Principal Financial Group, Inc.
Q3 2017 Earnings Call Transcript

Published: 27 Oct 2017

[Operator:]

Good morning and welcome to the Principal Financial Group Third 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 over to John Egan, Vice President of Investor Relations.

[John Egan:]

Thank you and good morning. Welcome to the Principal Financial [Technical Difficulty] as always, materials related to today's call are available on our website at principal.com/investor. Due to the annual actuarial assumption review this quarter, we've included additional slides in the earnings conference call presentation. We've added a comparison of the third quarter operating earnings, excluding significant variances, as well as income statement line item impacts of the 2017 actuarial assumption review. Following a reading of the Safe Harbor provision, CEO, Dan Houston; and CFO, Deanna Strable will deliver some prepared remarks. And 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; Amy Friedrich, US Insurance Solutions; and Tim Dunbar, our Chief Investment Officer. Some of the comments made during this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. The company does not revise or update them to reflect new information, subsequent events or changes in strategy. Risk and uncertainties that could cause actual results to differ materially from those expressed or implied are discussed in the company's most 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. Before I turn the call over Dan, I want to extend an invitation to our upcoming 2017 Investor Workshop in New York City on Thursday December 7. This year's focus will be on our spread and risk businesses, including a deeper dive on our pension risk transfer and group benefits businesses, as well as an update on our long-term capital deployment strategy. Additionally, our 2018 outlook call will be held on December 12. Dan?

[Daniel Houston:]

Thanks, John, and welcome to everyone on the call. This morning I'll share some performance highlights and key accomplishments to position us for continued growth. Deanna will provide details on third quarter financial results and an update on capital deployment. Before I get to the quarterly results, I want to briefly comment on our planned acquisition of MetLife's Afore business as announced yesterday morning. Mexico is a very important market for us and is one of our largest countries in terms of Assets Under Management or AUM. It's currently the 15th largest pension market in the world and poised to become one of the world's 10 largest economies. MetLife Afore has approximately $4 billion of AUM as of the end of the third quarter. And after closing, Principal's Afore is expected to be one of the largest pension providers in Mexico in terms of AUM. The acquisition will provide benefits of scale and will position us to accelerate our growth in the mandatory pension business as well as in voluntary long-term savings and mutual funds. Deanna will provide more details and this is clearly a very positive development for Principal. Moving to our results, I'm very pleased with where we stand through 9 months. We have very strong results driven by strong execution and favorable macroeconomic conditions. For the third quarter, we reported $374 million of operating earnings. Excluding significant variances, operating earnings were $417 million, a 17% increase compared to the year ago quarter. And on a trailing 12 basis, excluding the actuarial assumption review, operating earnings of $1.5 billion increased 18% from a year ago, reflecting strong net revenue growth and ongoing expense discipline. In addition, each of our four operating segments delivered double-digit growth in pre-tax operating earnings over the trailing 12 months, excluding the actuarial review, again, demonstrating the benefits of our integrated business model and execution of our strategy. With a record $656 billion at quarter-end, we've increased AUM by $60 billion or 10% compared to a year ago. Compared to second quarter 2017, we achieved a significant recovery this quarter, with $5 billion of positive net cash flow, reflecting a strong rebound in sales and retention for PGI Institutional and solid improvements in these measures for Principal International, including Brazil, Southeast Asia and Chile. Volatility of net cash flow is inherent in institutional asset management and retirement as large deposits and withdrawals can occur unevenly over time. Looking ahead, and as communicated last quarter, we still expect a few additional large retirement plans to terminate RIS-Fee over the next couple of quarters. That said, net cash flow in our core small to medium sized business market remains strong. Net cash flow remains an important metric. But our focus remains on revenue growth. We'll continue to differentiate by meeting client needs through value-added specialties, solutions and alternative investments. Our ultimate goal is to serve more customers over time, by meeting the unmet needs and solving problems. We remain well-positioned to attract and retain assets due to several key factors, including

[Deanna Strable-Soethout:]

