John Egan - VP, IR Dan Houston - CEO Terry Lillis - CFO Luis Valdes - President, Principal International Nora Everett - President, Retirement and Income Solutions Jim McCaughan - CEO, Principal Global Investors Deanna Strable - President, U.S. Insurance Solutions.

Sean Dargan - Wells Fargo Securities Ryan Krueger - KBW Seth Weiss - Bank of America Merrill Lynch Humphrey Lee - Dowling Partners John Nadel - Credit Suisse John Barnidge - Sandler O'Neill Michael Kovac - Goldman Sachs.

Welcome to the Principal Financial Group Conference Call Third Quarter 2016 Financial Results Conference Call. [Operator Instructions]. I would now like to turn the conference call over to John Egan, vice president of Investor Relations..

Thank you, and good morning. Welcome to Principal Financial Group's third quarter conference call. As always our earnings release, financial supplement and slide presentation related to today's call are available on our website at principal.

com/investor, due to the annual actuarial assumption review another significant variances at this quarter we posted some additional materials on the website including comparison of quarterly operating earnings excluding significant variances from the third quarter 2016 compared to the year ago quarter.

Keep in mind our reporting, structure changed in the fourth quarter 2015, following a reading of the Safe Harbor provision, CEO Dan Houston and CFO Terry Lillis will deliver some prepared remarks then we will open up the call for questions.

Others available for the Q&A include Nora Everett, Retirement and Income Solutions, Jim McCaughan, Principal Global Investors, Luis Valdes , Principal International, and Deanna Strable, U.S. Insurance Solutions 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.

Risk and uncertainties that could cause actual results to differ materially from those expressed or implied are discussed in the company's most recently annual report on Form 10K and quarterly report on Form 10-Q filed by the company with the U.S. Securities and Exchange Commission.

Before I turn the call over to Dan, I would like to remind everyone of our upcoming Investor Day event in New York City on November 16th. Our executive team will provide strategic updates on each of our businesses with a particular focus on some of the key topics impacting our businesses.

Please let me know if you haven't received an e-mail invitation. We look forward to seeing you in a couple weeks.

Dan?.

Thanks, John, and welcome to everyone on the call. This morning I'll focus on my comments on three areas, I'll characterize results for third quarter and through the first nine months of 2016. I'll share some thoughts on execution highlights as we continue to extend our distribution reach and expand our product and service solutions set.

I'll close with some thoughts on certain external factors and how they are impacting our outlook for the future. I'm very pleased with the third quarter results with reported operating earnings of $336 million excluding significant variances. We had double digit growth in operating earnings when compared to a year ago quarter.

Terry will provide more details on the significant variances for the quarter including the annual actuarial assumption review later in the call. Compared to a year ago we increased assets under management or AUM by some $80 billion or 15% bringing AUM to record $596 billion as of the end of the third quarter.

As shown on slide 5, our longer term Morningstar investment performance remains among some of the best in the industry. As of September 30th, 90% of Principal mutual funds separate accounts and collective investment trust were above the median for the three-year performance and 86% were above the median for the 5-year performance.

For 10 consecutive quarters, at least 85% of our investment options have been above median for 3 and 5 year performance, though our 3 and 5 year investment performance remains among the best in the industry, the one year number with 59% of funds above median is off its highest.

Because of investment needs of our customers we focus on managing assets for retirement and other long-term strategies. We have created a leading array of multi-asset, multimanager outcomes oriented solutions and we have purposely designed our investment platform to provide diversification and non-correlation for different teams within key asset.

Between the strength of our investment teams, our global research platform and our process, we remain confident in our ability to continue to stand out among active managers in both performance and net cash flows. With multiple sources of demand for our investment solutions, we're on track for a 7th consecutive year of positive net cash flows.

By comparison, approximately half of the funds complexes were in outflows between 2010 and 2015, according to data from the investment company institute.

Our track record of positive net cash flows during this same time frame underscores the benefit of our diversified integrated business model with strong diversification by investor type, asset class and geography and strong integration of our businesses enabling us to meet investor needs as they transition from accumulation into retirement.

While Terry will cover these topics in more detail, I'll provide a couple of comments on expense management and capital deployment. As stated on previous calls, we continue to focus on aligning revenue and expense growth. Over the trailing 12 months, despite flat equity markets a strong U.S.

dollar and competitive pressures we have managed expenses and improved margins, driving growth and operating earnings compared to a year ago.

I'm particularly proud of this ultimately in light of 8% higher average AUM on a year-to-date basis, the additional cost to implement the department of labor's fiduciary rule as we have quantified in last quarter's call, an increased investment in key areas including technology, product development and our global brand.

Through the first nine months of 2016, our capital deployment strategy has enabled us to deploy more than $600 million between common stock dividends, share repurchases and increased ownership in boutiques. As announced last night we have included our quarterly common stock dividend for a third time this year.

Moving to execution I'll start with enhancements to our solution set. In the third quarter we have launched five new funds bringing year-to-date launches to nine.

Our global product strategy contemplates both opportunities and challenges, including aging global populations and growth in emerging market middle class, potential regulatory disruption and a trend towards lower cost product structures.

