the retirement of the founder followed by the pension fee portfolio manager departure in March that was mentioned by Larry. And that was one of the two people who took over the founder’s responsibilities. So that led to some clients saying, hey things have changed.

But the investment performance through the whole period has been very strong, one of the strongest in the high yield bond business. And so, we are definitely getting a good pipeline of enquiries both the clients come and back given the storm they have passed and new clients looking at them.

I hope that answered this?.

Yes, that's very helpful. Thank you. And then maybe just back to - maybe thinking about RAS accumulation margins. In the past, and you've talked about a 30% to 32% longer-term target. We have been pretty far above that for a couple quarters.

Obviously, the equity market has helped, but I think, perhaps other things that have changed or a kind of continued scale being built in the Principal Funds business and margin expansion there.

So, can you comment on the 30% to 32%? Do you think it's reasonable to expect maybe that range could be higher longer-term at this point?.

Ryan, yes, this is Larry. I like the inherent optimism that’s contained in your question. But I am also a little bit tempered by more than 40 years in this business.

So, again what I would say is that, if you are able to achieve a 30% to 32% margin return in this business, you are really talking about a business that has an ROE in that sort of an equivalent number. So you are talking about a business that’s got a 30 plus percent ROE.

And I guess the way I think about this is that, while there may be periods, as you said, because of some extra DRD in Q1 and because of some good market performance in Q2, we’ve been a little bit above that range.

I think as an investor and we are all investors just like all of you, we are pretty happy and excited about a growing business that’s got a 30% ROE.

So, I think that, while there is going to be some periods where it maybe a little bit above that, there might be some periods where it’s a little bit below that as we invest in the business or continue to build out the platform.

And I think really over the long-term, if we can hang in that 30% to 32% area, I think, that’s a really, really good return in that business. .

Understood, I mean, it seems like the 30% to 32% is kind of like a cross-cycle target. So, we could be in a period….

Correct. Yes, that's correct. Yes, you want to think about that as kind of the long-term sort of return in that business. And again, that's incredibly attractive, which of course, is why many other, many other competitors are trying to get into that business.

So we know the competitive environment is going to remain difficult, but I think our track record is really second to none in those businesses..

All right, thanks. Appreciated..

You bet. .

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

Hi, thank you. A couple questions for retirement. I guess, first in FSA, you are guiding to sales that are about flat with 2013, which would imply a pickup in activity in the second half.

Is this just based on the timing of closing transactions? Are you starting to see more activity in the marketplace?.

I'll let Dan..

Yes, I think that's well said. Second quarter as was mentioned on Larry's earlier comments tends to be a soft quarter. We anticipate having a strong second half of the year large part, Erik; because of just strong pipeline close rates continue to improve. I would be remise if I didn't call out strong investment performance.

It was commented on earlier, but, whether it's one year, three year or five year, that's a strong indicator of how competitive we can be in a marketplace.

So again, I feel very optimistic that we will not only on the full service accumulation business, but also in the mutual fund business, let that strong investment performance carry us through the rest of the year. So we feel good about it.

I maybe add one quick – if I could add one quick comment, Erik, I think it's important to understand and this is somewhat true in the Funds business, but also true in the Retirement business, there is less business moving and that's typical.

When you have a year where the market is as generous as it was in 2013 and you go back and look at prior periods, inevitably, there is less business sort of out to bid.

And that's the reason that in my earlier comments, I said, net-net, really if you thought in terms of economics, the reality is, is that we are better off at mid-year 2014 than we were at midyear 2013 because we retained an additional $1.6 billion. So, sales only happen if and when business is out to bid and there is actually less business moving.

So I actually think that, if we end up equivalent to 2013 sales, that’s going to be a strong year for us..

That's helpful. And then if I could ask one other on - for FSA. At its recent Investor Day Agon commented that it’s seeing an increasing number of requests for 401(k) pricing on a per-head basis rather than as a percentage of AUM, particularly at the larger end of the market.

I am just wondering if this is something that you are seeing and could it become more prevalent in the mid-sized market? And I guess if it does become a wider spread phenomenon, how should we think about the impact on profitability and growth of the 401(k) business if you take out the market leverage component?.

