John Egan - Vice President of Investor Relations Daniel Houston - Chairman, President and Chief Executive Officer Deanna Strable - Executive Vice President and Chief Financial Officer Nora Everett - President of Retirement and Income Solutions and Chairman of Principal Funds Luis Valdés - President, Principal International James McCaughan - President, Global Asset Management and Chief Executive Officer.

Tom Gallagher - Evercore ISI John Barnidge - Sandler O'Neill Seth Weiss - Bank of America Humphrey Lee - Dowling & Partners Jimmy Bhullar - J.P. Morgan John Nadel - Credit Suisse Ryan Krueger - KBW.

Good morning and welcome to the Principal Financial Group First Quarter 2017 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 conference call over to John Egan, Vice President of Investor Relations..

Thank you, and good morning. Welcome to Principal Financial Group’s first quarter conference call. As always our materials related to today’s call are available on our website at principal.com/investor.

Following a reading of the Safe Harbor provision, CEO, Dan Houston; and new CFO, Deanna Strable will deliver some prepared remarks then we will open up the call for questions.

Others available for the Q&A session include Nora Everett, Retirement and Income Solutions; Jim McCaughan, Principal Global Investors; Luis Valdes, Principal International; and Tim Dunbar, our Chief Investment Officer.

Some of the comments made during this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. The company does not revise or update them to reflect new information, subsequent events or changes in strategy.

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 10-K, filed by the Company with the U.S. Securities and Exchange Commission. Additionally, some of the comments made during this conference call may refer to non-GAAP measures.

Reconciliations of the non-GAAP financial measures to the most directly comparable U.S. GAAP financial measures maybe also be found in our earnings release, financial supplement and slide presentation. Now, I’d like to turn the call over to Dan..

Thanks John and welcome to everyone on the call. This morning I'll share some performance highlights and accomplishments that positions for continued growth. The Deanna will follow with details on our financial results and enough data on capital deployment and our investment portfolio. First quarter was a good start to the year for Principal.

We continue to deliver strong growth execute on a customer focused solutions oriented strategy, balance investments and growth in expense discipline, and be good stewards of shareholder capital.

At $371 million of after tax operating earnings we delivered 29% growth compared to first quarter 2016, this reflects good underlying growth across our fee, spread and risk businesses. It also reflects some softness in prior quarter driven by equity market and foreign currency headwinds.

Over the trailing 12 months we increased assets under management or AUM by $72 billion or 13% to a record $620 billion. This reflects strong asset appreciation and nearly $20 billion of positive net cash flow and it provides a solid foundation for revenue and earnings growth for the year.

During the quarter we again receive some notable third party recognition including Best Mix Fund in Mexico for Morningstar, Benchmark Fund of the Year in Hong Kong, and multiple best fund Awards in Malaysia from Thomson Reuters Lipper.

Additionally our global high yield and preferred securities Dublin funds received multiple Lipper Best Fund Awards in New York.

Our longer term Morningstar investment performance remains among the best in the industry and actually improved from year end as shown on Slide 5 at quarter end 80% of principal mutual funds, separate accounts and collective investment trusts were above median for three year performance, and 89% were above median for five year performance.

Clearly the three and five year rankings are critical given our focus on managing assets for retirement another long term strategies. Our one year performance with 46% above median is down from year end and compared to a year ago. We continue to watch this closely, but view this as part of the normal ebb and flow of investment performance.

After a somewhat disappointing 2016 our investment performance rebounded in the first quarter was 67% of our active funds above median. Over the past 20 quarters on average 75% of our investments were above median for one year performance with more than 80% above median for the three and five year periods.

First quarter 2017 was our 24th consecutive quarter of positive total company net cash flow.

This reflects strong consistent investment performance, solutions that resonate with retirement retail and institutional investors, the diversification and non-correlation of our global multi asset, multi manager, multi boutique model and the integration of our businesses enabling us to meet investor needs across life stages.

Before moving on, I'll share a couple of additional thoughts on first quarter net cash flow, I was particularly pleased with the net inflows for Principal International. For RIS-Fee and RIS-Spread and from the U.S.

retail funds business, despite the undeniable success of ETS across the industry and with the ETF garnering record net cash flows in the first quarter we continue to have great success selling our value added active strategies and solutions. I'll also comment on PGI’s institutional net cash flow.

As a general point institutional flows tend to be uneven in any given quarter. We'll see investors harvest gains and rebalance portfolios.

And as we saw again this quarter, we can also experience withdrawals as we reach the end of fixed term mandates, while institutional flows for the quarter were at net negative $900 million in total, eight boutiques generated at least to $100 million of net inflows. Just four boutiques had net outflows an excess of $100 million.

While Columbus Circle experienced negative net cash flows of $1.3 billion in the first quarter. We are pleased to see a recovery in investment performance at this boutique during the quarter. Despite flat net cash flows for PGI in the first quarter, operating revenues less pass through commissions were up nearly 14% over the year ago quarter.

As expected and previously signaled we also had net outflows in China during the quarter due to withdrawals of short term funds. Despite recent outflows we've increased AUM in China by $40 billion or 70% compared to a year ago.

Growth in China is helping to further diversify our revenue and earnings strings overall, in fact China is the third largest contributor to PI's pretax operating earnings.

