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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning and welcome to the Principal Financial Group First quarter 2019 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 the Principal Financial Group's First Quarter Conference Call. As always materials related to today's call are available on our Web site at principal.com/investor. I'll start by mentioning two changes to our first quarter financial supplement.
As a reminder effective January 1, 2019, we changed how we allocate certain expenses and net investment income among the business units. These changes were evaluated in conjunction with the enterprise wide global financial process improvement project. Results for prior periods have been recast so that they are on an comparable basis. There was no impact to total company financial results. Also effective January 1, 2019, Claritas our investment management company in Brazil with approximately $1.4 billion of assets under management moved from Principal International to Principal Global Investors. This realignment results in deeper integration with PGI's global distribution and stronger connectivity to the shared services and investment teams within PGI.
I also want to note that with the planned acquisition of the Wells Fargo Institutional Retirement Trust business, we are currently evaluating our reporting structure and financial supplement to best reflect the combined organization. The acquisition is scheduled to close third quarter 2019. Following the reading of the Safe Harbor provision, CEO, Dan Houston; and 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 Renee Schaaf, Retirement Income Solutions; Tim Dunbar, Global Asset Management; Luis Valdez, Principal International; and Amy Friedrich, U.S. Insurance Solutions. 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 strategies. Risk and uncertainties that could cause actual results to differ materially from those expressed or implied or discussed in the company's most recent 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 may be found in our earnings release, financial supplement and slide presentation. Dan?
Thanks John, and welcome to everyone on the call. This morning, I'll share some performance highlights and accomplishments that position us for continued growth, including the planned acquisition of the Wells Fargo Institutional Retirement and Trust Business that we announced April 9. Deanna will follow up with details on our financial results and capital deployment. First quarter was a good start to the year for Principal. We continued to expand our distribution network and array of retirement investment and protection solutions, advance our digital business strategies creating value for customers and gaining efficiencies, balance investments in our business with expense discipline, be good stewards of shareholder capital, and deliver strong results despite ongoing revenue pressure.
At $400 million, non-GAAP operating earnings were down 2% compared to a very strong first quarter 2018 but up 27% on a sequential basis reflecting a strong rebound in macroeconomic factors. On a trailing 12-month basis, non-GAAP operating earnings were nearly $1.6 billion up 5% from the year ago period reflecting 2% growth in non-GAAP pre-tax operating earnings and a lower effective tax rate.
Compared to a year ago, total company reported assets under management or AUM increased nearly $2 billion to a record $675 billion. Excluding the impacts of foreign currency exchange and operations acquired and disposed during the trailing 12 months, AUM would have increased by $29 billion or 4%.
On a sequential basis, AUM increased $49 billion or 8%. Asset appreciations added $43 billion to AUM in the first quarter more than offsetting the $34 billion drop in the fourth quarter from unfavorable market performance.
We've also increased AUM in our joint venture in China to a record $158 billion in the first quarter. This is an increase of $14 billion or 10% compared to a year ago despite a negative $8 billion impact from foreign currency exchange. As a reminder, China isn't included in our reported AUM.
As further color on our asset management franchise, we again received some noteworthy third party recognition during the quarter including multiple best fund awards from Lipper. Additionally, at the Asia Asset Management 2019 Best of the Best awards, CIMB Principal was recognized as the Best Asset Management House in the Association of Southeast Asian Nations and was awarded Fund Launch of the year, and in Chile we were recognized by Morningstar as the best equity fund manager in 2018 for having the best Latin American equity fund in 2018.
Principal Real Estate Investors recently received the Partner of the Year Sustained Excellence Award for continued leadership and superior contributions to Energy Star. This reflects our longstanding commitment to responsible property investing and our focus on high-performing energy efficient buildings.
Slide 5 highlights the improvement in our investment performance. At the end of the first quarter, for our Morningstar rated funds, 81% of the fund level AUM had a four or five star rating, and 83% of the principal actively managed mutual funds, ETFs, separate accounts, and collective investment trusts were above median for a five year performance, at 53% above median, for the one-year performance, and 66% above median for the three year performance, we delivered 12 and 14 percentage point improvements respectively compared to the year-end 2018. These gains reflect a rebound in our international equity strategies, which as discussed at the fourth quarter call, were also dampening performance of our target date solutions.
Given our focus on long-term strategies, it's important for us to maintain conviction in our investment process. It's reassuring when performance recovers after short downturns. Moving to total company net cash flow, we delivered a positive $5.5 billion in the first quarter relative to outflows in the sequential and prior year quarters. RIS delivered $4.1 billion of net cash flow, its fifth consecutive positive quarter and the second best quarter on record. This was driven by record sales, strong retention, and recurring deposit growth in our RIS fee, and RIS spread sales increased $1.2 billion or 139% compared to the year ago quarter.
Principal International generated $800 million of net cash flow, its 42nd consecutive positive quarter and $1.7 billion of positive net cash flow from our joint venture in China that is not included in reported net cash flow. PGI sourced net cash flow turned positive in the quarter and nearly $300 million after five consecutive quarters of net outflows. First quarter was the best net cash flow quarter for our U.S. retail mutual fund business in more than two years.