Thanks, Dan. Good morning to everyone on the call. I'll focus my comments on the key contributors to our financial performance, and provide an update on capital deployment. We reported strong operating earnings of $374 million for the third quarter of 2017 or $1.28 per diluted share. As shown on Slide 6, excluding the impact of the 2016 and 2017 annual actuarial reviews and other significant variances. Third quarter 2017 operating earnings of $417 million, increase 17% from the third quarter of 2016. RIS-Fee, RIS-Spread, Principal International, Specialty Benefits, and Individual Life were all impacted by the actuarial assumption review. Slide 7 provides the income statement line item impacts by business unit. The total impact of the actuarial assumption review decreased third quarter reported pre-tax operating earnings by $66 million and after-tax earnings by $43 million. The most significant impacts were due to experience assumption changes including refinements to our variable annuity policyholder behavior assumptions in RIS-Fee, and an update to our premium payment assumptions for Individual Life. These items were partially offset by the higher U.S. interest rate environment compared to what was assumed a year-ago. The actuarial review will not have a material impact on our total company operating earnings run rate in the future. Our total company reported operating earnings tax rate of 18% for the quarter was lower than our guided range of 21% to 23% due to the actuarial review and certain tax benefits during the quarter. We still expect to be within our guided range for full year 2017. Net income attributable to Principal Financial Group was $810 million for the third quarter 2017, driven by strong operating earnings, modest credit losses of $10 million and $411 million after tax net realized capital gain, as a result of a real estate transaction. The real estate gain was over 40 years in the making through a successful joint venture with Majestic Realty Company to develop and manage industrial warehouse space in Southern California. We took the opportunity amid strong real estate market to manage our real estate exposure in the area and to gain control over the properties we retained. The low historical cost basis, strong value creation, and the size of the portfolio contributed to the magnitude of the net realized capital gains. At quarter end ROE, excluding AOCI other than foreign currency translation adjustment was 14.5% on a reported basis. Excluding the impact from the 2016 and 2017 actuarial reviews, ROE improved 90 basis points from a year-ago to 14.9% reflecting strong earnings growth and disciplined capital management. Strong total company net cash flows of $5 billion, and favorable market conditions during the third quarter, increased total company AUM to a record $656 billion, including record AUM for both Principal Global Investors and Principal International. Quarterly operating earnings in our U.S. fee businesses benefited from strong U.S. equity market performance. The S&P 500 Index quarterly daily average increased almost 3% over second quarter 2017 and 14% over the prior year quarter. In addition, mortality and morbidity were favorable for the quarter and benefited Individual Life and Specialty Benefits, but slightly pressured RIS-Spread mainly in our pension risk transfer business. And my following comments, I will exclude the impact of significant variances in both periods. The actuarial review was the only significant variance in third quarter 2017. Slide 6 provides a comparison of business unit pre-tax operating earnings, excluding significant variances for the third quarter and the prior year quarter. As always reported business unit results and key drivers can be found in the slides, supplement and press release. Pre-tax operating earnings for RIS-Spread, Specialty Benefits, Individual Life and Corporate were within our expectations for the third quarter. Our spread and risk businesses continue to deliver strong operating earnings, while providing important protection and guaranteed income solutions for our customers. In RIS-Spread pension risk transfer sales were a record $1.2 billion in the third quarter. The pipeline remains strong in our target market plans under $500 million, and year-to-date 2017 sales have surpassed our record $2 billion of sales in 2016. Pre-tax operating earnings in RIS-Fee, Principal International, and Principal Global Investors merit some explanation this quarter. As shown on Slide 8, RIS-Fee's pre-tax operating earnings of $149 million, increase 3% over the year ago quarter. Positive market performance contributed to higher fee revenue and lower DAC amortization during the quarter. Pre-tax operating earnings also benefited from favorable timing of expenses. Moving to Slide 10, Principal Global Investors' pre-tax operating earnings were $130 million, a 15% increase when compared to the prior year quarter driven by strong market performance, higher transaction and borrower fees, and disciplined expense management. As shown on Slide 11, Principal International's pre-tax operating earnings of $84 million were slightly lower than our expectations, primarily due to lower than expected inflation and encaje performance in Latin America, when compared to the prior year quarter currency translation was a slight tailwind. Moving to capital, while we don't normally speak to our estimated risk based capital ratio on a quarterly basis. We expect our RBC ratio at year end will be above our targeted range due to the real estate transaction, I mentioned earlier. We expect our RBC ratio to return to our targeted range of 415% to 425% over the next several quarters, as we strategically deploy capital. Turning to Slide 14, we deployed $191 million of capital in the third quarter, including $136 million in common stock dividends, $49 million in share repurchases, and $6 million to increase our ownership in a PGI boutique. Year-to-date, we've deployed $605 million of capital and remain on track to deploy $800 million to $1.1 billion for the full year. Last night, we announced $0.49 common stock dividend payable in the fourth quarter, a $0.02 increase from the third quarter 2017 dividend and a 14% increase from the prior year quarter. We continue to target a 40% dividend payout ratio and going forward our dividend growth will be more aligned with the rate of operating earnings growth. By growing operating earnings and reducing debt over the past few years, we've reduced our leverage ratio and given ourselves greater financial flexibility. When we evaluate M&A opportunities, we use three criteria

[Operator:]

[Operator Instructions] The first question will come from Ryan Krueger with KBW. Please go ahead.