We remain purposeful in our approach, building our four key areas, our suite of outcomes based funds with a particular focus on income solutions, our Alternative investment platform to enhance diversification and manage downside risk, our international retail platform in light of tremendous opportunities in Latin America, Asia, and Europe, and our ETF platform as part of a larger effort to address increased demand for lower cost options and provide cost effective alternatives to passive management.

Beyond our investment platform we are also highly focused on digital solutions that are shrimp already and faster, address how future generations will buy financial services and reduce barriers to access, allow easier decision making and eliminate pain points for our customers and advisers.

Throughout 2016 I have shared initial success with recently launched digital enrollment like Easyelect and My Virtual Coach as another example we launched an online application for our individual disability income products earlier this year. Since the launch we have received 2400 applications electronically, nearly 20% of the total volume.

This is helping fuel strong sales within specialty benefits. Moving to distribution, we continue to make meaningful progress toward getting our funds on third party platforms recommended list and model portfolios.

Through nine months we have had more than 40 placements in total putting 30 different funds on 18 different investment platforms with success across asset classes. I also want to comment on the joint venture with China construction bank, not included in our reported AUM, China reported a record $127 billion of AUM in the third quarter 2016.

A majority of the recent net cash flows in China have been short-term investments meaning lower fees and shorter duration in nature. The results illustrate two important points, one, the magnitude of the opportunity in China, and two, the power of our partnership with China construction bank.

Even more so as we expand our relationship and execute on our strategic cooperation agreement focused on asset management and pensions. China is now the third largest contributor to the pretax operating earnings within Principal International with the trailing 12 months pretax operating earnings more than doubling from a year ago quarter.

I'll close with sharing some thoughts on the future. First and foremost we go forward from a position of strength. Importantly we are also seeing certain opportunities further materialize and certain head winds beginning to abate. First I will express my optimism around Latin America.

In 2016 the tide seems to be turning in the regions largest academy in the Brazilian real and the Brazilian's benchmark index, Ibovespa, strengthening our third quarter net cash flows in Brazil increased 50% compared to a year ago quarter.

On the continued strategic of BrasilPrev, our joint venture with [indiscernible] we have generated at least a $1 billion of positive flows in Brazil for 12 consecutive quarters. Importantly we are taking market share from the next two largest competitors.

Claritas, our mutual fund company in Brazil is gaining traction as well delivering its best quarter of net cash flows on record. Despite recent press we remain optimistic about Chile, our value proposition in the AFP market is intact as we continue to be a market leader in long-term investment performance and customer satisfaction.

To be clear, our 2013 Cuprum acquisition is not under review by the Chilean regulatory authorities. They are once again reviewing the merge of two legal entities in Chile that gave rise to the deferred tax benefit we recognized in 2013. The merger has already been reviewed and approved twice and we have no reason to believe it will be overturned.

Over recent weeks, Luis and I have had multiple opportunities to meet with senior level officials in Chile. There is increasing awareness of the pressure on pay as you systems and the ability of workers to support a growing number of retirees who are living longer.

In turn they are increasing awareness of importance of voluntary contributions to achieve adequate income and retirement. We'll continue to be an advocate for retirement readiness and active participant in the pension dialogue, not only in Chile but around the world.

Additionally lower for longer interest rating present an opportunity and we continue to expand our suite of income solutions including guarantees to meet the increasing demand nor yield and security. Additionally, our business mix makes us less rate sensitive than many of our peers.

Lastly, while the DOL fiduciary rule clearly presents challenges, it also presents opportunities. During the third quarter one of our top third party distributors communicated a decision to reduce their proof of record keeper list by more than 80%. Principal was selected as one of their approved providers.

We expect this consolidation trend to continue. In the meantime we'll continue to strengthen relationships by helping our distributors work through implementation. In closing, our business fundamentals remain strong. While I'm pleased with our financial results through nine months, I'm even more satisfied with our execution.

We have again made meaningful progress towards enhancing distribution, expanding our solution set and strengthening relationship with customers and advisers. I look for us to continue to build momentum as we wrap up 2016 and move into 2017 and for that momentum to translate into long-term value for our shareholders.

Terry?.

Thanks, Dan. This morning I'll provide commentary on operating earnings for the quarter, net income including performance of the investment portfolio and I'll close with an update on capital deployment.

Principal reported $336 million of operating earnings for third quarter 2016 up 6% over the year ago quarter driven by over 10% growth in quarterly average AUM. Total company net cash flows were $7 billion for third quarter and $20 billion on a trailing 12 month basis.

Strong net cash flows and positive market performance drove total company AUM to a record $596 million in third quarter. Keep in mind that total company AUM excludes $127 billion of AUM in China that also contributed to quarterly earnings.

That's shown on slide 6 there were three significant variances from expectations reflected in third quarter 2016 operating earnings. This slide provides the line item impact by business unit of our annual actuarial assumption review and model enhancements, a single large real estate sale and higher than expected encaje in Principal international.

Consistent with prior years, we completed our annual review of actuarial assumption and model enhancements in the third quarter. The review reflected a lower interest rate environment in 2016 compared to what we expected a year ago and other retypements to our actuarial models.