In Chile, retention improved significantly from year end, but we still have negative net cash flows reflecting continued turmoil in the Chilean Pension System importantly the business remains resilient with record AUM in first quarter we're managing more customer money today than anytime in Cuprum’s history.

We continue to be recognized as the top service provider and a top tier investment manager.

Recent pension reform proposals have identified the real issue the need for a higher savings rate will continue to be actively involved in the dialogue on creating a sustainable retirement system in Chile, one that creates adequate income in retirement for its citizens through both mandatory and voluntary solutions.

I'll now share some key execution highlights in the first quarter. We continue to expand and enhanced our solution set with a focus on really four key areas.

Outcome based funds with a particular focus on income solutions, alternative investments to enhance diversification and manage downside risk, our international retail platform to capitalize on opportunities in Latin America, Asia and Europe our ETF and CIT platforms to provide lower cost investment options to complement our more traditional active strategies.

Fund launches during the quarter included two new asset allocation strategies on our U.S. platform designed to control volatility and the global multi-asset income fund on our usage platform. We also submitted three risk focused fund to fund products designed for individual savers for regulatory approval in China.

These products will help fill in that country in long term allocation driven solutions. We continue to advance our multichannel multiproduct approach to distribution as well.

As key developments we opened a new office in Zurich to strengthen and develop customer relationships and enhance our ability to deliver long term investment capabilities to investors and institutions throughout Europe. We continue to get our funds added to recommended list and model portfolios.

We earned more than 20 total placements during the quarter, getting 17 different funds on a dozen different third party platforms with success across asset classes. We expand our partnership with Zenefits beyond specialty benefits adding our new digital 401(k) solution to their benefits exchange platform.

We added new bank products to our online IRA self-serve rollover capability. And we launched a new Individual Disability Income solution partnering with Life Preserve the self-short term Individual Disability Income insurance online.

In addition, we continue to make progress on our digital advice and sales platforms not only in the U.S., but also in Latin America and Asia. Responding to demand for technology driven services, improving the customer experience overall enabling us to cost effectively serve customers with account balances of all sizes.

Clearly digital is influencing our product set and our distribution reach as we drive toward solutions that are simpler and faster, address our future generations will buy financial services, as well as reduce barriers to action and eliminate pain points for customers and advisors.

There'll be more to come throughout the year on these new developments, and on enhancements to existing capabilities including digital enrollment, online purchasing, as well as accelerated underwriting. Before closing a quick update on the DOL Fiduciary Rule, the delay in the applicability date to June 9, 2017 doesn't change much for Principal.

We continue to work closely with our distribution partners, and to actively engage in discussions around the implementation of the final rule. This work has only strengthened our relationship with these key partners.

We remain confident in our ability to comply and remain focused on helping advisors deliver retirement, protection and income solutions to their customers. I'll close with some additional third party recognition that speaks volumes about who we are as a company.

We received multiple Best Places to Work awards during the quarter, and for the seventh time Principal was named by Ethisphere Institute as one of the World's Most Ethical Companies. We still operate in world where most people are under saved, under insured and under advised.

Our strategy remains intact as is our commitment to do more to be part of the solution. We go forward from a position of strength with excellent fundamentals and the benefit of broad diversification. I look for us to continue to build momentum in 2017 and for that momentum to translate into long term value for our shareholders.

Deana?.

Thanks, Dan. First I'd like to start out by saying; I'm honored to have the opportunity to be the CFO at Principal. Well, I may be a new face and voice in the CFO role, I've been at Principal for a long time 27 years, in that time I have gained invaluable experience, running in our U.S.

insurance businesses, and I am excited to leverage that experience as I transition into this role. On the call this morning, I'm going to keep my comments focused on the key contributors to our financial performance during the quarter. I'll finish with an update on our capital deployment strategy and additional details around our investment portfolio.

The first quarter of 2017 was a strong start to the year for Principal, and a continuation of our strong results in 2016. I'm pleased with our integrated and diversified business model and how our businesses are performing.

Total company operating earnings of $371 million increased nearly 30% and operating earnings per share of $1.27 increased 31% over the prior year quarter. We had a few significant variances during first quarter that resulted in a net benefit to operating earnings.

Pretax impacts of these items included a $16 million benefit from higher than expected variable investment income that benefited RIS-Fee, RIS-Spread and Specialty Benefits about equally. A $12 million benefit from higher than expected in encaje returns and Principal International.

These items were partially offset by a $6 million assessment in Specialty Benefits associated with the Penn Treaty liquidation. Net income available to common stock holders was $349 million for first quarter 2017 including net realized capital losses of $17 million. Credit losses continue to be below our pricing assumptions.

First quarter 2017 ROE excluding in ALCI other than foreign currency translation adjustment was 14.6% on a reported basis. Excluding the impact from the 2015 and 2016 actuarial reviews ROE of 15.1% improved more than 200 basis points compared to a year ago, reflecting strong earnings growth and discipline capital management.

Keep in mind that over the long term we expect to improve ROE by 30 basis points to 60 basis points per year with fluctuations in any given period. These results were fueled by strong business fundamentals, underline sales growth and disciplined expense management. Macroeconomic conditions have been and will continue to be volatile.