[Ryan Krueger:]

Hi, thanks, good morning. First question was on capital and your commentary about looking to deploy the $400 million gain over the next several quarters. Can you give us some perspective on the - it sounds like your dividend is kind of at the level you kind of wanted to be at from a payout ratio standpoint. So can you give us some thoughts on the potential ways you're looking at on deploying that capital?

[Daniel Houston:]

Yeah, we'd be happy to do that. Thanks, Ryan, for the question. The first thing I would say is it may not happen in - as you stated that in the next two quarters, my guess is it happens over a longer period of time. We always want to take a very thoughtful approach to how we deploy capital. Well, why don't I have Tim Dunbar weigh in on those thoughts.

[Timothy Dunbar:]

Sure, thanks. As we said before in 2017, we'll deploy between $800 million and $1.1 billion and we're certainly on target with that, with the announcement of the Afore that we made yesterday. In addition to that, we have - are seeing really good growth opportunities, both in terms of organic growth within our risk and spread businesses, and within our fee-for-service businesses. But as well, we have a very strong pipeline and we talked a lot about some of the options that we have in the asset management business or income producing assets and we've also talked about furthering some of our relationship with our PI joint venture partners.

[Daniel Houston:]

Ryan, do you have a follow-up?

[Ryan Krueger:]

Yeah, I guess, just shifting gears, Dan, I guess, curious on if you want to - if you could provide some thoughts on - the potential for the Rothification idea and what Principal's view of that would be and the potential impact to you in kind of the savings market and the industry?

[Daniel Houston:]

Yeah, it's a good question. Frankly, I expected one. Frankly, our largest concern is that a policy like this doesn't negatively impact long-term retirement savings. That's kind of at the core of the issue. We actually did some modeling. And we know for a fact that today, if we look at roughly a third of the participants that make between $10,000 and $25,000, those folks today, with 35% of them, roughly a third, would be negatively impacted by a $2,400 limit. And that, I think that gets the attention of a lot of people. This isn't a high wage earner issue. This Rothification discussion impacts all wage earners in all categories. If you took that same cohort and you looked at people making between $30,000 and $50,000, today in qualified retirement plans, 70% of them participate. If you take that cohort of $30,000 to $50,000 who are eligible for a retirement plan, only 5% participate. So it gets back to the day the value proposition from an employer-based retirement saving scheme is around payroll deduction, employer matches, profit sharing contributions, and the positive impact that tax deferral has on that saver. They save more. As a result of this sort of policy, they would save less than they would have otherwise saved. So we've amassed as an industry roughly $15 trillion since 401(k) was first adopted. That includes both defined contribution as well as rollover IRAs in a completely voluntary system. And personally, I think the favorable or deferred tax treatment has been a big driver of why people have chosen to go that direction. Principal is very active on Capitol Hill. We're active within our trades to try to make sure we get the best policies possible, and that the education is out there. But, at this point in time, although as I've said we've done a lot of internal modeling, we're just going to keep pressing for educating people on the implications of this. And with that, I'm going to look to Nora, see if she has any additional comments she'd like to make.

[Nora Everett:]

Sure. Thanks, Ryan, for the question. Yeah, just to segue off of Dan's point, certainly, just like the DOL reg, first of all, we're all in speculation mode right now. But just like the DOL reg, we're extremely well positioned for these kinds of changes. I mean, if you think about the significance of that regulatory change and then you look at the potential significance of this regulatory change, we've got the expertise, we've got the scale, we've got infrastructure around plan design, technology. We're just really well positioned to deal with these kinds of changes if they do come down the pike.

[Daniel Houston:]

Thanks, Ryan, for the question.

[Ryan Krueger:]

Thank you.

[Operator:]

The next question will come from Humphrey Lee with Dowling & Partners. Please go ahead.

[Humphrey Lee:]

Good morning and thank you for taking my question. Just to follow up on the Met Afore transaction, can you describe how that business compared to yours right now? You mentioned about the gain of scale and the addition of distribution. Anything that they do kind of different from what you're doing right now?