As part of the review, no changes were made to the long-term interest rates or the time it takes to get to the ultimate rates. The actuarial assumption review decreased third quarter pretax operating by $74 million.

However, third quarter operating earnings benefited from a real estate sale that generated higher than expected variable investment income. As a reminder, real estate sales are part of our overall investment strategy but can add volatility to any given quarter.

This significant variance increase third quarter recorded pretax operating earnings by $3.5 million, third quarter operating benefits from higher than expected encaje performance in Chile, and increased reported pretax operating performance by $8 million.

Slide 7 provides a comparison of the significant variances in operating earnings in third quarter 2016 versus the year ago quarter. Both quarters were impacted by actuarial assumption review and other significant variances.

Third quarter 2016 reported earnings per share of $1.15 was up 8% over the year ago quarter excluding significant variances in both periods earnings per share of $1.22 was up 17 percent from the prior year period. At the end of the third quarter, trailering 12 month return on equity, excluding AOCI was 13.5%.

However, excluding the impact of both 2015 and 2016, assumption reviews, this measure was 14% in third quarter 2016 and third quarter 2015. Now I'll discuss the business unit results starting on slide 8 with retirement and income solutions or RIS-fee. Third quarter reported operating earnings of $131 million increased to 57% from the year ago quarter.

Excluding the significant variances shown on slide 7 third quarter pretax operating earnings were $145 million, a 6% increase from the year ago quarter. This was driven by a combination of growth in business and disciplined expense management.

The fundamentals of the business remain strong as RIS fee net cash flows were a positive $1.4 billion in the third quarter. The positive net cash flows were driven by quarterly sales of $2.7 billion. A 7% increase in reoccurring deposits from the prior year quarter and continued song plan retention levels.

Excluding the impact of the actuarial assumption review, pretax return on net revenue was 34% in third quarter 2016. We expect to end the year at the high end of our guided range. Turning to slide 9, RIS spread reported third quarter operating recordings of $76 million up 52% over the year ago quarter.

Excluding the significant variances shown on slide 7, RIS spread third quarter pretax operating were $66 million, a $14 million increase over the prior year quarter. Average account values grew 13% over the same time frame driving growth and net revenue.

Continued low interest rates negatively impacted retail annuity sales while pension buyout and investment only businesses continued to be opportunistic. We continue to meet our pricing discipline when deploying capital in this space. Trailing third quarter pretax return on net revenue was 60% above our guided range.

Turning to slide 10, Principal Global investors reported pretax operating earnings of $113 million in the third quarter an 18% income over the year ago quarter on 12% growth in AUM. This demonstrates the continued benefit of scale in Principal Global investors.

Both the retail and the institutional platforms contributed to a record AUM of $397 billion with more than 4 billion-dollar of positive net cash flows in the third quarter. Our unique boutique strategy is proving successful and allowing us to provide value added solutions that continue to resonate with clients.

On a trailing 12 month basis, PGI's pretax return on an adjusted revenue was 35%, and at the higher end of our guided range. As shown on slide 11, reported third quarter pretax operating earnings for Principal international were $84 million, up 65% from the year ago quarter increasing record operating earnings in BrasilPrev.

Encaje performance was higher than expected during third quarter 2016. But was more than offset by the impact of the actuarial assumption review, excluding the significant variances shown on slide 7, third quarter 2016 of pretax operating earnings increased 25% over the year ago quarter.

Foreign currency translation was a $1 million benefit to pretax operating earnings for the third quarter compared to the prior year quarter excluding significant variances. This is the first time in the past 5 years we have experienced tail winds from currency translations in earnings when compared to the prior year quarter.

As slide 11 shows, there can be volatility from quarter to quarter in Principal international's growth rates, excluding significant variances and on a constant currency basis, Principal international continues to produce mid teens growth in pretax operating earnings on a trailing 12 month basis.

Principal international's net cash flows for the third quarter were $2.5 billion. Primarily driven by $1.8 billion from Brazil and a very strong $1.1 billion from southeast Asia.

While not included in Principal international's reported net cash flows, China reported third quarter net cash flows of nearly $27 billion, another very strong quarter that contributed to China's 51% growth in pretax operating earnings from a year ago.

Excluding the significant variances shown on slide 7, Principal international's trailing 12 month combined pretax return on net revenue was 38% and within our guided range.

On slide 12, specially benefits reported third quarter pretax operating earnings were $7.4 million, up 13% over the year ago quarter, excluding the significant variances shown on slide 7, pretax operating earnings were $56 million, an increase of 5% from the prior year quarter driven by underlying growth in the business.

Additionally, especially benefits hit a milestone during the third quarter and crossed $2 billion of premium.

On a trailing 12 month basis, excluding the impact of the actuarial assumption review our loss ratio of 64% reflects continued strong underwriting, pretax return on premium fees and specialty benefits was 12% on a trailing 12 month basis excluding the impact of the actuarial assumption review. This was at the top end of the our guided range.

As shown on slide 13, individual life reported third quarter pretax operating earnings were a negative $4 million, however, excluding the significant variances shown on slide 7, individuals like pretax operating earnings were $40 million, 8% lower than the prior year period.

