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Principal Financial Group Inc  (NASDAQ:PFG)
Q1 2019 Earnings Call
April 26, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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.

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 website at principal.com/investor. I'll start by mentioning to 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 a 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 of 2019. Following the reading of the Safe Harbor provision, CEO, Dan Houston; and CFO, Deanna Strable will deliver some prepared remarks. Then we'll open up the call for questions. Others available for the Q&A session include Renee Schaaf, Retirement and Income Solutions; Tim Dunbar, Global Asset Management; Luis Valdes, 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. Risks 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 US 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 US GAAP financial measures may be found in our earnings release, financial supplement and slide presentation. Dan?

Daniel J. Houston -- Chairman, President and Chief Executive Officer

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 & 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 continue to expand our distribution network, an 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 of 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 a year-ago period, reflecting 2% growth in non-GAAP pre-tax operating earnings and the 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 have 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 is not 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 long-standing 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 4 or 5-star rating and 83% of Principal actively managed mutual funds, ETFs, separate accounts and collective investment trusts were above median for five-year performance. At 53% above median for the one-year performance and 66% above median for the three-year performance, we delivered 12 percentage point and 14 percentage point improvements respectively compared to year-end 2018. These gains reflect a rebound in our international equity strategies, which is discussed at the fourth quarter call. We are also dampening performance of our target date solutions.

Given our focus on long-term strategies, it's important for us to maintain conviction and 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 a second best quarter on record. This was driven by record sales, strong retention and reoccurring deposit growth in RISP 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, it's 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 source 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 US 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 clients to withdraw the entire amount over the course of the second quarter. We continue to manage other assets with this client and other strategies where hedging cost 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, 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 US 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 line up 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 deferring 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 risk and address inflation. I'll now share some key execution highlights starting with our planned acquisition of the Wells Fargo Institutional Retirement & 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 in custody and institutional asset advisory. This doubled our footprint of our US 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 in custody offering add to diversifying revenue source. Importantly, the acquisition is expected to generate $425 million of run rate revenue of 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, the US 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 RobustWealth. The solution introduces robo advisor services for retirement savings and retirement income. While we've provided education and guidance to our customers for many years, this is our first foray into digital advice for our US retirement business. Initially, we're focusing on participants who are retiring or changing jobs where we are the planned provider. It is 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 used the tool in the first quarter. Early results show that we are improving retirement outcomes. Average deferral rate exceeded 7%, with more than one in four participants at 10% or higher. And at 26% of the take-up of the automatic savings increase is twice the rate of our existing block of participants. In 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 dental providers more convenient access to answers while reducing call volume. We've also debuted e-delivery of our term life insurance policies, enhancing experience for both the customer and the advisor.

Dan 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 will also share some additional recognition for the quarter. Forbes named Principal one of America's Best Employers for Diversity. For the fourth consecutive year, Principal earned a perfect score on the human rights campaign, Corporate Equality Index, making us one of HRC's Best Place to Work for LGBT Equality. For the ninth time, Ethisphere Institute named Principal as one of the World's Most Ethical Companies. And for the 18th time, the National Association for Female Executive 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 achieved 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?

Speaker C-Deanna D. Strable

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 a $1.43 per diluted share in the first quarter. EPS increased 2% compared to a very strong first quarter of 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 macroeconomic 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 a $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 of 2018, but decreased 10% from the very strong year-ago quarter. Looking at macroeconomics, 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 of 2018. Mortality and morbidity experience for RIS-spread and specialty benefits, we are in line with our expectations, but less favorable than first quarter of 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 on investments and other ongoing investments in the businesses.

Pretax operating earnings for all businesses, with the exception of corporate, were in line with or 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 a 11% increase in deferrals and a 14% increase in employer matches. Defined contribution plan count increased more than 3% or over 1,200 plans and Defined Contribution participant account increased 9%, with nearly 300,000 net new participants. During the quarter, RIS spread had $2.1 billion of sales, more than double 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. US Insurance Solutions also started the year with strong sales including record sales in specialty benefits. We continue to grow and deepen relationships with customers, as we increased lines of coverage in 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 in 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 close the acquisition, we will have transaction costs 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 a $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 & 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 NAIC 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 NAIC formula associated with US tax reform.

Our capital and liquidity positions remain 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.

Questions and Answers:

Operator

(Operator Instructions) The first question will come from Humphrey Lee with Dowling & Partners. Please go ahead.

Humphrey Lee -- Dowling & Partners -- Analyst

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 is notable is that escrows (ph) 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?

Daniel J. Houston -- Chairman, President and Chief Executive Officer

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.

Renee Schaaf -- President-Retirement and Income Solutions

Thank you Humphrey. Yes, you're correct. If you do look at our withdrawals for first quarter of 2019, they are favorable. And if you were to dissect that a little bit further, you would see that our planned sponsor or the contract withdrawals in particular were very favorable. One thing to note though is as you make a quarter over one-year ago quarter comparison, we did have a relatively large plan withdrawal in first quarter of 2018. So that, 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.