[Daniel Houston:]

Yeah, it's a great question, Humphrey. And let me also just say, I compliment you on the report that you wrote recently on group benefit space. I thought it was incredibly well done. This transaction I think is being a little bit like the transaction for the - in Hong Kong that we had with AXA in the MPF business. Operating from a top-five position versus operating from a top-ten is a big deal. And so as you point out, we do get the advantages of scale and distribution. But I'm going to ask Luis to weigh in here on how this benefits our entire Mexican strategy as opposed to just limiting it to just the Afore. Luis?

[Luis Valdes:]

Yeah, good morning, Humphrey, thanks for your question. One thing that is good addition to our strategy in Mexico is the customer base that they're adding. The customer base in general terms, there is a 0.5 million customer. And those customers, they have I would say a very good quality in terms of Mexican standard, so that's going to give us opportunity to add more value to our services and also to add more advice, and to certainly to expand and extend our voluntary business. So I would say that it's a matter of scale as Dan said. It's moving us up to the fifth position, 8% market share in total AUMs, and certainly is adding a good number of customers that we are going to be able to serve going forward.

[Daniel Houston:]

Does that help, Humphrey?

[Humphrey Lee:]

Yes, and thank you for the compliment. So maybe I ask question on the group space. Can you talk about some of the market dynamics that you see, especially in your core small case market, especially given Specialty Benefits have been growing at a very nice pace?

[Daniel Houston:]

Yeah, it really has been a nice growth engine for us, and Amy is well prepared to answer that question.

[Amy Friedrich:]

Sure. Thanks, Humphrey. Some of the market dynamics, especially in the small space, are that the small employers are really feeling optimistic, you've noted that more seeing that out in the industry. So when you're looking at things that are coming out guidance on regulation, guidance on trying to make access to capital easier, those are the things that small business owners get excited about it. And so when I look at the dynamics in the industry, small business owners tend to be ones that really take seriously their obligation to take care of their employees. So we don't tend to have to come in and talk to them a lot about, let's have a great benefit - set of benefits. It really come down to they want to get the right benefits out there. So one of the dynamics is, when they're optimistic, when they're feeling excited, they're going to make investments in their employees. And those investments in their employees benefit companies like Principal. So we end up getting a larger share of wallet with them, we end up having a closer relationship and just doing the right things with them. So I'd say one market dynamic is increased optimism. You'll see things like employment growth, when you look at our total employment growth numbers, what we're seeing is about 1.4% we mentioned this last quarter on a trailing 12 months basis. But when you look under the covers, if you're a group that employees less than 200 employees, it's closer to 2%, it's 1.9% on a trailing 12 months basis. So one of the other things we're seeing is employment growth that is even over pronounced in the small market. So small market employment growth is there, optimism is there, and their willingness to take care of their employees is there. And all of those things formulaically really benefit Principle and then the broader industry as a whole.

[Daniel Houston:]

Thanks, Humphrey, for the questions.

[Humphrey Lee:]

Thank you.

[Operator:]

The next question will come from Alex Scott with Goldman Sachs. Please go ahead.

[Alex Scott:]

Thanks for taking my question. I had - I guess, one on retirement fee of the $3 billion that you guys have highlighted potential terminations. How much of that was included in the numbers this quarter?

[Daniel Houston:]

Yeah. Thanks, Alex, for the question, and thank you also for initiating coverage on Principal. Nora, you want to go and take that one.

[Nora Everett:]

Sure. So 3Q of that roughly $3 billion, we thought just north of $1.5 billion with regard to that handful of larger cases that we called out on the last call. So - and recall what we identified in addition to that was that there was within that $3 billion estimate, one relatively larger case that was north of $1.5 billion that case has not left, has not terminated at this point. And that cases, there's still some question as to whether or not that case would transfer either towards the end of 4Q or potentially, and often this happens with these types of transfers into 1Q. So there's still some uncertainty as to whether we have that as a 4Q event or 1Q event. But to answer your question just north of $1.5 billion, we realized in 3Q.

[Alex Scott:]

Got it. Thanks. And then maybe one follow-up on the CCB partnership. Just around some of the stuff in the treasury report, it looks like they're going to maybe try to push to allow U.S. companies to have higher ownership of joint ventures. Would you potentially go bigger and a partnership with CCB in terms of your percent ownership, if they were interested and you have the ability to do that.

[Daniel Houston:]

Yeah. Let me just first say, Alex, we really have a strong working relationship with China Construction Bank, it is not limited to just Principal International, Principal Global Investors also is a very important part of that relationship, as is the overall company. And again, we know each other well. We have the Memorandum of Understanding to look deeper into opportunities related to the enterprise annuity, but there's also other work being done around working more closely together around Asset Management. Of course, we would welcome the opportunity to have a larger stake, because, again, you cannot ignore a country, whose GDP is likely to represent a third of total global economic growth. With that, I'll see, if Luis would like to make any additional comments on our relationship to CCB.