As we've discussed on prior calls, we have approximately $3 billion in the at-risk investment grade bond strategy with a single international client in PGI due to high currency hedging cost. We expect the client to withdraw the entire amount over the course of the second quarter. We continue to manage other assets for this client in other strategies where hedging costs can be more easily absorbed. The client continues to award us additional mandates reflecting the ongoing strength of the relationship. As we're all aware, of the asset management industry and PGI continues to experience pressure including increased demand for lower-cost investment options and volatility in capital markets. We’re pleased with our headway on multiple fronts to address these industry pressures.
We're starting to see benefits emerge from restructuring our distribution teams. We continue to add key resources and we're building our business intelligence to help inform our sales process positioning us for increasing success in key institutional retail markets. Other progress in the first quarter included the launch of more than a dozen new investment strategies across our U.S. and international platforms with the vast majority in Latin America and Asia. I'm particularly encouraged by the continued collaboration between PGI and Principal International in these markets.
We also launched the Principal Guaranteed option during the first quarter expanding our lineup of fixed income investment solutions for retirement plans. This new option offers a compelling crediting rate and seeks to preserve capital and support performance through differing market cycles. It's also portable. Customers can maintain their investment even if the plan moves to a new record keeper.
As a notable ETF development, we created a guided approach to factor investing to help customers achieve their unique goals. We partnered with NASDAQ Dorsey Wright for the first time to launch the Principal NDW factor rotation model portfolio. We also earned nearly 30 total placements in the first quarter with more than 20 different offerings on 16 different platforms. This reflects our continued success getting our investment options added to third-party distribution platforms, recommended list, and model portfolios.
More broadly, we continue to see strong interest in our specialty, solution-oriented and alternative investment capabilities as we help clients diversify, build wealth, generate income, protect against downside risks, and address inflation.
Now, I will share some key execution highlights starting with our planned acquisition of the Wells Fargo Institutional Retirement and Trust Business. As of year-end 2018, this business had more than $825 billion of assets under administration across several retirement and non-retirement products including Defined Contribution, Defined Benefit, non-qualified executive benefits, institutional trust and custody, and institutional asset advisory. This doubles our footprint of our U.S. retirement business, increasing our retirement assets to over $500 billion and will serve a combined 7.5 million participants making us a top three retirement plan provider.
Given the current competitive environment, it could have taken us more than a decade to grow participants to this level organically. Beyond adding scale to our retirement businesses, the addition of the non-retirement trust and custody offering adds a diversifying revenue source. Importantly, the acquisition is expected to generate $425 million of run rate revenue for Principal once fully integrated in 2022.
The acquisition is clearly strategic further enabling us to capitalize on one of the largest opportunities in financial services, U.S. retirement savings and retirement income markets. This acquisition will solidify our leadership and enhance our position in pension reform discussions around the world. We look forward to serving our new customers and working with new employees and new advisors.
As part of our accelerated digital investments, we launched simple invest during the quarter. Our first product with robust wealth, the solution introduces robo advisor services for retirement savings and retirement income. While we've provided education guidance to our customers for many years. This is our first foray into digital advice for our U.S. retirement business initially we're focusing on participants who are retiring or changing jobs where we are the plan provider. It's designed for participants who don't have an advisor or prefer to do it themselves over the long-term, the addition of Wells Fargo institutional retirement business only magnifies the potential opportunity.
We recently became the first retirement plan provider to offer voice activated financial wellness and retirement readiness education. With our February launch of a weekly Principal flash briefing through Amazon Alexa. We launched a new onboarding experience for retirement plan participants last November nearly 70,000 people use the tool in the first quarter.
Early results show that we are improving retirement outcomes. Average deferral rates exceeded 7% with more than one in four participants at 10% or higher and at 26% the take up of the automatic savings increase is twice the rate of our existing block of participants. And our protection businesses, we continue to invest in initiatives that make us easier to do business with. Our specialty benefits call center chatbot is now giving general providers more convenient access to answers while reducing call volume.
We've also debuted edelivery of our term life insurance policies enhancing the experience for both the customer and the advisor. Deanna will cover this in more detail, but I want to emphasize our balanced approach to capital deployment in addition to ongoing investments in organic growth, strategic acquisitions and our accelerated investment in digital business strategies, we continue to return capital to shareholders.
In the first quarter, we returned $280 million to investors through common stock dividends and share buybacks bringing our trailing 12-month total to more than $1.2 billion. I'll also share some additional recognition for the quarter.
Forward's name Principal one of America's best employers for diversity. For a fourth consecutive year Principal earned a perfect score on the human rights campaign's Corporate Equality Index making us one of HRC's best places to work for LGBT equality. For the ninth time [indiscernible] Principal as one of the world's most ethical companies. And for the 18th time, the National Association of Female Executives named Principal one of the top companies for executive women. This speaks volumes about who we are as a company and why we're going to be successful long-term.
In closing, again, first quarter was a good start to the year for Principal. We continue to make steady progress in helping customers and clients achieve financial security. I expect us to build additional momentum throughout 2019 and for that to translate into long-term value for shareholders and each of our stakeholders. Deanna?