First quarter 2017 benefited from changes in macroeconomic condition including strong equity market performance as the daily average S&P 500 index increased more than 6% from fourth quarter and 19% from the prior year quarter and a weaker U.S. dollar and strengthening international economies particularly in Brazil and Chile.

The first quarter 2016 results were dampened by headwinds from these same factors. As a reminder there is seasonality in some of our businesses. First quarter earnings are seasonally lower in Principal global investors from higher payroll taxes, and specialty benefits due to seasonally hired total claims and sales related expenses.

Also mortality can be volatile quarter-to-quarter and its impact varies by business unit. In first quarter 2017, mortality experience was favorable for the pension risk transfer business in RIS-Spread slightly favorable and individual life and slightly unfavorable in Specialty Benefits.

As Dan indicated total company AUM increased 13% from a year ago to a record $620 billion in first quarter 2017.

This strong growth in AUM was driven by positive investment performance, favorable foreign currency translation, and importantly positive total company net cash flows nearly $20 billion over the trailing 12 months including $3.7 billion during the first quarter.

As expected total company net cash flows rebounded from fourth quarter 2016 levels of $900 million and exceeded our first quarter 2016 cash flows of $3.3 billion. Once strategy that has proven successful for our U.S.

retirement business has been our multi-manager investment platform that offers our customers best-in-class solutions, including affiliated and non-affiliated managers, as well as a suite of target date investments with both active and hybrid solutions.

Our target date suite flows in the first quarter remain positive with strong sales and contribution from our retirement plan participants. Digging deeper into the business unit results, it's important to reiterate our focus on balancing growth and profitability.

This means finding the appropriate balance between managing expenses and maintaining pricing discipline while continuing to invest in product and service solutions that meet our customer's needs.

On a trailing 12 month basis and excluding the impact of the 2016 actuarial assumption reviews, first quarter 2017 revenue growth and margins were within or above the 2017 guidance ranges for all of our businesses. All of my comments today on business unit earnings will exclude the impact of the significant variances I mentioned earlier.

I’ll also focus my comments on the business units with notable differences from expectations, as always reported business unit results and key drivers can be found in the Slides and the press release. Principal global investors and individual life pretax operating earnings and key metrics were in line with expectations in the first quarter.

Each continues to produce growth and margins that look very attractive relative to industry results. As shown on Slide 6, RIS-Fee pretax operating earnings of $139 million increased 22% over the year ago quarter.

The strong increase in earnings was driven by higher net revenue stemming from higher account values as a result of favorable investment performance and positive net cash flows. Turning to RIS-Spread on Slide 7, pretax operating earnings were $95 million or 40% higher than the prior year quarter.

RIS-Spread account values grew 11% over the year ago quarter driven by strong sales in the pension risk transfer business, and fixed annuities as well as opportunistic issuance and investment only. Additionally mortality gains in our pension risk transfer business contributed to earnings.

We remain disciplined when deploying capital to our spread and risk businesses, we continue to see attractive opportunities in our pension risk transfer business, especially in our target market of small to medium size businesses.

As shown on Slide 9, pretax operating earnings for Principal International were $89 million compared to the year ago quarter on a constant currency basis, Principal International’s pretax operating earnings growth rate continues to be in the mid-teens. This reflects our strong execution in both Latin America and Asia.

In fact Brazil, China, and Hong Kong all had record pretax operating earnings in the first quarter. In line with our diversification strategy in the emerging markets we operate in on a trailing 12 month basis, Asia represents nearly 20% of PI’s pretax operating earnings increasing revenue and earnings diversification for PI and Principal in total.

We continue to focus on deepening our existing relationships in PI, in particular collaborating with one of our existing joint venture partners China Construction Bank to become a partner in its pension company in China.

Moving to Slide 10, Specialty Benefits quarterly pretax operating earnings were $46 million and 18% increase from the year ago quarter driven by growth in the business and benefits of scale.

Despite higher group life claims compared to the prior period, which can be volatile in any one quarter the overall loss ratio was within the targeted range for the quarter. Corporate pretax operating losses of $59 million were slightly higher than our expected run rate. Keep in mind that corporate losses can be volatile in any given quarter.

We anticipate full year 2017 corporate pretax operating losses to be at the favorable and of the previously announced range of $200 million to $225 million. This range reflects the $19 million annual interest expense saving from the 2016 debt refinancing and deleveraging transaction.

Turning to our investment portfolio, it continues to be high quality, well diversified, actively managed and constructed according to our liabilities. During the quarter there has been some additional scrutiny on brick and mortar retailers, and the financial stress they are facing. A couple of things I'd like to highlight.

Our real estate portfolio is well positioned for the risk and opportunities of this evolving economy. As a leading real estate manager, we closely monitor geographic and property space trends and adjusts our portfolio strategies accordingly.

Over the years retail space trends have shifted with e-commerce taking market share from brick and mortar stores in particular large department stores.

While we've seen several store closure announcements e-commerce has provided us attractive investment opportunities in industrial and other property types, and we have anticipated these trends in our portfolio construction.