[Luis Valdes:]

Yeah, good morning, Alex. As you know, we have a 25% ownership in CCB Principal Asset Management. And today, we're very focused in order to extend our partnership also with CCB in the pension arena. So it's publically known that we have signed an MoU with CCB in order to go into the next joint venture with them. So we - as Dan has said, we are very much more focused in order to extend our relationship with CCB, nevertheless, we're going to be more than pleased, if we are going to have any other opportunity in order to increase our ownership in CCB family.

[Daniel Houston:]

Thank you for the question.

[Operator:]

The next question will come from Jimmy Bhullar with JPMorgan. Please go ahead.

[Jimmy Bhullar:]

Hi, good morning. I had a couple of questions. First on the PGI business, your flows improved this quarter, I think, the last few quarters you'd had a few cases that were actually either maturing or leaving because of changes in allocation on the part of clients. Where do you stand on that? And what's your outlook for that business? And then secondly on the fee retirement business, you made a few comments on losing some cases and potentially more in this - later in this year or early next year. What's really driving that and what's the competitive environment, and specifically in the 401(k) market from a pricing standpoint.

[Daniel Houston:]

Yeah, thanks, Jimmy, for those comments. And I'll have Jim certainly handle PGI flows. But one thing, we've gone on the record of - and that is - there is some lumpiness to these institutional flows. And the one thing, we also were very pleased about was the recovery of some of the investment performance. And again, we feel like, we're in a very good position in our Asset Management franchise to continue to attract retain assets. Would you want that specifically, Jim?

[James McCaughan:]

Yes. Thank you, Dan. And thanks for the question, Jimmy. As you know, the lumpy flows that can happen in institutional were not on our side in cash flows in the second quarter. There were no - none of these particularly lumpy outflows in the third quarter. We had continued outflows of Columbus Circle, but that's more - that's easing up and getting to a better space, because of the changes in promotions of portfolio managers and also because of a strong improvement there in investment performance. But going back to the lumpy flows in the second quarter and running up to that. There were a number of special factors, but what it tended to a fact was some of our lower fee and relatively speaking lower added value mandate. For example, investment grade credit with increased hedging costs, not enough margin lead some clients to terminate those mandates. But you know the other side of that is where you have a higher spread, for example, through high yield that is not happening. And this illustrates the fact we've mentioned before, which is we are really managing the business for added value to clients and therefore for our revenues. The two are very linked. And that doesn't necessarily always have a one-to-one correspondence with the asset flows. And I would point really to - it was a very diversified asset base not particularly dependent on equities. We've seen strong and steady growth in revenues, and that's what we've been trying to do at the Principal Global Investors level. Having said all that, looking forward, I don't see any likely lumpy outflows in the next few months. I could always be wrong, because people do react to things like shared - like shifts and hedging costs. But I'm more confident about the ability to continue growing equity - growing revenues, absent any real dislocation in the marketplace. So that remains our objective, and we actually see some potential lumpy inflows. But again, I wouldn't necessarily weigh those too highly when they happen, because these very large billion dollar plus mandate tend to be on relatively low fees, partly because of pricing for scale and partly because they're often in more liquid categories. Our basic growth remains in the less liquid categories from real estate, to high yield, to small cap, to emerging markets. And that's an illustration strategically that we're running the business for revenues rather than for AUM.

[Daniel Houston:]

Yes. Clearly, we've seen not only in Jim's business, but also in Nora's the separation of revenue growth from net cash flow positive or negative. So I'll ask Nora to speak to some of these losses, but also what it is that we're doing to retain and win business as well. Nora?

[Nora Everett:]

Sure. So Jimmy, actually and we talked about this last quarter as well. We don't see this handful of cases as systemic at all. In fact, if you look at the handful of cases that we called out, more - a majority of them are due to M&A and some bankruptcy. So on the M&A cases, we're going to win some, we're going to lose some. But there's nothing systemic about the handful of cases and these transfers. And more important from our perspective is, if you look at our core SMB segment really strong net cash flow, so really pleased with our core SMB business and how that is net cash flowing. But because of the size of these larger cases and the impact on net cash flow, we'll call them out, just to help you all be able to discern what that net - what we're unbundling the net cash flow for you.

[Daniel Houston:]

Thanks, Jimmy, for the questions.

[Jimmy Bhullar:]

Thank you.