Thanks Dan. Good morning and thank you for participating on our call.
Today I'll discuss key contributors to our first quarter financial results and I'll provide an update on capital deployment. The first quarter was a good start to 2019 with net income attributable to Principal of $430 million, an increase of 8% from the prior year quarter. Non-GAAP operating earnings were $400 million or $1.43 per diluted share in the first quarter.
EPS increased 2% compared to a very strong first quarter 2018. Our non-GAAP operating earnings effective tax rate was 16.4% for the first quarter at the lower end of our 2019 guided range of 16% to 20%.
ROE excluding AOCI other than foreign currency translation adjustment was 13.4% on a reported basis. As a result of favorable macro economic conditions, we had three significant variances during first quarter with a positive $33 million benefit to reported non-GAAP pre-tax operating earnings.
The significant variances included $15 million of lower DAC amortization and RIS fee due to the point to point increase in the equity markets, $13 million of higher than expected encaje performance in Principal International and $5 million benefit from the net impact of inflation in Latin America also in Principal International excluding significant variances in both periods, total company non-GAAP operating earnings of $376 million increased 6% from fourth quarter 2018, but decreased 10% from the very strong year ago quarter.
Looking at macro economics equity markets started the year strong with a 13% increase in the S&P 500 Index during the quarter. Despite this, the Daily average increased only 1% compared to fourth quarter and decreased slightly from the year ago quarter. As there was only a slight increase in the daily average, revenue and earnings did not receive much of a benefit from the positive market performance in the quarter. Foreign currency exchange rates created a headwind of $10 million for Principal International's pre-tax operating earnings relative to the prior year quarter, but were a slight benefit compared to fourth quarter 2018.
Mortality and morbidity experienced for RIS spread and specialty benefits were in line with our expectations, but less favorable than first quarter 2018. Seasonality impacts our first quarter results in both PGI and specialty benefits. As expected, PGI had higher compensation costs in the first quarter. That said, PGI's total operating expenses were lower than a typical first quarter.
Also as expected, specialty benefits experienced higher dental and vision claims and higher sales related expenses in the first quarter. As a reminder, first quarter 2018 benefited from an extremely low and unsustainable individual disability loss ratio. We expect annual earnings and specialty benefits to emerge approximately 45% in the first half of the year and 55% in the second half of the year with the seasonality concentrated in the first quarter.
The following comments on business unit results exclude significant variances from both periods. On a trailing 12-month basis excluding the annual actuarial review and encaje performance, pre-tax margins for all business units were within or above the 2019 guided ranges. Expenses continue to be well managed even with our accelerated digital investments and other ongoing investments in the businesses.
Pre-tax operating earnings for all businesses with the exception of corporate were in line with our better than our expectations for the quarter. RIS fees underlying business fundamentals continue to be strong compared to the year ago quarter, sales were up 30% to a record $5.4 billion, recurring deposits grew 9% with an 11% increase in deferrals and a 14% increase in employer matches. Defined contribution plan count increased more than 3% or over 1200 plans and defined contribution participant count increased 9% with nearly 300,000 net new participants.
During the quarter, RIS spread had $2.1 billion of sales more than doubled the prior year quarter. Fixed annuity sales were $800 million and we had record first quarter pension risk transfer sales of $600 million. The pipeline for pension risk transfer sales remained strong for 2019.
U.S. insurance solutions also started the year with strong sales including record sales and specialty benefits. We continue to grow and deepen relationships with customers as we increase lines of coverage and our group benefits block by 13% from the prior year period. PGI's pre-tax operating earnings declined 11% from the prior year period to $101 million. This was primarily due to lower fee revenue due to a decline in average AUM resulting from muted market performance, negative net cash flow and operations acquired and disposed over the trailing 12 months.
At$84 million corporate pre-tax operating losses were higher than our expected run rate due to normal quarterly volatility and expenses. For full year, we do anticipate corporate losses to be above the high-end of our 2019 guided range of $300 million to $320 million. This is primarily due to the impact of the planned acquisition of the Wells Fargo Institutional Retirement Trust business and higher security benefit expenses due to the market decline at the end of 2018. After we closed the acquisition, we'll have transaction cost and additional interest expense from our new debt issuance as well as lower investment income from using available capital to finance a portion of the acquisition.
As shown on Slide 12, we deployed $280 million of capital during the quarter including $150 million in common stock dividends and $130 million in share repurchases. We expect to deploy well above our $1 billion to $1.4 billion capital deployment range in 2019 after taking into consideration the $1.2 billion that we committed in April for the planned acquisition of the Wells Fargo Institutional Retirement and Trust business.
We anticipate the acquisition to close in the third quarter of 2019 and we are evaluating our reporting structure and financial supplement to best reflect the combined organization. As shared on the acquisition announcement call, we have suspended share repurchases and expect to resume no later than first quarter of 2020.
Last night, we announced a $0.54 common stock dividend payable in the second quarter a 4% increase from a year ago. On a trailing 12-month basis, we have approximately a 4% dividend yield and we're at our targeted 40% net income payout ratio.