It's also worth noting that our retail exposure in the commercial mortgage loan portfolio is predominantly grocery and home improvement anchored centers. Direct exposure to regional malls represents a $150 million or less than 25 basis points of our total U.S. invested assets.

None of these properties were impacted by recent anchor store closure announcements. Further our exposure to risk of loss in the CMBS portfolio is modest. We underwrite and monitor our CMBS portfolio to the underlying property level and stress tests our exposure within the CMBS structure, which gives us confidence in our estimate.

We remain very comfortable with our overall portfolio including the retail exposure within our commercial real estate and commercial mortgage backed securities portfolios.

Moving to Slide 12, in first quarter 2017, we strategically deployed $248 million of capital including $130 million in common stock dividends, and $118 million in share repurchases. We'll continue to be strategic and disciplined in deploying capital.

This balanced approach to capital deployment supports our diversified and integrated businesses, the needs of our customers and creates long term shareholder value. As earnings continue to grow, we remain confident in our ability to deploy $800 million to $1.1 billion of capital in 2017 as we previously announced.

Last night we announced a $0.46 common stock dividend payable in the second quarter and 18% increase from the prior year period at 38% we are well on our way to our targeted 40% dividend payout ratio. In closing I see great opportunity in our future, and I'm excited to grow in my new role as CFO.

I look forward to meeting with each of you as I get out on the road in the coming months. This concludes our prepared remarks. Thank you for listening to our call today. Operator, please open up the call for questions..

[Operator Instructions] Your first question comes from Tom Gallagher of Evercore ISI..

Good morning, Dan, I’d like to start with a question on strategy in M&A.

Can you comment just broadly on things you’d be interested in the M&A front, I know you've done certainly more in the way of action management deals international pension, how about the good benefit space, is that an area that you'd be interested in pursuing M&A or is it more likely to remain with what you've been doing in the last several years?.

Yeah, thanks Tom for the question, and good morning. To answer the question, M&A is in your goal part of our strategy, we're look for the right combinations and that usually starts with making it in an accretive transaction.

There's really two reasons why we go out there, one is to add additional capabilities, and we've done that over the years as you point out, whether it's around a different investment asset class or whether or not it's a capability within our core businesses so capabilities is a big part of it.

The second one is around scale, the scale in the retirement business, scale in the asset management business, you asked a specific question around group benefits.

We would be curious of course, if there is a good match out there that overlays our existing commitment to small to medium size employers, where we think additional scale could be helpful to our long term shareholders.

Having said that, I would tell you that we feel very good about the current portfolio of businesses and our current capabilities, and so for there to be a transaction for Principal it would have to be a very financially favorable. My last comment I want to make and I think I touched on this the last quarter as well.

We've got very favorable relationships with our joint venture partners in China and Brazil and Southeast Asia, sometimes they’re going to different countries, we want to make sure that we're able to support that, but oftentimes just to look at their overall strategy, and if we can complement their strategy by adding additional capabilities from Principal across our range of products, we want to be good partners to do that.

Does that helpful Tom?.

That is Dan. And then just shifting gears to Deanna just on the RIS margins were above target.

Can you comment at all, I think there was some lower deck amortization and expenses were pretty favorable? Could you comment on where you see that trending was - would you viewed 1Q as somewhat of an anomaly and expect them to be more in line with what you've guided to or do you think you can sustain something a bit above the range here?.

Yeah thanks Tom. I'll make a few comments on that and see if Nora wants to add some comments as well.

I think as you listen to the script and look at our material, you are correct that even with the things that we called out the RIS earnings both Fee and Spread as well as our margins were slightly above what we would normally expect and I would expect some of that to trend down as we go through the year, but still to be at a very strong level.

Obviously in RIS-Fee line our expenses in our deck were a little bit more favorable than what we would anticipate, and in the RIS-Spread we had some benefits this quarter from mortality gains, but that will normalize overtime, I think the other thing I'd say relative to that is as you know first quarter it does have some seasonality that depresses our earnings in a few of our lines and honestly I'd say those were two pretty offsetting factors in the first quarter, so if you take out our total company normalizing items, I would say that that's a good run rate to run-off service we go through future quarters..

Nora something to add?.

Well just confirming that we would give what we see today and assuming equity markets cooperate with us to the balance of the year. We would expect both in RIS-Fee and in RIS-Spread to be at the high end of the margin guidance that we gave back at the outlook call..

Tom thanks for the question..

All right that's helpful, thanks..

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

Thank you. On Principal International flows were much improved from the year ago, but down from 4Q 2016. Can you talk about this is there some seasonality of play between 1Q and the rest of the quarters of the year, and then I’ll have a follow-up question..

Okay, John, yeah appreciate that. And I'll have Luis Valdés on that, I mean just as a broad comment as it relates to Principal International’s net cash flows you have countries like China that could be quite disruptive large flows in and out.

We try to call these out and recognize that there is going to be some level of volatility given the size and scope of these operations.

Luis, some additional comments?.

Yeah, thanks John for your question. And let’s stay focus on little bit on the longer term and if you're looking at PI trailing 12 months we put together $9.5 billion in the last trailing 12 months as of March 2017. If you're looking at the supplement, same period March 2016 it's about $7.9 billion, so it’s a 20% increase you know among peers.