[Operator:]

The next question will come from Erik Bass with Autonomous Research. Please go ahead.

[Erik Bass:]

Hi, thank you. Something you could provide an update on what's going on in Chile, and the implications of the upcoming election, what that could have on the retirement system in the outlook for AFP flows and pricing?

[Daniel Houston:]

Yeah. Great question, and very timely. Especially, as we look at some of the recognition we've received in a very positive thing about our customer service coming out of Cuprum and our ability to continue to see the net cash flow migrate to becoming more favorable. But a lot of moving parts in Chile, and Luis you want to go and take that one.

[Luis Valdes:]

Yeah. Good morning, Erik. First, you could see in our flows and we continue our positive trend in Chile. So we put basically a modest negative outflow, but basically we - all those a negative outflows happened in the very beginning of the quarter - the third quarter. So we continue to seeing a positive behavior in Chile. We continue - Dan said, very focused on the main strength of our Cuprum. So customer service - we continue increasing our customer service, we continue paying a lot of attention of our net investment income and investment return. So with that, as we know about asset retention and customer retention, all the focus that we have put in Cuprum the last, I would say three quarters and it's paying off good dividends for us at this moment. From a political standpoint of view in less than three weeks, we are going to have Presidential election in Chile. And very likely that all that sort is going to finish in the December in the second round. So - and so we will see with that we have almost no chance in order to move that our pension bill ahead in the congress. So it seemed to be that the next government, the administration is going to have to take this. And probably depending who is going to be the next President. I will see that probably they're going to change the bill probably - the one that is right now in the congress. So many things are coming, many discussions are coming. And we're ready to participate in those discussions going forward being very actively working and being a pension advocator in that country, and we're going to continue doing so.

[Erik Bass:]

Great. Thank you. And then, just one follow-up. I think, you had commented in the prepared remarks about expecting less of the normal seasonal bump in earnings in fourth quarter this year than in the past. And that's just a function of your outlook for performance fees and the timing of expenses, are there other factors we should consider as well?

[Daniel Houston:]

Yeah. There's really only two factors there, Eric. One is the performance fees and again Jim's demonstrated in the past, our ability to predict the timing of those, and we don't think that we're going to see a significant bump in Q4. There's also some speculation in the dental space that we would not see the normal seasonality, perhaps and as a result that's why we've reflected in our prepared comments. Is that sufficient?

[Erik Bass:]

Got it. And I think, you'd also commented just sort of a lower G&A expense in last couple of quarters due to some timing, so I wasn't sure if that would move some of those into the fourth quarter as well?

[Daniel Houston:]

Yeah, sure. And maybe I'll have Deanna make additional comments there.

[Deanna Strable-Soethout:]

Yeah. As we've talked about in the past, obviously, we try to align the growth in our expenses with our growth in revenue and balance that with investments in the business, but it can be lumpy quarter-to-quarter. If you look at just the supplement for many, many years, you'll actually see an elevated comp in other in the fourth quarter relative to what you see in the first through third quarter. And that can be driven by branding and marketing cost that tends to be fourth quarter loaded. Some of our benefit costs just naturally are a little bit higher in the fourth quarter. And technology costs can be higher in that fourth quarter as well. That hasn't been as evident in past years, because of that seasonality, but because that could be more muted this year, I think you could see more of an impact of that in the fourth quarter. And so, I just wanted to point that out. You can see that very evidently both for PFG as well as a number of our businesses. And we think that could very likely occur in this year as well.

[Daniel Houston:]

Thanks, Erik, for the question.

[Erik Bass:]

Yeah.

[Operator:]

The next question will come from John Barnidge with Sandler O'Neill. Please go ahead.

[John Barnidge:]

Thank you. Can you talk about plans for implementation of MiFID II in your businesses? Do you see it as a driver of expense savings or increased costs? And are you implementing it globally or just in Europe? Thank you.

[Daniel Houston:]

Yeah, good question, John. And I would answer, D, all the above. It's certainly going to require us to take a look at across the organization. Jim is probably the closest to this topic and I'll have him go ahead and address to that.