During the quarter, we made the decision to lower our long-term [NIIC] [ph] risk based capital target by 20 percentage points with the midpoint of our range now at 400%. As a reminder, at year-end 2018, our RBC ratio was reduced by 45 percentage points as a result of a change to the NIIC formula associated with U.S. tax reform.
Our capital and liquidity positions remained very strong. At the end of the first quarter, we had $1.1 billion of available capital in the holding company, $400 million of available cash in our subsidiaries and $200 million of capital in excess of our new RBC midpoint of 400%. The financial flexibility we've created allows us to execute the Wells Fargo transaction without compromising our liquidity and leverage targets.
We have no meaningful debt maturities until 2022 and our leverage ratio is expected to remain within our 20% to 25% targeted range. Whether through strategic acquisitions organic growth or investing in our businesses, we continue to prioritize investments that position Principal for long-term success.
This concludes our prepared remarks. Operator, please open the call for questions.
[Operator Instructions] The first question will come from Humphrey Lee with Dowling & Partners. Please go ahead.
Good morning and thank you for taking my questions. A question for Renee regarding. RIS fees, flows obviously were very good in the quarter, transfer and recurring deposits were strong. But one thing that's notable is the withdrawals came down meaningfully compared to the past couple of quarters. Can you talk about the driver for the improvement and kind of what you think about the net flows pictures for the balance of the year?
Yes. Humphrey thanks for the question. It really was a great quarter for RIS full service, and Renee is in an ideal position to respond to your question.
Thank you, Humphrey. Yes, you're correct. If you do look at our withdrawals for first quarter 2019, they are favorable. And if you were to dissect that a little bit further, you would see that our plan sponsor or the contract withdrawals in particular were very favorable. One thing to know, though is, as you make a quarter over one year ago quarter comparison, we did have a relatively large plan withdrawal in first quarter 2018, so that needs to be taken, excuse me, third quarter -- excuse me, first quarter. Pardon me. And so that would have to be taken into consideration as well, but it was a very good net cash flow quarter overall.
I guess, are you doing anything different in terms of client retention or anything like that that helps to foresee the more favorable withdrawal activities?
I would say, Humphrey, that if you were to look at our overall model, we continue to invest in the customer experience and you see this in several different ways. We've made consistent digital investments into creating new tools that would make both the plan sponsor and the participant experience better. So, from a plan sponsor perspective, for example, investing in the chat features, investing into new tools that would allow the plan sponsor to better serve their participants using online capabilities certainly lead to a better experience and better retention. And the same thing is true in the participant side. So I would say that the favorable retention results that you see here reflect a very strong underlying business model.
Yes. The only thing I might add Humphrey to that impressive list of things that Renee and her team are doing is, if I look at it, it's still 50% of the sales are total retirement suite. They find great value in combining deferred comp, defined benefit, and defined contribution. Also, I think that the new tool that was rolled out within the last six months called Picture that allows our sales reps to be more fluid in their sales presentations to prospective clients and advisors, very positive feedback from the market. And then, also noteworthy, a 12% increase in the number of new advisors we're working with in this current period. So I think across every one of the important metrics around leveraging technology and our position with our alliance partners we've got good momentum. So thanks for the question Humphrey.
I appreciate the color. Just a follow up on PGI. So you've talked about the $3 billion outflows. You saw and I understand that they have very low fees, but I was just wondering, can you size the earnings impact from that outflow, and then on the flip side, the new mandate that you're getting from the same clients, do you expect that to offset the earnings impact from the $3 billion outflow?
Tim, you’ve got a quick response.
Sure. Thanks for the question, Humphrey. I think as we've talked before, this is a good relationship with a really good client. We continue to see interest in higher-value added strategies that fit well with the hedging costs that they're seeing today. We don't quantify exactly how much we're losing in terms of the fees related to the $3 billion, but I would say the new mandate goes a fair way to replacing that revenue.
Thanks for the question.
Thank you.
The next question we will come from Erik Bass with Autonomous Research. Please go ahead.
Hi. Thank you. For RIS fee, looking at the adjusted return on net revenue ex the favorable DAC this quarter, looks like they are still at the high-end of the guidance range for the year even though fee income was still dampened a bit by market. So just wondering if there’s anything else that boosted results this quarter or do you think margins at the higher end of the range are sustainable going forward?
Renee?
Yes. Thank you for the question Erik. When we look at the 30% return on net revenue for our first quarter, we're not seeing anything unusual that would boost the results there. And so, when we look forward for the remainder of the year, we think our guidance of 26% to 30% remains very appropriate.
Thanks. Got it. And then another question for RIS shifting to the spread side, PRT activity was strong both for you and it looks like across the industry in 1Q, I’m curious what you think is driving this and does it suggest that we're on pace for just a really strong sales year or is that a pull forward of activity?
I think it's a great question. I'll have Renee answer it, but I will say that it's been interesting to me as we've seen these interest rates go up and sort of tested 3.25, 3, and knocking on the door at 3.5, and they've fallen back. I think again, it just sort of wakes up. These things are normally in process. They're in motion. They're -- they've already sort of aligned their thoughts with things they want to unload this liability from their balance sheet, and frankly it not only was a good quarter but it's an incredibly strong pipeline for the balance of the year. Renee?