While mortality for both quarters was within the expected range, third quarter 2015 experienced favorable mortality while third quarter 2016 mortality was in line with expectations. Excluding the impact of the actuarial assumption review, the trailing 12 month pretax return on fees was 15% and was within the guided range.

Corporate's third quarter pretax operating losses were $58 million, in line with our guided range. For the quarter, total company net income was $308 million, credit rating loss, $7 million. Turning to slide 14, we have deployed and committed nearly $730 million of capital so far in 2016.

In third quarter 2016, we paid a $0.41 per share common stock dividend. Last night we announced another $0.02 increase in our common stock dividend bringing the fourth quarter, $0.33 per share.

We take a long-term view of our balanced capital deployment strategy looking for ways to increase long-term shareholder value and improving our financial flexibility. While capital deployment may fluctuate quarter to quarter, we expect to be within our $800 million to $1 billion guided range for full year 2016.

As we near the end of our prepared remarks, I'd like to leave you with a couple of thoughts. We continue to manage through the competitive pressures and volatile macroeconomic environments to forecast growth in revenue.

We have aligned growth and expenses accordingly as we focus on balancing growth and profitability while still investing in our businesses. As a result our efforts to manage expense growth have contributed to operating earnings growth and margin expansions over the trailing 12 months.

In conclusion, I'll echo Dan's earlier comments, third quarter was another strong quarter, adding to a very strong 2016 thus far. I'm very excited as I look ahead and see great momentum going into the end of the year, and 2017. This concludes our prepared remarks. Operator, please open the call for questions..

[Operator Instructions]. Your first question comes from the line of Sean Dargan with Wells Fargo Securities.

I have a question about Chile, and Dan, you addressed the issue at length, but realizing that the merger itself is not under review, what is the status of the tax benefit that you have on your books and if that was unwound, what would that do to earnings in the quarter in which it was unwound and secondarily, I'm wondering if you see any impacts to coupons flows next year as fallout from these protests?.

I'll have Terry hit the tax piece, and Luis make some additional comments. First let me come from the perspective, we have every reason to believe that this tax credit is very much intact. There are actually 48 other companies that took the exact same tax credit back in 2015 so again, we feel very, very confident we'll prevail.

We have been in Chile now since 1995. There's 21-year history of providing chill with retirement solutions on the voluntary, certainly on the payout and now the mandatory program. We have great performance, we have strong customary service, we are well-positioned in Chile to continue to do that.

We employ 15,000 individuals down there that go work every day trying to strengthen that program and again as you noted in my prepared comments we have had this codified now twice, so with that as a bit of a backdrop on a very, very stretch, if you will I'll have Terry comment on the tax implications if it were to be overturned..

Just to put it in context here, 2015, we recognized the benefit of the merger with the AFP with one of our subsidiaries in Chile.

As a result of that merger, we were allowed to amortize or reflect the amortization of the intangible in our tax calculation that amount was $105 million at that point in time, and we ran it through another after tax adjustment.

Now, that would be reflected over a 7-to-10 year period on a quarterly basis, so it wasn't going to have a significant impact in any one particular period but if we were to have that overturned, we would have to unwind that $105 million and again, we probably run it through another after-tax adjustment, as we did when we recognized the benefit..

Luis will make a couple comments relative to the flows in Cuprum and your thoughts there..

Talking about our flows in Chile that you might see in our page 16 in the supplement. It's important to say if you're paying attention now [indiscernible] to put inflows remains impact, the 1.4 billion level, so the problem we have had is about outflows during this particular quarter. Two main factors are affecting our outflows.

One is affecting the whole industry. There's a new discussion about a potential pension reform in Chile is making more customers have and are anticipating their retirement decisions so they are taking their money out from their SPs and mostly they are buying a compulsory annuity as a [indiscernible] in life insurance companies.

That is one factor which is affecting the industry, and it's affecting Cuprum as well. The second thing is further market aggressiveness in the transfer market in the SPs, certainly they're using the window of opportunity that the headlines and press is providing to them about our merger.

We are working and paying a lot of attention about asset retention and client retentions because all our fundamentals remain very solid, investment performance and client service remains among the best in the industry, so we're taking care of all of that, and I'm saying that our people is paying a lot of attention about that, and as I'm saying, we continue good inflows and we are paying a lot of attention about these two factors.

Having said that, it's important to remain Sean that in Cuprum we don't charge fees over AUMs. Instead we charge fees over flows on contributions and monthly contribution, so o this affects particularly specific what happens last quarter has a very marginal impact in our financials..

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

And RASB, your margins are currently running ahead of plan. I know you talked about the high end for the year of the 28 to 32% range.

Is that still the right general range to think about going forward or has anything changed given some of the expense management that you have been able to complete?.

As you know, we don't update on the ranges that we provide but what I would say generally is we still feel as optimistic about the long-term potential for our full service accumulation business for a variety of different reasons, but with that let me have Nora frame for you our expectations..

We and Terry mentioned this as well. We still expect to be at the high end of our outlook guidance, the guidance that we gave last year, and we have mentioned that other the last couple of earnings calls. What you saw this quarter were a couple of things.