So we continue with the very strong Brazilian and solid franchise out of U.S. We do have some seasonality particularly in the first quarter, summertime in Latin America probably a longer good carnival that is needed in breakeven February, but anyway all in all we continue putting solid net consummate cash flows.

And this quarter in particular was a 34th consecutive quarter with positive net cash flow as well Latham. We continue to working on and we believe that we're going to continue put in proceed in that consumer cuts going forward..

John I think you said, you had a follow-up..

Yeah, thank you very much.

PGI definitely saw investment performance rankings improved for three and five year, can you talk about how much of a lag you believe there is between improved investment performance on the long term rankings and resulting improved flows?.

Yeah sure and I'll have Jim respond to you.

Jim?.

We’ve got something interesting one, I mean I think as was commented by Dan in the script nearly all of our boutiques have performance was good enough to be able to be pitching seriously for new business.

So we're not worried about the pipeline, I think the three and five year are actually making us competitive, there is maybe a question mark that one year is not as pretty close to average. And if I can go back to our more normal rating then I think the flows would pick up, but I wouldn't want to make that a big growth story.

I think the growth story is more around our ability to continue growing revenues and earnings, as we did in the first quarter..

That helped you John?.

It is indeed. Thanks a lot..

Okay, thank you..

Your next question is from Seth Weiss of Bank of America..

Hi good morning, thanks for taking the question.

I want to return to RIS-Spread and I understand some of the seasonal benefits that come in the first quarter, but from speaking to the team last night it sounded like mortality was maybe just a marginal improvement versus last year the year ago quarter 1Q 2016, so I'm just struggling to get a run rate down here because the growth in earnings far outpaced the growth in assets when looking over the previous year’s quarter.

So if you could comment on what you think is in appropriate margin level or ROA level for this business that would be really helpful?.

Okay, I'll have Nora do that, but before I do, I just want to remind all the investors out there, but the RIS-Spread business is really an integral and important part of our overall franchise and serving the needs of our customers.

We think there's a natural growth that's going to be coming, because people are going to demand income in retirement, and not only income in retirement guaranteed income or in retirement.

Principal’s fortunate that we do that one of two ways either through the payout business, which is more lumpy and the other of course is by providing individual retail annuities to our customers.

So again I think this is an important conversation to be having, because we typically get caught up on the RIS-Fee talking about the defined contribution plan, so we see this is a real growth driver for Principal in the future.

We've been in it for a very long time, and feel as if we have a lot of skill and knowledge with that I'll have Nora speak specifically to the earnings here in the most recent quarter..

Sure. Obviously we had a really, really strong quarter, but if you look back and that was and that's being driven by that by the growth in the business, no doubt.

But if you look back at our outlook call and look at what we talked about then with regard to net revenue growth at 5% to 10% and then pretax margins at 55% to 60% as we talked about a moment ago, we expect sitting here today looking through full year to be at the high end of that margin based on what we're seeing here in 1Q equally important with regard to net revenue growth again sitting here today looking out at 1Q and projecting forward.

We would expect to be at the high end of that net revenue growth as well.

What was driving some of the high 1Q over and above the strong growth in the underlying business were things like the variable investment income that we called out, we called out a piece of that a $5 million piece of that, but there we also are looking forward it at variable investment income and that and that's what's moderating some of that view.

The mortality gains in 1Q were about $9 million, so on an absolute basis its certainly helped drive 1Q. And again as we look at all those things and project forward, we would expect to be at the high end of that that net revenue growth outlook..

Okay, thank you.

If I could just press on just the profitability there, because even if I take out the mortality games end of the PI above trend, I saw get to a quarterly ROA of about 90 basis points, which is a full 10 basis points to 12 basis points better than what you did in 2016 on an adjusted basis, so just seems that the earnings run rate had a dramatic improvement there, and I'm just having a hard time reconciling it as I think about a run rate..

Let me have Deanna dive down into that one little bit more detail..

Yeah, I think as we pointed to really focus on the return on net revenue versus the return on assets. And I think Nora is correct that the current quarter would be above that range some of that's going to normalize as we go throughout the year we wouldn't expect mortality gains in every single quarter.

And so again, I think the more appropriate way to look at that is the return on net revenue and as Nora mentioned we do as we look through the remainder of the year and consider our first quarter results, we expect to be at the favorable and of our guidance range relative to that return..

Great thank you..

Okay, thank you..

Your next question comes from Suneet Kamath of Citi..

Hi good morning. Just question for Luis we were just noticing during the quarter I think Provida cut its compensation pretty sizably in some asset classes are some products in the quarter.

So just wondering if there is some additional competitive pressure that's going on in Chilean market?.

Yeah, Suneet thanks for that question.

And of course, we monitor every one of these markets very closely, and they all have their own kind of unique aspects and what we would tell you is very consistent, I have Luis comment here in just a minute, from the very beginning when we were identifying the right target in the Chilean marketplace we're looking where we felt like we could have the most long term success, and that had a lot to do with the makeup of Cuprum and relationship to the other potential acquisition we could have made and that's proving out to be the case, and Luis maybe we can delve into that a little bit closer and talk about some the details..