Yes. Erik, just to give you a little bit of color about the sales that we saw in first quarter. We did see about $600 million of pension risk transfer sales and this was not dominated by a single large sale. This was really many smaller sales that are smaller sized transfers that fall comfortably within our sweet spot.
We do continue to see a very robust pipeline for PRT and the other thing that I would, I think is very interesting when you look at the industry. There's about $3 trillion of defined benefit or pension corporate plans out there. And only a very small portion of that has been derisks from corporate balance sheets. So I do think we'll continue to see strong pipelines moving forward. We will also continue to be very careful and very disciplined as we look at these opportunities to make sure that the risk profile and that the returns are well within our comfort range.
Sure. Thanks for the questions.
Thank you.
The next question is from Alex Scott with Goldman Sachs. Please go ahead.
Good morning. First question I had was just on PGI on the fees. I mean just looking at the fee rate quarter-over-quarter, I mean doing a calculation it seems like it dropped more than it has sequentially for a while now. So I'd just be interested in any commentary was there any kind of repricing activity that maybe drove that. Does it have to do maybe just with the fear of fee days or something like that? I'm just trying to get a feel for -- if there is more pressure there or if it's just something with the calculation?
And certainly mix comes into that as well Tim you want to go and take that.
Sure. So the fee rate did drop as you suggest for the first quarter here and I would say the large majority of that is related to transaction fees. Those are predominantly on commercial real estate. So if you think about first quarter after that sort of volatile fourth quarter commercial mortgage loan activity got started off at a slower pace. I would say that's picked up dramatically and we're seeing that come back. So, we don't see that being a long-term issue throughout the year.
We also had a little bit less than what we would have seen in performance fees. And then, as you suggest there has been fee pressure in the industry and we've continued to update our fee level but that's been -- and so you've seen a little bit of that but that's been a much smaller component of it.
That's helpful. And then, my follow up question is, just in the corporate segment, compensation and other came in a bit higher, I guess can you add dimension, how much do you expect to continue, I mean is the 300 to 320 range for the full year still so a good way to think about it.
Yes. It's a good question and one of course Deanna is in a good position to respond to.
Yes. Thanks Alex. As I mentioned on earlier on the call, we do now expect to be above the guidance. So really have a larger [indiscernible] two drivers of that, one that was seen in the first quarter and one that will more play out towards the end of the year. The one that was seen in the first quarter was that we did have higher security benefit pension expenses. That was not known at the time of the outlook call it really gets determined really on 12/31. And due to the market decline that increased our GAAP expense for the pension plan and that will continue as we go throughout the year.
The other driver and corporate will actually be due to the impacts of the Wells acquisition. So we will have some one-time transaction costs that will come into corporate. We'll also have the additional financing costs due to our debt issuance and we'll also have some lost investment income due to lower excess capital as we fund that acquisition. And so that will cause us to be above that original targeted range of 300 to 320. I would say that the first quarter loss is a good proxy, absent the impact of the Wells transaction. But as you have seen in corporate for many, many years, this will obviously be very volatile quarter-to-quarter.
Appreciate the questions Alex.
Thank you.
The next question is from Jimmy Bhullar with JPMorgan. Please go ahead.
Hi. Good morning. First, I just had a question on asset management flow. They obviously turn to positive this quarter after I think five straight quarterly decline. So does this have anything to do with any of the management changes or the initiatives you've been undertaking over the past year in the business or just if you could give some color on what drove this?
Yes. We're excited about the change in direction and Tim and Dunbar and Pat Halter, I think have just done an extraordinarily outstanding job Jimmy looking under the hood of PGI and understanding where some efficiencies in distribution could be gained. And so there has been some realignment and I'd also tell you that the group is highly motivated and excited about the leadership. With that I'll ask him to fill in the blanks.
Jimmy thanks a lot for the question. And we have talked a lot about some of the management changes we've made, some of the structural changes and really trying to align the group with our clients. And so really the focus has been in creating that long-term relationship and bringing to bear all of the solutions that are diversified boutique model brings. And so we are starting to see some positive signs of that placements on platforms of some of our products. And really for this quarter one of the things, I'm probably most excited about is that the range of products we've seen positive flows and has really been something that we've been trying to achieve. So not only did we see some of our yield oriented products like preferreds, high yield, diversified real assets see positive flows, but even a lot of our equity products.
So REITs, blue chip which has a large cap U.S. equity product really sets some decent flows, equity income and small cap international, so really across a broad range of capabilities. And so we're optimistic about the future. Obviously second quarter we'll have some headwinds with a client that's leaving, but for the second half of the year, we still feel good about that then net cash flows.
Okay. And then, there's a lot of talk about new pension regulation, secure act and how that affects smaller employers. Do you see that as more as an opportunity or is there a threat in there as well that the potential sort of better bargaining leverage on the part of smaller employers as they can combine to offer a retirement plan.