Sure.

Dan, do you want to comment?.

Yes, it's a good question and that has always been the case, Erik, for the larger case market. And so I kind of think about plans north of say, $100 million to $200 million. There is generally a very healthy conversation around the per-head charge as opposed to something that might be more asset-based.

We've not really seen that come down below the $50 million mark. As I've mentioned in previous calls, if the plan has more than $5 million of planned assets, we'll do - actually do a profitability analysis on each one of those pieces of business. Each one of them does differ a little bit in terms of resources that we use.

Certainly, the use of Principal branded funds will drive that pricing. But on a net-net basis, whether it’s on a per-head basis or a function of the assets under management, we think we can still hit our long-term margin targets by adjusting accordingly. So it's not a new phenomenon and certainly something that we can adjust our model to..

Erik, it's Jim here. Remember also to supplement what Dan correctly said, that even if the per-head pricing for the 401(k) services, the people are still choosing investment options and we would be able to make investment management fees on those investment management options..

Got it. So you retain, as long as you are managing the assets you retain the market leverage component, it’s in a different piece of the business..

We're well defended against that change..

And that's core, Erik, to our strategy, right, is to manage those assets. It's not our intention to be a standalone record keeper. We've got a world-class global asset management franchise with strong investment performance, bundled with all of those services, whether it's retire works or retire secure. Those are what value is being placed on that.

As a matter of fact, there was an interesting article earlier this week talking about a study that Bloomberg did focusing on the largest 250 plans and the emphasis was on outcomes. And that's something you've heard us talking about for nearly a decade now.

So again, I think that, momentum is moving towards what is it doing for my employees, is it preparing them for retirement in a satisfactory way and by managing the assets, providing the services, we think we've got a competitive advantage by packaging in that fashion..

Great. Thank you for the color..

Thanks, Erik..

Your next question comes from the line of Shawn Dargan with MacQuarie..

Thanks and good morning. I have a question about Brasilprev. I think there is a notion with a lot of investors that Brazil is if not in recession at least facing a pretty tough economic climate right now.

I'm just wondering what you are seeing, what you think is driving your performance there?.

This is Larry. I'll make a few comments and ask Luis if he like to add on to that. I mean, what is driving the performance there is, first of all, the very strong distribution platform of Banco Brasil.

There is over 7000 Banco Brasil branches in all areas of that country and there is a very clear understanding on the part of the middle income and upper middle income group in Brazil that they need to take responsibility for their own financial future.

And while the economy itself may struggle from time-to-time, and frankly in some respects, maybe due to perhaps more intervention by the government into the economy than what would be ideal, it doesn't disrupt the sort of fundamental demographic premise that you have this emerging middle-class that is very motivated to save and invest for their own financial future.

So it's really a combination of catching the right demographic trend with an incredibly strong distribution partner, all backed up by the expertise of Principal, who is really managing, kind of under the surface, is really managing all of the critical elements of the business, so, investment portfolios, product development, product pricing, technology, et cetera.

So you really have sort of that world class operation in a market that's growing very substantially. But any – okay? All right..

Does that help, Shawn?.

Yes and is there anything in the financial reporting of BB Seguridade – I pronounced it right, Seguridade that would give us some insight to the, I guess the underlying trends in the business?.

Yes, absolutely. There's pretty good transparent – there is very good transparency as to the various components of the business. Brasilprev is one of about - I think three different areas of the business there and you can certainly go to their website. They do earnings calls in both Portuguese and English.

I believe their earnings call is in about ten days or two weeks. But there is very, very good transparency and for those that are interested in kind of seeing how that company operates under the surface and how Brasilprev works, that's a great opportunity to better understand that..

All right. Thank you..

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

Hi, good morning. I would actually like to follow-up on Shawn's question, just on the strong flows in Brazil. Do you have any visibility in terms of penetration into Banco de Brasil? I believe right now the retirement clients in Banco de Brasil fill a very small portion of the overall client base.

Just wondering how you are seeing that progression in the last couple quarters?.