Obviously even when you adjust for the annual assumption review and adjust for the real estate sales that were called out, we're still going to be this quarter, lower with regard to our amortization expense, and we have got some expense timing issues as well.

Great quarter, we're very confident with regard to our ability to manage expenses going forward, but you're always going to get some lumpiness with regard to timing of expenses and we got the benefit of some of that this quarter, so high end of the range for sure, great quarter, and we look forward to continuing to extend the success of the business..

And just a reminder on that point, Ryan, that if you look at the trailing 12 month S&P performance on the average contribution it's actually only up 0.4% so there really is a lot of heavy lifting going on in terms of managing the expenses and driving reoccurring deposits and improving overall quality of these plans..

Thank you.

And then Terry, could you provide some more detail on the interest rate assumption changes you made, and I guess what your long-term assumption is at this point?.

As we talk about the assumptions, there's more to it than just simply the interest rate assumptions.

We look at all the experience adjustments in our annual actuarial review that we do, and if you recall, if you recall in 2012 and 2015, we took a look at our long-term interest rate assumption and we brought those long-term ultimate rates down, but probably more importantly, we changed the trajectory in order to get to that longer term rate.

We went from a relatively short period of time to over 10 years in order to get to it.

Now, you're very well aware that the long-term interest rate assumption really varies by product that we have and we'll be across the yield curve and it will also reflect not only what the risk free rate is, but it will also have an impact for the spread that we have, the default rate goes into the assumption which we don't disclose any of that information as for pricing and proprietary purposes, but to try to give you maybe a little bit more insight in terms of using as a proxy, a proxy of the yield curve, we talk about the 10-year treasury, and that seems to be a pretty good proxy to use.

A year ago when the 10-year treasury was about 2%, we talked about basically a 25 basis points increase to that rate over a 10-year period. Now, the expectation, then was that we would be up by 25 basis points this year, but as you're very well aware, instead of going up by 25 basis points, it went down by 50 basis points or so, the 10-year treasury.

However, as we look in terms of our forecast into the future, which everybody will have a forecast as to what they think.

We take into consideration what we're hearing in the industry, what we're hearing from rating agencies, what we are hearing from auditors, what we are hearing from different groups, economists, central banks, investments, we take all of those things into consideration, and we feel very comfortable where we are at this point in time.

We have actually moved out and keeping that time period, that 10-year time period in order to get to our long-term rate consistent.

But we're from a different starting point, so you'll look at going out into the future, what we're hearing anecdotally is that others are starting to increase their trajectory or their time period as well but still we feel that our ultimate rate as well as our time period in order to get to the rate, we're very comfortable with that at this point in time..

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

A lot of commentary on the call in terms of expense management, driving the margins, I think more broadly speaking there's concerns of secular pressure on fees in both retirement and asset management.

Can you talk about what you're seeing both in the retirement space as well as asset management and the different asset categories that you manage in terms of the fee side of the equation..

First let me kind of hit the macro sort of expense initiative that we have, and we have always had a lot of expense discipline around Principal.

What we have tried to do is to make sure, Seth, that we're lining our expenses with the revenue that we're able to generate, and as part of that process, as you might expect, we rigorously go through the organization to determine if there's services that we're providing that aren't valued by our clients or they're unwilling to pay for, so I would say it's basic blocking and tackling, making sure that we have a disciplined approach to expense management.

Now, having said that, we're also continue to go make some very significant investments around digital, and technology, certainly we have talked about the expenses related to the DOL implementation and we're wanting to make sure we're still planting seeds within all of our businesses, so we have future growth.

So I don't want anybody to walk away from the call or quarter and think somehow it's taking out all expenses at all costs, because that's just not the approach that we would take here at Principal, so with that as a backdrop as it relates specifically to fee growth and revenue growth along the lines of business, I'll have Jim go first and have Nora make additional comments..

If I look at the industry and institutional, the fee pressures depend a lot on which product and which asset category you're in. If you want a rule of thumb, over the last three to four years, passive fees for institutions have roughly halved.

When you look at large scale, large cap core assets and fixed income and equities where there is a passive alternative, there has been intense fee pressure and in the industry they have maybe halved over the last decade or 15 years.

There is a whole area however of relatively newer, relatively less liquid, relatively less efficient markets and those are areas where there is still quite a lot of pricing power and the fees have not moved for at least a decade, and that includes areas such as real estate, both public and private, high yield, other investment grade fixed income and preferreds all of which are areas we're strong in, and that's why our revenues have been quite buoyant, relative to assets compared with most of the industry.

So we have some carefully chosen last liquid categories for active management still pays and where clients benefit from it and are prepared to pay.

In the retail and mutual fund area, you can add some of those areas as helping the general performance, but the other piece to this in terms of where fees are going is our strength in multiasset, multimanager strategies which are designed to produce an outcome thiazide by clients. Here I think diversify income, diversified real asset.

Those are areas where the outcome is beneficial to the client so the pricing is more resilient than it would be for the more commodetized passive and core areas. We feel pretty good right now about where we are relative to the fee pressures in the industry.

We need to become more efficient because pricing is going down, but I would say that relative to the industry we feel very well placed..