Jimmy, we spent a lot of time on this topic, it's an important one not only important here in the U.S. but there's a lot of pension regulation changes occurring around the world. But, the idea of the MEPs, the multiple employer plans. We've been in that business for a long time. We understand exactly how to execute on that strategy. And our vantage point is, if it increases coverage and it increases adequacy for American workers, we want to pursue that. It's just good policy. But I'll ask Renee to add some additional color on how we're executing on that strategy. Renee?
Thank you, Jimmy. As Dan said that we're very excited about the potential of what could evolve with pension reform in the United States. And the open MEPs is just one of the aspects that we think will extend coverage to smaller employers. But there's another aspect of this reform that I think is very important and we believe will serve Americans well and that is better positioning the annuity to be a part of retirement plans moving forward. As you know today, it's not clear there's not a safe harbor plan design for plan sponsors to add the annuity option [indiscernible] defined contribution plan. So we really believe that it's in the best interest of Americans to have this kind of income guarantee available to them moving forward. And so, we're excited not only about the open MEPs, but also about the ability to provide that higher through retire solution to the U.S. worker.
Thanks Jimmy. Great questions.
Thank you.
The next question will come from John Barnidge with Sandler O'Neill. Please go ahead.
John, you there?
Sorry. My phone is muted. Specialty benefits on increase in lapse rates for group life and incurred loss rates for group dental as compared to a year ago. Can you talk about what you're seeing there a little bit please?
Yes, absolutely. Amy please?
Thanks for the question, John. I think what we're really getting at here is probably mostly a comparison issue. I think Deanna mentioned it in her comments before, but we typically see a lot of first quarter seasonality from our dental vision line. And last year first quarter we didn't see quite as much of that. I would say we're back to normal seasonality for dental and vision for first quarter of this year. For group disability in terms of the loss ratios, first quarter last year was unusually low. We had a lot of moving pieces happening first quarter last year that kind of made things a little noisier product by product. But I would say we're back to something at this point now that we feel like is indicative of a pretty good run rate. So always a reminder too on loss ratios given the seasonality, given the things that can happen quarter-by-quarter in these businesses, trailing 12 months tends to be a good guideline to go back to.
And well within the ranges.
Yes. And then lapses. Did you have a lapse question as well John?
Yes. I did. Thanks.
Okay. Let me get at the lapse question then Q. One of the things that will happen with the businesses from quarter-to-quarter, we can have larger cases that have some impact into our lapses. And so when I look at Group Life, Group Life for first quarter of this year was impacted by some larger case lapses. Keep in mind that as we look at the business we look at what rate we need. We asked for rate increases against that business and when I look at our Group Life Lock, we are increasing the profitability and performance of that block. So I'm comfortable with any lapses that happened first quarter.
Great. And then my follow up sticking with the group a bit, it's really strong sales continued a lot of the progress seen. What are you seeing there on the pricing competitive landscape and where you're maybe seeing demand come from? Thank you very much.
Amy?
Right. So that the landscape is competitive but not irrational in the markets that we're in. So, keep in mind in the markets that we're in, we're mostly in that small to medium sized marketplace. So, we don't tend to be in that larger and we don't tend to be in the jumbo case on the hunt for some of those jumbo cases. And so, when I look at the pricing we're able to typically get the type of price that we want on a really attractive growth rate. I would come back to I think we do the fundamentals of the business really, really well especially in the small market. In fact I'd argue in the small market we're probably one of the best total offerings out there in terms of total value.
Appreciate the questions John.
The next question will come from Ryan Krueger with KBW.
Hi. Thanks. Good morning. I had a question on the Wells retirement acquisition more strategic. In the past, they typically seemed more cautious on a larger case record keeping business, so was hoping you could give some perspective on how and why your view on that has changed now?
Ryan thanks for that question. Well, I can't tell you how excited we are about welding the Wells Fargo institutional retirement and trust business to Principal for a lot of different reasons. We actually as you've pointed out have focused on that small to medium with a modest amount of large plans. And then, if you looked at their block, it really inserts nicely because we actually have more jumbo cases than Wells Fargo has. So there was a little bit of a gap in our sort of total lineup. So we're excited about what that feels. Additionally as was mentioned in the prepared comments, the fact that they have this trust business gives us some additional flexibilities.
I would also tell you that the fact that they have an ESAP program in place, a non-qualified structure in place. It just fits like hand in glove in terms of our existing structure. So other than size, it is also additive and that they have historically worked with a group of advisors, consultants that maybe weren't first top of mind for Principal and given our strategy in terms of bringing over a large percentage of the relationship managers and the consultants, relationship management teams et cetera. We feel that we can really create a seamless transition for the advisors, for the clients, for the participants and just frankly add a whole lot more value. And with that, I realize I took quite a bit of time Renee. But we'd love to have you make some additional comments.
Yes. Thank you. Yes, I would agree with Dan's comments. This acquisition is really ideal from so many different perspectives. First off, it reinforces our commitment to the retirement industry. And when you look traditionally at the capabilities that we've brought to the marketplace, from a record keeping perspective, we serve a wide range of clients in terms of size, in terms of makeup, in terms of the various characteristics and needs.