Right, so again, this is Larry. I will just make a couple of comments. I think, you are exactly right, that the key here is the cross-sell percentage of the total retail client base of Banco Brasil, which is I think in that $60 million sort of range.

And so it's really a question of what percentage of that retail base is eligible if you will, or is a good candidate for some sort of a retirement savings program. And others can sort of put their own number on it, but let's just say I'll put a number of 5% to 10% of that $60 million.

So that's roughly 4 million, 5 million, 6 million retail clients that are potential. And I think in Brasilprev today, Luis, we're looking at – yes, 1.8, 1.8 million retail clients. So that's, that means, we could triple the opportunity in Brasilprev, if we just kept the retail client base of Banco at the same level.

Now, of course the retail base of Banco is growing at that kind of 8% to 10% sort of range as well. So, as we say, when we go down and visit the folks at Brasilprev and have ongoing discussions, we got a lot of work to do. But it does give you a sense of what the longer-term potential is of that business..

Okay, great. And just in flows in Chile, you mentioned that voluntary flows were up three-fold versus last year.

Can you give us a sense of what that is in dollars?.

I'll ask Luis to maybe comment on that..

Yes, in dollars, that is a – we put $30 million in net customer cash flows a year ago, second quarter. And right now, we put in more than $70 million in this quarter. And essentially, we have in place right now three different initiatives in order to continue selling our voluntary products with Cuprum.

The first one is that we are open to independent financial advisors; they are being able right now to sell our voluntary products that are manufactured by Cuprum.

The second initiative is that, we already combined our sales forces with Principal Financial Group, prior one in then Cuprum in order to continue selling voluntary products and in a much – with a much more broader array of products. And the three initiatives is that we, - third, cross-selling, up-selling our current clients in Cuprum.

So, these are the three initiatives are already in place in Cuprum..

Does that help, Seth?.

That does.

So, just for me, that $70 million of the $1.4 billion in deposits, is that the right way to think about it from Chile?.

Yes, I mean, I guess the way I would think about it is that, what it demonstrates, I think, Seth, is that we're getting some pretty early traction with the initiatives that Luis discussed. I mean, we are sort of in the first inning, really of that opportunity. We just put these initiatives in place just in the last quarter or two.

And it's actually very encouraging from our perspective to kind of see the traction that we are already getting. So I think, it should continue to further improve from here as those initiatives that Luis described get traction..

Another way to see this, if today kind of 97% of our total fee incomes are coming from the compose rate business 3% 4% are coming from the bond. So you can see there what is that potential that we have in cuprum right now..

Okay, great, and just if I could ask one very quick one to Terry, on buybacks.

What level of buybacks is required just to offset dilution?.

We look at probably about increase in dilution each quarter will vary based upon a few things. But, we are looking probably at, anywhere in the – on an annualized basis, anywhere in that $75 million to $100 million depending on the execution of the options in our share price.

But I would say in that $75 million to $100 million is what we probably need for anti-dilution share buybacks. Now as we I said, this year, we had a $200 million authorization for this year, plus a $55 million carryover from last year. And to-date, we have executed on - about $155 million of execution. So we still have $100 million outstanding.

So, the goal or the intention is, first off get the anti-dilution out there and second, opportunistically continue to buy back shares.

Okay?.

Okay great. Thanks a lot..

Thank you..

Your next question comes from the line of Randy Benner with FBR Capital Markets..

Hi, good morning. Thanks. I wanted to touch on, I guess, mortality. It was weak kind of for two quarters in a row.

Just wondering if there is any color you can give us on that or analysis you've done to understand the shortfall there?.

Yes, Randy, this is Larry, thanks for the question. Again, I'll have Dan make a few comments. We've obviously spent a fair bit of time, quite a bit of time around that and I guess, what I would say is that, it has been kind of at the low end of our expectations for the last two quarters.

I think in Q1, our experience was reasonably consistent with what we are seeing across most of the industry..

Right. .

In Q2, it was more severity than it was incidence. But whether we are similar to the industry or a little different than the industry, I think we'll have to see as the next couple weeks play out and as other companies report.

But, again, what I would - I guess, try to emphasize is we think that our recent results, while slightly disappointing on mortality are still sort of at the low-end of the expected range and within what should be statistical fluctuation, so..