Yeah, sure. Suneet it’s important to keep in mind first that Provida and Cuprum are two important patients companies, but focus on different market segments. So we don't see Provida as a direct competitor that’s number one. And number two, we follow very closely what all those pensions companies are doing in the market, how they position themselves.

And I do really understand whether doing and why they're doing. But having that in our case, Suneet and due to our consumer segment that we're focused on, but in fact is the one that has the highest average balance for costumer in that market, we continue with a more differentiated value proposition to them.

So to our customer, our valuable solution to our customers based on superior long term investment performance, financial advice and excessive customer service, in fact, we have received the number one customer service ranking in the last five periods and we competing ranking number two in the long term investment performance.

So we do position Cuprum in a very unique way in order to be very much more focused on the segment that we serve in Santiago, Chile..

That helps Suneet?.

Yeah does, and then just a follow-up for Luis on the joint market it seems like on these calls we've talked about uncertainty in the pension market for quite a few quarters now.

So I guess what is the outlook there at what point do we think we'll have some stability in that market?.

Yeah you know the whole discussions the pension reform is making that markedly you know kind of an easy bet. First of all let me try to go back and try to put all my comments under into perspective about the Chile and then our to Chile performance in particular.

Our trailing 12 months operating earnings in Chile they believe were $148 million of pretax, this is number one. So it’s a 7% increase over same periods in 2016, same thing for our revenues also growing at 7%. So with all these discussion what I'm trying to say to you Suneet that this is a very resilient you know operation and an asset.

Also we're reporting in this quarter our AUMs are record high $44 billion for our franchise in Chile, and also record high for our AUMs and Cuprum $37 billion that we manage for our costumer, that’s a record point in the whole history of Cuprum.

In that sense we're well aware and we understand that we have been experienced some outflows over the past three quarters, although it's still negative, our first quarter 2017 we have shown meaningful improvements in our retain customers and clients.

And our management team is Cuprum is going to continue to be in laser focus on improving our net customer cash flows within our company.

And again in order to do that, we do rely on our track record as I mentioned to you to serve our customer needs and expectations particularly in the areas like a superior loans investment performance and customer service, so this where we’re and we're going to continue working for. So this is essentially where we are..

Thank you Suneet for the question.

Your next question is from Humphrey Lee of Dowling & Partners..

Good morning and thank you for taking my question.

Just a question on the China earnings contribution, looking at a local currency basis is actually improved by more than 20% year-over-year, I was just wondering how much of that was benefit from you have a make shift in your AUM based shipping to the mutual fund as opposed to the money market fund? And then also in terms of the flows in this quarter from a growth sales perspective, can you share in terms of the mix between the mutual funds versus the money market funds product?.

Yeah, so good question. And your question was a little hard to hear on this in for some reason Humphrey, but I think we've got it generally.

And the reality is this we've worked very closely with China Construction Bank on focusing in emphasizing these long term assets more long term in nature and to discourage really loading up on money market or short term assets, and so that's been a very deliberate strategy, and with that I'll ask if Luis would like to add some additional detail on what it looks like going forward?.

Yes, thanks for your question.

Uncertainly if you're looking our numbers and supplement and growing up of facts regular earnings $13.4 million for China, and but if you're looking our net revenues and if you’re looking the growth of our net rose in China quarter-over-quarter 18% and in consecutive quarter 4%, so we continue online and in trying to put a double digit growth for this year.

The main ship that we are experience it is as any other country, is a very motivated because China is very government policy driven market.

And today and this year 2017 in particular is a year of political transition, so you know a power She is going to renew is the second term so this is the year that the Chinese government they are looking for no surprises to lower the risk to deleverage and the risk that the financial markets.

So in that sense we continue to focus on our strategy those money that flow into our company money market is usual mandate very small fees in that were incidental, but we continue focus on our target market which is to put long term saving products or the middle class in China and these are much more higher fees based and based on mutual funds.

So this is the numbers and we continue transition in that sense..

Humphrey if that accurately answer your question?.

Yeah, I think want I’m trying to get in terms of the gross deposits in the quarter the $46 billion what portion of that would be going into those lower cost in money market funds versus those going to the higher long term - higher fee long term assets..

Probably less than 20% that’s my - but we can go back to you to provide that information very precisely..

Okay, thank you.

And then just one more question if I can, on the life insurance side with the proposal from the White House that potentially be a repeal of a state tax, and then looking at Principal’s life insurance business account, looking at the average policy count, tends to be a little bit on the higher side, so I was just wondering if you have any high level thoughts right now in terms of what a repeal of the state tax would affect your life insurance business in general?.

A good question, and you're right, it will be at a high level, and it will be speculative, because we really don't have much detail out of the White House except to say broadly, they're looking for an across the board reduction in corporate tax rates, to try to stimulate the economy, and I would call your attention in fact that a lot of the discussion has to do with growing and helping small to medium size businesses, so a revised tax policy that stimulates small to medium sized growth for small business, is good for PFG.

I look at it really in two buckets, the first bucket is really around retirement savings, and implications either at the corporate level or the individual level, and I come to this conclusion, employees generally benefit significantly by employer matches, regardless of what the impacts on the tax deferral might be in a 401(k) plan and again it's not a tax deduction and simply a tax deferral they benefit from employer matches, they benefit from payroll deduction and they benefit from institutionally priced products.