[James McCaughan:]

Yeah, thank you, John, and thank you, Tom. First thing to say is really as a matter of context, we have invested a lot in proprietary research over the last 15 years, developing industry leading tools, both for equity and for fixed income research. We've been investing a lot in data science. I think we've noted that in the past. And that makes us somewhat less dependent on third-party research and data than a typical asset manager. So that's a strong background in this move towards greater transparency by the regulators. With operations and clients all around the world, will obviously be timely and transparent in how we implement this for our various clients and in different investment strategies. And so the direct costs, and as you know where it comes to research provided to investment professionals based in the EU, and also to clients in the EU, some research costs that have been bundled into trading will become a direct expense of the manager. And we will be covering those and they are in outlooks that we're developing, we'll talk of the outlook call in December about profits. But I can assure you at the moment it's a pretty small number because of the aforementioned points that I made about our own investment in research. It's not a number that we'd really end up calling out of it when it hits us. So you know I don't see this as a big challenge in terms of near-term execution. I do think longer-term, and this is welcome, I think longer term it will lead to a more open environment, a more transparent environment for how research gets paid for. And I think that that influence on the global business, particularly with the SEC making some clarifications that help market participants operate consistently between a MiFID environment and an SEC environment. I think that's still in progress, and that will be actually quite healthy in terms of how in the future affects the asset management industry.

[Daniel Houston:]

Do you have a follow-up, John?

[John Barnidge:]

Yeah, just to clarify, are you doing it just in Europe or globally or have you even determined, because one of your peers earlier this week said that they're just going to do it in Europe?

[James McCaughan:]

Yeah, we're certainly doing it in Europe. We are finding interest from some clients in other jurisdictions about exactly the MiFID means of operation and the MiFID type transparency. So I wouldn't go dogmatically and say we're only doing it in Europe. But I would say that as of January 1, we're going to be rigorous and clear about doing MiFID compliance in Europe. But I do think that as the SEC clarifies how MiFID can operate alongside their environment, I think you're going to see a kind of more of a global practice emerging in the asset management industry. So in terms of the next two or three years, I wouldn't want to be dogmatic and say only Europe. But I think we're crossing the hurdle we have to from a regulatory point of view, very effectively in the near-term.

[Daniel Houston:]

John, thanks for the question.

[John Barnidge:]

Thanks a lot.

[Operator:]

The next question will come from Suneet Kamath with Citi. Please go ahead.

[Suneet Kamath:]

Thanks. Good morning. Just wanted to circle back on that real estate transaction that you announced, can you just provide a sense of how much capital that freed and then how much of that freed capital would you be willing to deploy?

[Daniel Houston:]

Yeah, very good. I'll have Tim do that. Tim?

[Timothy Dunbar:]

Yeah, as we said as Deanna said in that script that created about $411 million capital gain. And now that we would say there is probably about $300 million or so additional capital that we can deploy. And so, as we talked about we'll do that judiciously and in alignment with our balanced approach in 2018.

[Suneet Kamath:]

Okay. And then my second question is on the DAC review. I think you said the RIS-Fee impact was largely due to lapse assumptions on VA, which I get. I didn't quite get the individual life, because that was the other sizeable item. So can you talk about what you saw in the review, which products it affected and essentially what caused it?

[Daniel Houston:]

Yeah, very good. Deanna, you want to go and tackle that one?

[Deanna Strable-Soethout:]

Yeah, so specifically within our individual life products, we obviously - product designs today allows for flexibility and how the policyholder views of those products. And so, specifically to our UL with secondary guarantee, as well as the variable universal life that we used to fund our non-qualified deferred comp perspective. What we noticed occurring over the last year or so was that future policyholder premium payments were lower than what we had factored into our DAC models. They have the flexibility to do that. When we price the products, we obviously look at profitability over a lot of different ranges relative to that assumption. But we felt it was prudent to lower our expectation of future policyholder premium payments in those UL type products. That in effect lowers your future EGPs, and then obviously leads to the write off of some of that DAC. So that is what happened specifically in the individual life perspective. As we mentioned, not just in individual life, but across the company, we feel that the run rate impact of the changes we made are very immaterial and very manageable going forward.

[Daniel Houston:]

Thank you, Suneet.

[Operator:]

The next question will come from Sean Dargan with Wells Fargo. Please go ahead.

[Sean Dargan:]

Yeah, thank you. Deanna mentioned that you delevered as you've grown the earnings base and retired some debt. But just thinking about your capacity to either make an acquisition or strengthen a strategic tie with available resources, would you be able to run your debt to capital back up to 25%, which I think would be about $750 million additional capacity, because I think you've taken it there before with a commitment to delever?

[Daniel Houston:]

I don't think there is any question that we'd have the capacity to take it back up to 25% for the right reasons. And as long as it is strategic with our long-term shareholders, we would very much consider that sort of additional leverage. But frankly, we find ourselves in a very good position today. There are very favorable markets to re-ladder our debt and to drive it down, to put us in a better position should the right opportunity come along that we could have more financial flexibility in both the equity side as well as in the debt side.