I'll be brief. To Jim's point, we have a couple things going in our favor here, one is in the retirement area, tremendous scale with regard to services and record keeping in that platform, just a tremendous scale and with the consolidation in the industry we're going to be a net gainer on that front.

Two, and this is really critical, part of our retirement franchise, well, two pieces of it, one is what we call total retirement suite, we are one of very few competitors in the U.S.

where you can have one stop shopping with regard to your DB, your DC, non-equal, and ESOP plan, and that is hugely valuable to our plan sponsors and advisors with regard to the one stop shopping, and three and this is another critical piece is we have one of the most extensive layups of target dates in the U.S., and they are multimanaged, which is a real benefit in this environment.

Multi-managed and hybrid, in other words, the choice not only around sub advisers but also around passive versus active. We don't pick a position in that space.

We have the choice in what we have seen add planned sponsors, really, really taking that particular investment product and putting a premium on that and the ability to have the one stop shopping in addition to that qualified default option..

Your next question comes from the line of Humphrey Lee with Dowling Partners.

Just a follow up to Luis in terms of what you're seeing in terms of Chile pension reform, what can you see in terms of potential impact to the industry?.

Let me say first that we’re very pleased about the fact that finally the Chilean government is taking serious actions in order to review and propose a more comprehensive pension reform in Chile that it might sound counter-intuitive.

But I have to say also that Principal since the early 2000 we have been a strong advocator in order to review the pension reform in Chile in a much more comprehensive way as I said, the pension system as you know is the golden standard in system [indiscernible] but it has some issues that has to be addressed about adequacy, and the most important problem is the one that's created, this kind of unrest you have seen in pillar zero.

It has nothing to do with the ASPs, the pillar that’s been called a solidarity pillar, in which the governance is in charge of that pillar is very much more the one that provides a safety net for low income segment in Chile and most of the low income segment, they haven't been part of the labor force they were, they had a few contributions AFP system.

For you to know, not this government, you know, many governments, even, you know, in the past, they took a kind of free ride with the pension system. The total government retirement expenditure in the pillar zero is 0.7% of the GDP. Average for countries is OECD 18% up to 20%.

So here we have the most important issue about adequacy in the pension system. The Chilean government, they send very quickly, the bill in order to raise the minimum pensions in pillar zero upto 10% last week. So they're reacting very quickly.

Having said that, the government has to pay a lot of pension of Pillar O and Pillar Zero and that’s the most important initiatives about this whole discussions are going with. The second thing that we have to address in Chile, and this discussions about the self-employed segment. You know, they are not well covered.

They don't have any compulsion contribution. They don't belong to any system, and they have to.

The third element is to put some adjustment for the ASP system, which our pillar one, still the [indiscernible] 10% contribution rate over salary, I mean, its absolutely insufficient lower for longer is an issue for every place and Chileans are living longer as well.

Also they do have a salary cap and the salary cap remains almost the same one in the last 30 years. At the beginning of the system, just 2% of the labor force was kept, today more than 20% of the labor force is capped, 35% of our customers are capped, so that 10% over your salary is even lower than 10%, so we have to address the 10%.

We are advocating for a 15% minimum, and to remove the salary cap.

The third issue is to reinforce the pillar two, which is the workplace solutions and group solutions in that country, and we have I would say good and [indiscernible] in order to support those -- I will say improvements, but I will say that the whole discussion is going to take a kind of long time in order to really have a solid and good pension reform, and I think that is very unlikely that this current administration is going to be over to go through and absolutely sure that probably this whole discussion is going to go over the next administration in 2018..

I think just a quick follow up. I think there was some discussion about the fees, I think some opposition of the current system complaining about the fee being charged to the pensioners.

Can you just talk about in general how do you see the fee structure right now, and what could potentially be at risk?.

We're going into details. We have been vocal in our proposal, not just now is to charge over AUMs instead of flows, there is much more transparent, much more clear. That is going to align the interest of our customers and our oldest stakeholders in the ASP system. So we really do think that the system has to charge fees over AUMs.

On average today, that discussion is going to help us in order to make much more clear that the pension system in Chile is one of the most efficient and cheapest, around the 27 pensions [indiscernible]. On average, the pension system charged 60 basis points over AUMs and in the case of Cuprum we charge a number which is lower than that..

Your next question comes from the line of John Nadel with Credit Suisse..

So it sounds like if pension reform, you know, really gets through, ultimately in Chile, there's actually some potential, you know, for your business to thrive a bit more if some of these things go through, but I'm interested in what the sort of near to intermediate term might end up looking like as you sort of transition through this process, and, you know, the deposits, if I'm looking at page 16 of your supplement, have been very stable, you know, but the withdrawal side, you know, has started to really expand these last cup of quarters and I'm wondering if there's really cause and effect there, you know, cause being the, you know, the protesting.

And where you expect that money to end up going and what your flows could look like at least during a transitory period here?.

I guess the way I would go at this is to, again, remind everyone on the call that our strategy in Chile does not limit itself just to the compulsory. That's the newest piece of business that we have.