So that's a big part of our franchise, as you know Humphrey. The second around is state planning whether they're using life insurance or mutual fund as a funding device for non-qualified deferred compensation, which is another important part of our franchise is key.

And then lastly for key man insurance, I don't see that that goes away, if you have a individual there are two key partners, and it's they're trying to drive the success of the business, life insurance proceeds are what ensure that that business can continue to go on, and a lot of a state planning will see what happens in the ultimate bill whether or not there’s a tax bill or not.

But I just don’t think that Principal has a disproportionate percentage of its business that’s a directly tied to a state planning that there wouldn’t be that additional in needed life insurance protection.

So I would say we think we’re sitting actually in a very favorable position related to the tax reform, again at the core of that is growing small to medium sized businesses.

Is that helpful?.

Yes. Thank you..

Okay. Thank you..

Your next question is from Jimmy Bhullar of J.P. Morgan..

Hi. Good morning. I had a couple of questions. First just on the fee retirement business, you had pretty strong flows this quarter.

And just wondering to what extent that gives you confidence for the rest of the year and are you do you feel that you could exceed your 1% to 3% target on from net flows for the year as a whole?.

Sure. Thank you for that. I’ll ask Nora to fill the blanks in for you..

Yeah. Thanks Jimmy for the question, obviously a really strong 1Q on net cash flow at $2.2 billion and it really reflects two things those strong sales at $3.8 billion and then this continued outstanding retention.

Across all of our planned sizes, we talked about quarterly results being lumpy income, they can be impacted by one or two larger cases decisions we’ve had that discussion before. As you look at that 1% to 3% that we’ve talked about with regard to positive net cash flow as a percentage of the beginning of the year comp value.

It’s important to remember that when we’re in this rising when we were in rising equity markets that can put pressure on that percentage in other words those withdrawal amounts are driven by these higher equity markets, but the payroll base contributions are unchanged by that market growth.

So just from a percentage basis something to keep in mind, but certainly based on what we see today based on the sales pipeline. The expectation that this outstanding retention will continue to see that we’re comfortable in that 1% to 3% range with that caveat around these raising equity markets..

Okay. And then I have a question for Jim on PGI, your flows were flat this quarter, and I think you had some fixed income mandates the matured that happened last quarter as well.

So can you just give us an idea on how much more of this you have as you’re looking at the rest of 2017?.

Yeah. Thanks, Jimmy. On the fixed income mandates there are - there is a steady kind of drip of those because we did quite a few three and five years mandates, three and five years ago. It’s the way particularly Japanese funds tend to be drawn up.

And the challenge we have actually for flows isn’t so much just the drop off at the end of those mandates which is a kind of mission accomplished thing. It’s the challenge of finding further products for them to roll into typically five years after the rolled into this one first time and that’s what we are aggressively working on.

But in terms of quantifying it it’s a study growth group it won’t change much from the position in the fourth quarter last year and the first quarter of this year.

The bigger number has really been the outflows of Columbus Circle and since we’re on flows maybe I’ll mention Columbus Circle had a very, very strong start to this year in terms of investment performance.

The other thing that has been done at Columbus Circle and I have to credit the management there to develop the next group of people and the work for promotions to portfolio manager among the group there. We believe the combination of the revise performance and the management clear signs of succession planning.

I think that’s going to help us get back clients confidence. So that’s the piece that I think will ride the ship by later little bit year. So I’m not pessimistic about the flow outlook..

Thank you..

Thank you, Jimmy..

Your next question is from John Nadel of Credit Suisse..

Hi, hey, good morning. Sort of going to apologize in advance, because I want to dive a little bit deeper into first RIS-Fee and second RIS-Spread.

On RIS-Fee I guess the question is this recurring deposits have just been terrific sort of a steady increasing pace of year-over-year growth in recurring deposits, but transfer deposits sort of inflected this quarter.

And I’m wondering if you could sort of help us understand why and what to expect from that particular line item moving forward?.

So this is Nora, John. When you talk about transfer deposits inflecting transfer deposits were $3.9 billion. Strong on the transfer deposit side, so I mean we maybe are using that term of art in a different way than I typically used that.

But certainly we’re always going to see when we talk about sales there sometimes can be some timing differences between the sale and then the actual transfer deposit when that when those funds come in. But if you take a look, again I would encourage you to take a long term view because quarter-over-quarter you can have a sequential quarters.

You can have timing issues, but as you look at it if you take a long term view of both sales and transfer deposits they have been strong. Recurring deposits that in plan cash flow you talk about those being strong they absolutely a strong that 8% quarter-over-quarter is a very significant growth driver for us.

So the transfer deposits related to sales and then the in-plan cash flow which we call recurring deposits those two things have both done very well over the last several quarters. So I may be missing your question..

No. I think, I understand what they’re both related to I’m just, and I’m not really looking at sequential because I know there can be some impact relative to the timing on the transfer deposit line.

I’m looking at year-over-year 1Q versus 1Q and this past bunch of quarters on a year-over-year basis you’ve had really good growth in transfer deposits this quarter down on the year-over-year basis. But I just wondering if there was anything to point to there that you know we might need to be thinking about..