Yes, that's exactly right. So it's kind of plus or minus the $5 million off of expectation of around $25 million, a $20 million that’s certainly lower than – that's on the low end of the range, tutoring right on the edge of whether or not get call it out or not. We did do some look back analysis, Randy.

If we did experienced higher mortality in six of the last 14 quarters with only three outside, one standard deviation. So, again, it's on our mind. We are looking at it very closely. As you know, we've got a lot of reinsurance treaties on a fair amount of this business and there is a little bit of accounting noise.

But, it's still within the range of reasonableness from our advantage point. And to that end, we still view that life business as a very valuable part of the franchise. We got good leadership overseeing it. We use it as our funding vehicle for non-qualified deferred comp and for our Business Owner Executive Solution.

So it's good for the organization and like you would like to see, maybe a little less volatility, but it is expected as Larry pointed out, we had a couple relatively large claims that really drove the performance down for the quarter..

Okay, got it, large claims. And then just a quick one and this is – I mean this is a little bit higher level or quite a bit. But, Larry, I guess, I’d be interested if you have any commentary that's different in the past on DRD and that relates to kind of current efforts in Washington for corporate tax reform kind of around this inversion issue.

I mean, is anything different on DRD for you all, based on what's going on here now, because that is, it's a significant item in your financials?.

Yes, so I think, Randy, it's probably best for my comments to stay more related to just overall, overall tax reform. And I'm probably – over my years, I have been more of an optimist than a realist around that.

And I think I am certainly to become more of a realist, trending towards a skeptic really around the ability of Congress to take on a larger issue like tax reform.

I think, because of the way political cycles work today with four-year Presidential election cycles and two year house cycles, I think the reality is that there is a very, very short window of time when a - such a significant piece of legislation like tax reform would get done.

And I think, about the only time it can get done, is if you've got alignment between sort of the White House, or Senate and the House, and even then it sort of has to go on within kind of the first year of a two year term. So I don't see any possibility, despite discussion. I don't see any possibility that much is going to change in 2014 or 2015.

Then we'll have a Presidential Election in 2016 and then depending on how that lines up, you could see, I think a kind of narrow window in there in the post-2016 period.

But, I think before that, it's going to be most between that and the 2016 election, Randy, it's going to be mostly political posturing and discussion about what each party would do if they had sort of control of White House, Senate and House. But nothings are really going to really happen on that score..

So status quo on DRD is good to plan on?.

Well, I mean, we will adapt to whatever situation, we find ourselves in. We've done this for many, many years and again, I - specifically as it relates to DRD, I don't really have comments other than to say, I think we apply the tax laws as they are..

All right. Understood, thanks..

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

Thanks so much good morning. Larry, you mentioned you put forth PFG’s proposal for reform to the Chilean pension system.

So wanted to see if you could comment some on what your suggestions were? Maybe how they differ from what we currently know about the pension system there or maybe what some others are proposing?.

Sure. Yes, thanks for that question, Chris. I'll make a few comments and then I'll let Luis, add to that, because actually, Luis was the one who did the testimony in front of the Bravo Commission.

What I would say relative to the meeting with Chilean President, Bachelet that I referenced in my opening comments is that, we stressed the importance, if there is a decision around some sort of government run AFP. First of all, why is there some interest in that? And the answer is that it's to try to improve coverage among the lower income segment.

There is a group of workers often not in completely formal employment who are simply not saving enough for their retirement. And I think the Chilean government to their credit, is really focused on that problem. But one of the points that we made was that, that's actually more of a labor issue than it is a retirement issue.

It's, again, the fact that these people are in more informal employment arrangements and that's why they haven't been participating regularly in the AFP system.

The other point that I would say I made relative to the President Bachelet is that, if there is a desire to have a government run AFP for the primary purpose of focusing on lower income workers, that it be critical that that AFP sort of operate with the kind of same governance structure that is required of private sector AFP companies.

And I would say we received immediate and total assurance and agreement that that would be the case, i.e., no sort of government subsidies, no sort of easier set of rules or fiduciary responsibilities around it, but it's got to operate at the very same level as the private sector.