And so having the ability to add scale to our recordkeeping platform makes us that much more competitive, the ability to lower the unit cost, the ability to scale our platforms to allow us to remain competitive in the industry to continue to invest in this business and to deliver favorable margins. The capabilities that we're adding in the large planned market are very attractive to us. Adding abilities in the consulting channel again is very important.
And the last thing that I'll mention is, we also have access to a very experienced and talented employee pool and I can't stress that enough. We had the opportunity this past week to invite about 100 of the Wells Fargo institutional retirement and Trust Team members into the line. And I can't tell you the level of energy and enthusiasm that we had amongst the group. And what struck me was the commonality that we all have in terms of keeping the customer at the center and making sure that everything that we do is customer-centric and will advance our ability to serve both the plan sponsor and the participant in the years to come. So we're very excited about this transition and the acquisition.
Great. Thank you very much.
Thank you, Ryan. Appreciate it.
The next question will come from Andrew Kligerman with Credit Suisse. Please go ahead.
Hey, good morning. Maybe just staying on RIS fee for a bit. Just in terms of the fee levels maybe you could give a little guidance as to where you kind of see that going in the next year or two, we kind of do a calculate. We calculated 66 basis points of fees and other revenues divided by average assets in '17, and then it was 63 last year. And we will get this quarter and it was about 58 basis points and I know that it has something to do with the average daily balances versus 59 in the prior quarter. But, maybe you could just give us a little color on where you see that going over the next one or two or three years.
Happy to cover that, Renee?
Sure. First off, let's maybe take a look at what happened in first quarter and then I'll make some comments about where what we might expect moving forward. But when we look at first quarter and you compare that to a quarter one year ago. The first thing to keep in mind is that the S&P daily average was down about 0.5%. And so that of course had a very -- that muted market performance had an impact on the year-over-year fee levels that you can expect for us to deliver. So, a portion of that of the gap there was about a 6% gap year-over-year, a quarter-over-quarter rather. So most of that again as a result of a very muted market performance.
The other thing that I would draw your attention to is, when we mentioned this in our outlook call, we anticipate seeing about a 1% to 2% decline in fees as a result of commissions beginning to transfer to fees paid to advisors. And what this does is it, it reduces the net revenue, but it also reduces the commission line, so that the impact to the pre-tax operating earnings remains the same and the impact to the margin remains the same.
And just a quick commentary on that trend, we view that very favorably. It absolutely isolates the advisor, compensation and makes that very visible to the plan sponsor and it removes it from a conversation that's necessary as we think about our fees with the plan sponsor. So, we would anticipate that kind of activity to continue. So, then looking forward, historically you've heard us talk about that 5% to 8% gap between growth and account values and growth in net revenues. And that's the result of the typical pressures within the industry on revenues that results from decoupling the recordkeeping decision from the investment management decision, the open architecture reduction and investment management fees due to passive investing things of that nature.
We envision that that's a reasonable guideline moving forward. So, we would say, you can expect to see about a 5% to 8% gap due to simple industry revenue pressures as well as maybe a 1% to 2% shift due to commissions moving to a fee-based compensation arrangement.
Andrew, I think it also speaks to why we feel we have to have scale on these businesses for this very reason.
Got it. And very helpful. And then, just the next question actually maybe I could sneak a one liner before the next question. But just the tax rate at 16 were and Deanna talked about 16 to 20 guidance. Can we expect the low end going forward? And then just shifting over to just staying on pension risk transfer. Maybe talk about the level of competition in these smaller accounts. You mentioned that the pricing is better than the jumbo, but how many competitors do you see when you typically go after one of these smaller PRTs. Is it aggressive?
Yes. Let me take both of those, I would say that the tax rate we still think is going to be well within the range. I wouldn't want to speculate at this point in time on a full year basis, but when we look at the tax rate on the lower end, but well within the range. On the pension risk transfer business there really does break into two different groups large and small. Think about kind of below $0.5 billion and greater than a half a billion. And I would say in each case there's about a half a dozen key competitors we know who they are. We know how they get to where they're at. We're still getting what we consider to be a very nice return on invested capital in these lines of business. There are a few more competitors today than there was two or three years ago, but it is a competitive marketplace. But we think we're getting more than adequately compensated for the use of the capital for this line of business. And again very committed to it. Appreciate the question.
Thank you.
The next question will come from Thomas Gallagher with Evercore. Please go ahead.
Good morning. Another follow up on RIS fee. So it looks like it is going to be related to I guess the comment that you made about that 5% to 8% gap in revenue growth versus asset growth. But, if I look at the disclosure that you have between plan sizes, it looks to me like either all or vast majority of your growth in flows is coming from a thousand lives and in larger plans. If I just look at either playing grow or asset growth. Is that a fair characterization, I mean are you sure in terms of the business that's a thousand lives and smaller. Are you actually seeing net outflows overall. And can you talk a little bit about what the economic difference is, if revenue field for these large plans versus mid to small.
Yes. We actually see good net cash flow in each of the market segments, but I'll have Renee speak specifically to your question Tom.
Yes. Thank you for that question Tom. When we look at the mix of business that we have between the larger plan and the smaller plan, we're actually seeing good growth in both of these segments. And certainly the retention of clients in both of these segments remains very positive.