Humphrey Lee -- Dowling & Partners -- Analyst

I guess are you doing anything different in terms of client retention or anything like that, that helps to see the more favorable withdrawal activities?

Renee Schaaf -- President-Retirement and Income Solutions

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 planned sponsor and the participant experience better. So from a planned sponsor perspective, for example, investing into chat features, investing into new tools that would allow the planned 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 participants side. So I would say that the favorable retention results that you see here reflect a very strong underlying business model.

Daniel J. Houston -- Chairman, President and Chief Executive Officer

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, 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, 12% increase in the number of new advisors we are working with in this current period. So I think across every one of the important metrics around leveraging technology in our position with our alliance partners where we've got good momentum. So thanks for the question, Humphrey.

Humphrey Lee -- Dowling & Partners -- Analyst

Appreciate the color. Just a follow-up on PGI, so you've talked about the $3 billion outflows. Can you size and I understand they have very low fees, but I was just wondering can you size the earnings impact from that outflows? 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?

Daniel J. Houston -- Chairman, President and Chief Executive Officer

Amy, got a quick response?

Amy C. Friedrich -- President-US Insurance Solutions

Sure. Thanks for the question, Humphrey. I think as we 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 cost 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.

Daniel J. Houston -- Chairman, President and Chief Executive Officer

Thanks for the question, Humphrey.

Humphrey Lee -- Dowling & Partners -- Analyst

Thank you.

Operator

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

Erik Bass -- Autonomous Research -- Analyst

Hi, thank you. For RIS fee, looking at the adjusted return on net revenue ex-favorable DAC this quarter. You're still at the high end of the guidance range for the year even though fee income was still dampened a bit by markets. So just wondering if there is anything else that boosted results this quarter, or do you think margins at the higher end of the range are sustainable going forward?

Daniel J. Houston -- Chairman, President and Chief Executive Officer

Renee?

Renee Schaaf -- President-Retirement and Income Solutions

Yes, thank you for the question, Erik. When we look at the 30% return on net revenue for 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.

Daniel J. Houston -- Chairman, President and Chief Executive Officer

Thanks.

Erik Bass -- Autonomous Research -- Analyst

Got it. And then another question for our -- shifting to the spread side, PRT activity was strong both for you and it looks like across the industry in 1Q. I am 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 it a pull forward of activity?

Daniel J. Houston -- Chairman, President and Chief Executive Officer

I think it's a great question. I will have Renee answer it, but I will say this, it's been interesting to me as we've seen these interest rates go up and sort of tested 3.25%, knocking on the door 3.5% and they falling back. I think again it just sort of wakes up, these things are normally in process, they are in motion. They've already sort of aligned their thoughts thinking 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?

Renee Schaaf -- President-Retirement and Income Solutions

Yes, Erik. Just to give you a little bit of color about sales that we saw in first quarter. We did see about a $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 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 it only a very small portion of that has been derisked 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.

Daniel J. Houston -- Chairman, President and Chief Executive Officer

Sure. Thanks for the questions.

Erik Bass -- Autonomous Research -- Analyst

Thank you.

Operator

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

Alex Scott -- Goldman Sachs -- Analyst

Hi, 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 that have to do maybe just with fewer 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.

Daniel J. Houston -- Chairman, President and Chief Executive Officer

And certainly mix comes into that as well. Tim, you want to go ahead and take that?

Timothy M. Dunbar -- President, Principal Global Asset Management

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 the 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.

Alex Scott -- Goldman Sachs -- Analyst

Got you. That's helpful. And then my follow-up question is just on the corporate segment. Compensation and other came in a bit higher. I guess can you dimension how much of that you expect to continue? I mean, is the $300 million to $320 million range for the full year still so a good way to think about it?

Daniel J. Houston -- Chairman, President and Chief Executive Officer

Yes, it's a good question, and one of course Deanna is in a good position to respond to.

Deanna D. Strable -- Executive Vice President and Chief Financial Officer

Yes, thanks, Alex. As I mentioned earlier on the call, we do now expect to be above the guidance. So really have a larger last two drivers of that, one that was seen in the first quarter and one that will more play out toward 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 in corporate will actually be due to the impact 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 million to $320 million. 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.

Daniel J. Houston -- Chairman, President and Chief Executive Officer

Appreciate the questions. Alex.

Alex Scott -- Goldman Sachs -- Analyst

Thank you.

Operator

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

Jimmy Bhullar -- J.P. Morgan Securities, Inc. -- Analyst

Hi, good morning. First, I just had a question on asset management flows. They obviously turned positive this quarter after I think five straight quarterly declines. So does this have anything to do with any of the management changes or the initiatives that you've been undertaking over the past year in the business, or just if you could give some color on what drove this?