The second is the voluntary workplace environment that Luis very appropriately articulated and the last piece is to provide lifetime income to retirees, all three of those are key components in this strategy. I don't think Chile is different than the U.S.

in the DOL debates or the challenges around the rest of the world, whether it was a conversation in Hong Kong, there is an outcry, I would suggest about making sure that the fees are appropriate and just Reich in the case of Chile, and Hong Kong and the U.S., there's conversation with the DOL, and various regulators around the world to make sure they understand that the products and services that are being provided for by the service companies, and you know, we all know, and we can speak to the issue of asset management, but the hand holding, the call centers, the ability to provide information, education, and advice in some instances, is really the life blood of this business model around the world.

So Luis was articulating, we have spent a lot of time educating regular regulators that there need to be a reasonable fee associated with all of these products so to answer your specific questions, we are getting outflows today in Chile in large part because some of the protests that were large, six weeks ago, they continue to get smaller and smaller and smaller in terms of the number of people participating.

I don't think this is going to have any sort of meaningful impact on our flows or our ability to generate an earnings off the investments that we made in Chile..

And I had a separate question for Terry.

If we look on a consolidated basis your investment income in the quarter and we adjust for the fact that encaje was a little bit stronger and you had the real estate gain, would you characterize, you know, investment income X those items, as, you know, still a bit elevated, you know, maybe driven by some prepayments or bond calls or would you characterize it as more normal..

As we look at these items, there's going to be volatility from quarter to quarter as to Hoyer or lower, a little bit from expected variances.

What we try to do is call out the significant items in this particular quarter, we talked about three significant items, the one being the annual actuarial review that had actually a volatile number this quarter.

But the real estate sale that we had as well as the encaje performance, we felt that that was a little bit more transparency, visibility into the volatility that we have seen in terms of volatility, I have talked in the past about real estate sales as well as prepayment activity generating anywhere from 3 to 7 cents EPS.

This quarter, we were significantly higher than that, well north of, you know, 12, 13 cents. So actually, this volatility that we called out brings us right back into that more normal range for that particular piece.

But as I said, you'll have periods where the Alternative investments might be a little bit higher or a little bit lower, the general count is actually growing, so you'd see some increase in the net income because of that.

But we try to give you the best information possible in terms of variance and volatility from what we would have expected, so the $1.22 that we had is the run rate that we believe is an appropriate number for this quarter..

Your next question comes from [indiscernible] with Deutsche Bank..

I want to go back to the RIS margins which seem to be quite strong relative to your guidance in previous periods. I guess what's driving this performance. You have highlighted expenses or expense management. Is there a timing issue there or are there also other drivers that have really driving this performance here..

I think it's a fairly clear explanation, but Nora please go ahead and make some additional comments..

I mentioned earlier, even when you exclude some of the variances that Terry has talked about, we're still on the lower end of our DAC expenses this quarter and we have some meaningful timing issues with expenses so that's why we're not saying this is the run rate.

What I would say is what's creating the very strong quarter, what we can't lose sight of is the fundamentals, the really strong fundamentals in this business. You're seeing growth basically across every metric, plan count, whether that’s total reoccurring deposits, we're just seeing very strong, very broad growth in this business.

So the underlying growth is exceptionally strong.

What we're just, what we're speaking to is that run rate, and just want to make sure people understand that we've got two issues here, one is a timing issue with regard to expenses this quarter, and the other is this DAC amort that tends to be light this quarter in addition to the annual assumption review issue with DAC amort.

So that combination of things is why we're still guiding towards the higher end of our original outlook guidance..

And then we haven't spent a lot of time on this quarter for a change, but as we're nearing the implementation deadline of DOL, just wondered if you have any updated thoughts on where you stand there..

Just a couple of quick comments.

You know, I'm very pleased to say that the way things are turning out are fairly consistent with what we have been articulating and that is that our large distribution partners who we have been out to see and worked very closely with, most of them have come in on what their strategy is and allowing their financial advisers to work under two environments, one on a fee basis, one on the basis of the best interest contract standard.

We're seeing a full range and a lot of discussion around that, and again, we were anticipating that, and we would expect it.

Secondly, we don't see any sort of change as reflects our ability to continue to have a robust investment platform with proprietary investment options being made available to small and medium sized employers, and third a benefit event for job changers and retirees, again, requires disclosure, but again, a workable model for the sake of being able to continue to provide our customers with choices in retirement, whether they decide to keep the money in the plan, choose a rollover IRA with Principal or to take their funds to a different service provider and lastly as we have worked through our own broker dealer and looking closely at our financial advisers, our 1500 or so financial advisers, we're retaining our talent.

They have found what we have shared with them as a workable solution to allow them to continue to have a successful practice here at Principal. Again, we don't think there's a really a lot of new news as it relates to DOL here..

Your next question is from the line of John Barnidge with Sandler O'Neill..

You mentioned that foreign currency favorably impacted you year over year for the first time in five years, I believe, how much of a tail wind do you think this could prove, and then I have one follow up..

Sure. As we look at the exchange rate, actually we saw more stability in the exchange rain on a year-over-year basis.

However on a trailing 12 month basis there's still a pretty significant head wind that we're fighting because of the strengthening of the dollar has really, excuse me, the weakening of the dollar has really occurred since the beginning of the year. So this was the first quarter-over-quarter comparison where we actually saw some benefit from it.