Yeah. There were a few cases a year ago that timing issue that I discussed where there was a difference in quarter between the sales when we reported sales and when the transfers came in, so that’s that noise that I would identifying and that actually did happen a year ago. So that’s probably what you’re picking up..

John, one of the last comment on our RIS-Fee before we go to Spread in that has to do with where we’re at in the economic cycle and that has to do with new plan formation and we are finding ourselves in that sweet spot right now where we’ve far exceeded the pre-2008 period where there is a lot of new plant formation, which is exciting to us because this is interesting and fun is it is to get a transfer set of an established plan.

Seeing small to medium size businesses grow add new plans and add new participants that’s what’s good for all of America and that’s those are the kind of proof points that we’re on Capitol Hill talking about the effectiveness of the 401(k) model and how it’s working needs to be told. And I think you had a follow-up question on RIS-Spread..

Yeah. I was just going to comment I think I see where your second quarter is going to go. The question on Spread is, and I don’t mean to beat this horse too deeply, I understand you haven’t really good results there.

But if I look at the relationship of net revenue growth which you pointed us to these last nine months on a year-over-year basis you’ve had exceptional 23%, 24% growth on a year-over-year basis in net revenues. Against that the non-benefit related expenses are down on a year-over-year basis sort of low single digits.

And I guess my question is this, how long can you maintain that kind of differential I mean, I know you don’t expect to grow net revenues a 20% something I know your targets 5% to 10%. But can you continue to grow net revenues at a pace that so significantly exceeds the pace of expense growth..

So the first thing I would say is this is a highly scalable business and certainly we’re getting the benefit reaping some of that scale as we grow this business. And again it’s an interesting dilemma to be in exceeding expectations so significantly, which we’ve done in RIS-Spread over and over again the last couple quarters.

But we’ve looked forward and revisited that outlook call and really are confident that yes, we’re in the ballpark we’re going to be at the high end of the range with regard to net revenue growth. Now, will we exceed on margins, will we exceed on that revenue growth certainly possibly that can happen.

But as we look at that business going forward and look at the benefit that the operating leverage that we know we’re going to continue to be able to read that that’s where we guide you back to.

If we exceed that grade, but what sitting here today as we balance both the top line and the bottom line and look at our look at that scale issue that that’s where we come out today..

Nora, can I follow-up on that just real quick as one of the things you did so well as a company at your Investor Day was you talked to us about an outlook for 2017 and also margin outlook longer term and if this is a highly scalable business I’m surprised that the shorter term 2017 margin range of 55 to 60.

Isn’t something higher looking out at that longer term outlook, which is also 55 to 60? So I mean is that longer term outlook really pretty conservative now as you think about what you’re seeing in the dynamics of this business?.

I won’t say it’s conservative. The way I would describe that John is that we continue to have a very strong pricing discipline right now the market is in demand for this type of product we are very disciplined in how we go about setting that price.

We have no reason to believe that the margin is going to expand in the future, we in likewise that there may have been some pent up demand because we have seen interest rates rise in the relatively short term here in the last year or so..

Okay, Dan..

The other thing I would add there is a reminder that we are quite opportunistic in this space both with the full service the pension risk transfer business and our investment only business.

So I think you have to add that piece to the equation as well as we are seeing some very attractive opportunities but don’t forget that these are still opportunistic businesses for us so that that’s another piece of the equation that we keep in mind..

Thanks for the questions, we look for some follow-up conversations, John..

Appreciate. Thanks, Dan..

Your next question is from Ryan Krueger of KBW..

Hi. Thanks, good morning.

I just had a quick follow-up on the M&A discussion and just curious on how would you characterize the M&A environment at this point following the election in generally higher valuations in the market?.

In one word expensive.

I think is the answer there’s a lot of inflated values associated with most of the businesses that we’re in whether it’s the group benefits business and you see some of these transactions on annuity blocks and life blocks we’ve seen it certainly on the asset management reality there hasn’t been a lot of transactions, I would tell you that we’ve got a good set of eyes work very closely with the industry investment bankers to understand what’s going on across all the continents and again we put in place with Tim Dunbar’s leadership a very strong and disciplined approach to reviewing these opportunities and we doable proactively as well as those things that maybe we didn’t display would come to market.

But the values are inflated and we’re going to grow the company either through organic acquisition or through M&A. And right now, the best way to deploy our capital seemingly is around more organic growth.

Is that help?.

Yeah. It’s helpful. Thanks a lot..

Okay..

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

It just a couple of quick comments, we just finished up with a series of visits with a lot of our distribution partners and advisors and there’s something they kept reminded me - reminding me about as a related to the deal well change in general we do now have a new secretary of labor appointed and we’re excited about that.

But they make the point that they really are about financial planning, helping with life and disability protection, wealth distribution strategies, asset management strategies, education funding and securing the customers, financial future. That’s the business we’re in. We manufacture of those products and solutions for our advisors.

So regardless of the Reg tax regulatory changes the demand for these products that we’re engaged in is not diminished and of course our target market of small to medium sized business and individuals fits that very well.

So we look forward to coming out chatting with you over the course of the next quarter about our strategy again very pleased with the transition between Terry and Deanna, and again we’ll see out on the road. Thank you for taking the times when you listen story..

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