In any one quarter, we will tend to see sales migrate just naturally, we'll see some volatility or some difference in the mix of the business that we sell. So, for example in first quarter if you look at that record $5.4 billion of sales, you'll see that it is not dominated by any single large plan at all. But there's a really nice mix of the midsize plan. And that will vary from quarter-to-quarter. With respect to your question around the vary variation in the revenues that we would collect.
As you might imagine with smaller plans, we tend to not only pick up the record-keeping but oftentimes we pick up a share a larger share of the asset management as well. And with a larger plans they tend to steer more towards open architecture and our ability to win or capture assets is certainly favorable in that size market. But, it's going to be less than what you see in the smaller planned market. So, we feel very comfortable with the business mix and showed very comfortable with our approach and our and our ability to deliver growth in both small and in large plan and certainly our ability to retain that.
The other thing worth noting, Tom, on the asset retention part it's fairly indiscriminate on the relative size of the employer. We have a really good shot at small medium and large individuals who are part of a plan and who are looking for advice and benefits. Whether it's a job changer or a retiree.
Got you. and just a follow up on that, can you break out in terms of flows how much of your flows, if you can quantify of the, I think it's what $3.4 billion of cash flows would have been a thousand lives in larger versus the below that size if you're able to quantify that you know that's not something we're going to provide at this point. But, appreciate your comment. Thank you.
Thanks.
The final question is Suneet Kamath with Citi. Please go ahead.
Thanks. I just want to circle back on the well deal. So in RIS fee as you've spent a fair amount of money on digital over the past couple of years as you get to know the Wells block. Any color on -- are you getting anything that you didn't have or are there going to be some incremental expenses that you're going to have to incur to get digital on those plans. Certainly today would be helpful?
Yes. Great, great question. And as you might expect, you get some of that during due diligence, but the real lift is starting as we speak to really fully understand some of the capabilities and what you might onboard to augment and it is our promise and commitment to take best in class on all fronts. With that Renee, want to add some additional color on specificity.
Sure. When we think about the path forward and how we will integrate our businesses, we've really arrived at thinking about this in terms of four overarching principles. And the first principle is to keep the customer clearly at the center and to make sure that we minimize any disruption in service that we do everything we can to provide business as usual an excellent service to those clients.
The second thing, as Dan mentioned, we have the ideal opportunity to take the best from both operations and team and to put this together into an extremely compelling offering to the marketplace.
The next thing that we are very concerned about and we are paying a lot of attention to is talent. We are picking up a very experienced team from the Wells Fargo institutional retirement and trust business. And we want to make sure that we do everything we can to make their onboarding smooth as well.
And then, last of all, we don't view this as just an integration of business. We view this as an opportunity to create unsurpassed value to the marketplace. This is our opportunity to move the needle. And so will approach this very thoughtfully, very carefully and you can expect to hear a lot more on this as the months ahead unfold.
Got to make sense. And then my follow up is again on RIS fee. See if I look at your disclosures it looks like the percentage of assets that are non-proprietary is now slightly over a third of the mix and it's been the fastest growing piece. Based on your disclosures. So I guess is that performance, is that fee-related is it active to passive and where does that. I think it's about $33.5 today where does that do you think that goes over the next couple of years. Thanks.
Yes. So, maybe quickly on that one, it has in part as Renee described earlier. A difference on the size of the plan sponsor and if you're skewing towards the larger end you're going to put downward pressure on the percentage of proprietary Asset Management.
The percentage of small medium and large they've drifted slightly downward over the over the last few. But, again it's our objective to be customer centric, provide customers and advisors for what they are looking for, there are multiple sources of revenue growth for Principal in totality. And so we continue to manage that but we will continue it to be customer centered and how we present our investment offering. The fees are competitive, the performances is good and a little bit of an hiccup in Q4 period. But, as I look at the relative strength of the investment performance on the 1, 3 and 5 that still puts us on a formidable position to attract a lot of assets.
The last thing I would say and you can't forget this. We still capture a lot of assets through DCIO, it's where we're putting our investment options on our competitors platform and again that's been a growth engine for the company as well. And those results are not shown in full service, but rather within PGI. So thank you for the question.
We have reached the end of our Q&A session. Mr. Houston, your closing comments please.
Good. Thank you. And again, from our perspective good start to the year. We do have multiple parallel pass of growth that we're executing on as we speak and we've talked about this. One is around the digitizing of our business and it does have some cost, but that is starting to bear fruit and we're excited about what that's going to deliver. We also remain very enthusiastic about successfully onboarding the Wells Fargo Retirement Trust customers. And I emphasized both the retirement and the trust customers, it's a big part of their franchise as well as putting us in a favorable position with their advisors and their clients and executing on that.
The third is around our operational excellence initiative, a big undertaking for us here as we continue to be as efficient as we can in aligning our resources with the needs of our customers. And then, lastly, as you would expect delivering outstanding customer service. And again, if you looked at all the growth initiatives for the first quarter there is a clear sign that there's a good value proposition for principal clients. And so with that thank you for taking the time today and look forward to seeing you on the road. Thank you.
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