I think long-term we have always talked about stability in the dollar.

We're not actually looking for tail winds or looking for head winds, but when you actually reflected on a constant currency basis, which I think is a way we want to look at the business on a constant currency basis, we're still seeing that mid- to upper teens growth rate of our international businesses.

It's very strong, and we have been trying to reflect that on a year-over-year basis or excuse me for several quarters but now we actually have some numbers when the dollar is relatively stable that you're actually seeing the growth of that underlying business..

Yes, it's so unfortunate as you think about the last five years, there's been really solid work and performance from those local businesses driving local net cash flows, driving revenues, driving customer satisfaction, accumulating a lot of really significant number of investors and unfortunately because of the effects, it undermined its credibility and now we hopefully can see that start to turn around the other way.

Thank you, John for the question..

And then my follow up, if I may.

Yesterday, the DOL released FAQ's on the fiduciary rule that significantly disrupts how brokers recruit, and require a major overhaul, to recruit bonuses a way from making them contingent on asset sales or sales targets, how do you see this change impacting your distribution partners?.

You're right, those FAQs came out yesterday, and we expect a couple more rounds of those, I would say what was clarified in that FAQ was actually very consistent with how we had set up our plan forward with our advisers.

Again, I think we had anticipated the clarification would have been there, and we feel good relative to how we were planning to comply and compete going forward.

You know, I think as Dan mentioned, we have actually made announcements relative to our internal sales force, and we have moved from decision making into implementation, but I think those FAQs that came out really aligned with how we were targeting our implementation pact going forward..

Your next question comes from the line of Michael Kovac with Goldman Sachs..

One for Dan here, as you think about uses of capital.

In the past acquisitions have been a key strategy in use of capital Principal, and we have seen increased $ activity in some of your core markets and you did mention, I believe in your prepared remarks some expected consolidation continuing, so I'm wondering if you're expecting this to increase the use of capital heading into, either year end or into 2017, specifically as you think about asset management, multiples at these compressed levels today and as you build upon that, where would you be looking, whether it's asset management, retirement operations, internationally, and then give us a sense of what you see as the deployable capital against those types of acquisitions..

That's probably a 30 minute response but I'll give a relatively brief response, and what I would say is we have tried to really have a disciplined approach to capital deployment whether it's to increase our dividends, stock buyback, making investments in our organic growth strategies here at Principal, being very cautious about even within the organic lines, allocating that capital where we feel the shareholders benefiting the most, and as you point out, we have had a nice track record of making relatively small tuck-in acquisitions, I wouldn't call Cuprum tuck-in, but certainly across asset management and asset accumulation, we have had really, really nice acquisitions over the years, and I would say that we are going to continue to look for those opportunities and we’re going to continue to take a larger ownership share in some of the boutiques we have acquired in the past.

You saw some of that traffic in the most recent quarter. We just believe fundamentally that's a great way to deploy capital for our shareholders.

The other area we want to emphasize is getting tangential strategies where we have got existing boutique where we can infuse some additional capital and maybe acquire some talent and build out that capability. Jim's also added some sales offices over the course of 2016 to try to drive sales. So that's still very, very much part of our strategy.

We feel like we have had really good organic growth in the core funds business.

I don't think we would have to necessarily acquire another funds operation, and in terms of asset classes, we have talked about European real estate, we have talked about strategies that really align with what our investors needs are, which is generating long-term income and retirement, and long dated solutions, infrastructure is another area where we have looked at.

So we're going to continue to be inquisitive, where again we can deploy capital in the best interest of our long-term shareholders' needs.

Is that helpful?.

That is. So just as we think about the mix this year versus maybe future years, it appears sort of pretty light, I guess, on the acquisition front.

It sounds like maybe you're expecting that shifts in the future?.

Well, you know, pricing has a lot to do with these decisions and again, we try to be very organic and very disciplined in making acquisitions.

It hasn't been from a lack of taking a hard look but we're going to continue to hold ourself to very high standard in terms of how we deploy our capital and whether it's, you know, managing our debt, managing our acquisitions, managing our share account or dividends, we're going to just take a very, very disciplined approach..

We have reached the end of our Q&A. Mr. Houston, your closing remarks please..

Again, thanks everyone for joining the call today. I know it was a busy day with the number of other companies reporting. You know from our perspective we're going to continue to invest our business, we're going to continue to grow our businesses, globally.

We want to make sure we have a disciplined approach to aligning our expenses with our revenues and we're going to continue to take a very disciplined approach to tour capital deployment to the benefit of our long-term shareholders.

Again, we look forward to seeing many of you on Investor Day, as John mentioned in the opening comments on November, 16th. So with that, have a great day, and thank you, again, for taking the time to listen to the call today..

Thank you for participating in today's conference call. This call will be available for replay beginning at approximately 1:00 PM. Eastern Time until the end of the day November 4th, 2016. 821-8807 is the access code for the replay. The number to dial for the replay is (855)-859-2056 for U.S.

and Canadian callers, or (404)537-3406 for international callers. Thank you. This ends the call..