[Sean Dargan:]

All right, great, thanks. And then, just coming back to the Afore, it sounds like you can't tell us how much you paid. But I'm wondering if you can give us any detail to help us think about how it would be moderately accretive to both EPS and ROE in year-one.

[Daniel Houston:]

Yes, appreciate the question and we did agree to the seller's terms, not to disclose the price. But with that, I'll ask Luis to add a little bit of color on the question.

[Luis Valdes:]

Yeah, thanks, Sean, about this question. Yeah, it's going to be mostly a modestly accretive first year, mainly due to we do have some expenses of the - acquisition expenses and integration expenses. And it's going to be a more accretive in, I would say in the range of $0.03 in the second year. So it's a very good transaction. It's going to be immediately accretive. And that is where we are right now, Sean.

[Daniel Houston:]

And the other thing I would add to that, Sean, we've got a lot of experience now with Luis' teams to integrate transactions like this. And, frankly, Mexico, already has several including HSBC that we've done it. So the playbook is good. We understand the future value of these participants and the voluntary component, all the elements that allow us to have a fairly high degree of predictability of success in the integration and the ongoing relationship with Met for distribution. Thanks for the question.

[Sean Dargan:]

Thanks.

[Operator:]

The final question will come from Tom Gallager with Evercore ISI. Please go ahead.

[Thomas Gallager:]

Good morning. I had a follow up on Chile. These - so, Luis, I just want to understand, do you see the environment post-election being at greater risk or do you think there is actually hope for improvement from the current environment? I just wanted to be clear on that.

[Daniel Houston:]

Yeah, Luis, go ahead.

[Luis Valdes:]

Yeah, Tom, good question. I'm going to refer to the recent polls that are being published 24 hours ago. It's very likely, but you never know that the most possible next President is going to be Sebastián Piñera, who represent the center right. In that sense, we're seeing that in that case, the political environment - should be a kind of a sensible improvement in terms of the next discussion that is going to happen. So that's our take today, so we have to wait for the next three weeks in order to see what is going to happen in the first round. And then a very likely a ballot touch that has to happen in the second week of December. But my take, it is that we are cautiously optimistic about that the political environment is going to be much better. And that's my personal take today, Tom.

[Daniel Houston:]

Do you have a follow-up, Tom?

[Thomas Gallager:]

Yeah, that's - that was helpful, and then my follow up is just on capital investment. So the $300 million of capital created from the gain, should we assume that's going to be completely additive to the normal $800 million to $1.1 billion pace of annual capital deployment for 2018? And then, also do you have any other historic investments of size that would have these large embedded gains in them?

[Daniel Houston:]

Yeah, so let me have Deanna take the first question and Tim backing up on the second.

[Deanna Strable-Soethout:]

Yeah, just what I would say to that is we'll obviously incorporate that capital into our 2018 outlook as we come into our outlook on December. I think we have a strong pipeline of M&A that we talked about. We're committed to dividend increases. We'll explore organic opportunities, as well as other opportunities as well. But I think we'll continue to deploy our excess capital in a prudent way and will be more specific about our thoughts in 2018 at that outlook call in December.

[Timothy Dunbar:]

Yeah, just in terms, do we have other gains like this in the portfolio; certainly, we have a pretty sizeable core portfolio. And by nature of the fact that real estate depreciates, we do have other gains that we could realize, but certainly none of this magnitude with one joint venture partner or one group of properties.

[Daniel Houston:]

Thanks for the question, Tom.

[Thomas Gallager:]

Thanks.

[Operator:]

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

[Daniel Houston:]

First and foremost, I appreciate everyone listening in today and hearing more about our quarter and our results on the trailing 12-month basis. We feel good about the businesses. The fundamentals remain very much intact. We've certainly enjoyed broad economic growth and prosperity around the world. I can assure you that from this management team's perspective, deploying your capital is a very high priority for us. We think there are good places to invest from an organic perspective as well as making bolt-on acquisitions to help us grow the organization long-term. And again, we strike the balance with share repurchase as well as with increasing our dividend and hitting the metrics that we've described before. Again, I would encourage you to participate if you can on December 7 in New York, where we're going to focus on both the spread and the risk businesses we've talked, some of the fee businesses a year ago. And then also December 12, our outlook call should give you a better understanding of how we view 2018 and how it's shaping up. But in the meantime, we'll hopefully see you on the road. And again, thanks for your support.

[Operator:]

Thank you for participating in today's conference call. This call will be available for replay beginning at approximately 1