And then maybe I'll ask Luis if he wants to comment on the Bravo Commission component..

Yes, and kind of a short comments about what is our main proposal to that commission, Chris is, in three main areas. First, some proposal about the voluntary pillar and second proposal about the compulsory and then we put some proposal about the issues that related with the financial education that is needed.

But essentially in a nutshell, Chileans and the compulsory mode they are saving 10% out of their pay check. Our proposal is that 10% has to go up to 16%, up to 16%, 17%. So, in two tranches. First, we move the 10% compulsory up to 13% and then to cover the next 4% with a third pillar which is a voluntary pillar.

In that sense, two things are behind that. Not just moving the 10% up to 13%, it's also moving the salary cap. Just to give you a reference. You know the salary cap has to be updated, in the moment the salary cap was set in 1981, represent two times the – six times that total GDP per capita. Right now it represents two times.

So it's very, very, very dated right now. So moving that salary cap, we have to at least to triple the salary cap in order to update the salary cap. The other thing which is important, we presented all the - our proposal in order to enhance the APBC solution, which is a 401(k) type solution for Chile.

They are almost there, so they need just a few tweaks in order to really take off the Group solutions and the APBC industry. In the second issue, which is much more about the compulsory side, we certainly, we aim to move the fees and flows and fees over AUMs in order to align the whole industry in the right sense.

And the second thing that we are talking about is to introduce and by default the concept of the lifetime funds instead of the risk kind of oriented funds that they already have.

These are mainly the two main kind of things that we propose for how to enhance the system and certainly we put other important initiatives related with, financial education.

But all in all, my personal view is that, in Chile, they have a pretty good understanding that the right solution is to increase their rate, the saving rate, increase a 10% up to a kind of 12%, 13% to move the salary cap right now very quickly and to certainly enhance the third pillar which is the voluntary pillar, particularly in the kind of 401(k) type solution..

And all of those that Luis just mentioned would obviously be very beneficial to the activity there and to our businesses, so..

Got it. Thank you, helpful.

And then just my follow-up is, I guess, with the adoption of new mortality tables for retirement plans, wondering how you think about kind of the pressure that puts on DB plans and opportunities that presents to you guys?.

Yes, again, I would say that DB services are kind of becoming a lost art from a – it’s a kind of broad industry perspective.

And, I think we have found it very beneficial to sort of go against the grain and, over the last kind of 10 years or so, we've actually further built out our suite of services there, because it's very, very central to our total retirement suite, sort of concept.

So the point here I think, whether it's a mortality table or whatever else it may be, the point is that defined benefit sponsors need help and they need to kind of understand what some of these changes are going to do and that’s always creates a great opportunity, so.

Dan, you want to?.

Those mortality tables perhaps change the funding levels in that 8% to 10% range. Remember that, we've got a lot of these small to medium-sized plans, more than 2500 of them. So these are relatively small dollar amounts. They are generally leaning towards funding the retirement benefit for the principals of the organization.

So again, in the grand scheme of things, as we've talk to our defined benefit customers, this is not a derailer. So, I don't see defined benefit plan termination is increasing because of a increase in the use of the mortality tables. However, we do have to be very conscious so what the PBGC is doing relative to increasing fees.

But it's still a very, very powerful way to go about funding for certain small to medium-size businesses, their long-term retirement benefits..

Got it. Thanks so much..

All right, Chris..

Ladies and gentlemen, we have reached the end of our Q&A. Mr.

Zimpleman, closing comments, please?.

Well, thanks, everybody, for joining us for our call today. I would say the momentum on our businesses is strong, as we commented at the start of the call. And we look forward to finishing 2014 on a very strong basis.

So, we hope to see many of you out on the road over the next three months and particularly we would encourage if any of you are able to make it to please attend our investor event in New York in September. So with that, thanks and have a great day..

Thank you for participating in today's conference call. This call will be available for replay beginning approximately at 8 O’clock P.M. Eastern Time until the end of the day August 1st, 2014, 66303168 is the access code for the replay. The number to dial for the replay is 855-859-2056 for U.S.

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