Daniel J. Houston -- Chairman, President and Chief Executive Officer

Yes, we're excited about the change in direction, and Tim 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 and 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. And with that, I'll ask Tim to fill in the blanks.

Timothy M. Dunbar -- President, Principal Global Asset Management

HI, Jimmy. Thanks a lot for the question. 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 our 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 has really been something that we've been trying to achieve. So not only did we see some of our yield-oriented products like deferreds, high yields, diversified real assets, positive flows, but even a lot of our equity products. So REITs, Blue Chip, which is our large cap US equity products really saw 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 the net cash flows.

Jimmy Bhullar -- J.P. Morgan Securities, Inc. -- Analyst

Okay. And then there is 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 with the potential sort of better bargaining leverage on the part of smaller employers as they can combine to offer retirement plan?

Daniel J. Houston -- Chairman, President and Chief Executive Officer

You know, Jimmy, we spend a lot of time on this topic. It's an important one, not only important here in the US, but there's a lot of pension regulation changes occurring around the world. But the idea of the MEPs. 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?

Renee Schaaf -- President-Retirement and Income Solutions

Thank you Jimmy. As Dan said, 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 is another aspect of this reform that I think is very important and we believe will serve Americans well, and that is better positioning the annuities 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 planned sponsors to add the annuity option to (inaudible) defined contribution plan. So we really believe that it's in the best interest of Americans to have this kind of an 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 Hire to Retire solution to the US worker.

Daniel J. Houston -- Chairman, President and Chief Executive Officer

Thanks Jimmy for your questions.

Jimmy Bhullar -- J.P. Morgan Securities, Inc. -- Analyst

Thank you. Thanks.

Operator

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

Daniel J. Houston -- Chairman, President and Chief Executive Officer

John, you there?

John Barnidge -- Sandler O'Neill -- Analyst

Sorry, my phone was muted. Apologies.

Daniel J. Houston -- Chairman, President and Chief Executive Officer

Okay.

John Barnidge -- Sandler O'Neill -- Analyst

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?

Daniel J. Houston -- Chairman, President and Chief Executive Officer

Yes, absolutely. Amy, please go ahead.

Amy C. Friedrich -- President-US Insurance Solutions

Yes, thanks for the question, John. I think what we're really getting at here is probably mostly a comparison issue. I think Deanna mentioned in her comments before, but we typically see a lot of first quarter seasonality from our dental and 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 of 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 to on loss ratios, given the seasonality, given the things that can happen quarter-by-quarter in these businesses. Trailing 12-month tends to be a good guideline to go back to.

Daniel J. Houston -- Chairman, President and Chief Executive Officer

And well within the ranges.

Amy C. Friedrich -- President-US Insurance Solutions

And then lapses. Yes, did you have a lapse question as well, John?

John Barnidge -- Sandler O'Neill -- Analyst

Yes, I did. Thanks.

Amy C. Friedrich -- President-US Insurance Solutions

Okay. Let me get at the lapse question then. One of the things that will happen with the businesses from quarter-to-quarter is 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 rates we need, we ask for rate increases against that business, and when I look at our group life block, we are increasing the profitability and performance of that block. So I'm comfortable with any lapses that happened first quarter.

John Barnidge -- Sandler O'Neill -- Analyst

Great. And then my follow up, sticking with group a bit, so really strong sales continued lot of the progress seen. What are you seeing there on the pricing and competitive landscape and where you're maybe seeing demand come from? Thank you very much.

Daniel J. Houston -- Chairman, President and Chief Executive Officer

Please, Amy.

Amy C. Friedrich -- President-US Insurance Solutions

Right. So, 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.

Daniel J. Houston -- Chairman, President and Chief Executive Officer

Appreciate the questions, John.

John Barnidge -- Sandler O'Neill -- Analyst

Thank you.

Operator

The next question will come from Ryan Krueger with KBW.

Ryan Krueger -- Keefe, Bruyette & Woods -- Analyst

Hi, thanks, good morning. I had a question on the Wells Retirement acquisition, more strategic. In the past, Principal typically seemed more cautious on the larger case record keeping business. So, I was hoping you could give some perspective on how and why your view on that has changed now?

Daniel J. Houston -- Chairman, President and Chief Executive Officer

Yes, Ryan, thanks for that question. I can't tell you how excited we are about welding the Wells Fargo Institutional Retirement & Trust business to Principal for a lot of different reasons. We actually, as you have 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 is a little bit of a gap in our sort of total lineup. So we're excited about what that fills. Additionally, as was mentioned in the prepared comments, the fact that they have this trust business, it gives us some additional flexibilities. I would also tell you that the fact that they have an ESOP 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 would love to have you make some additional comments.

Renee Schaaf -- President-Retirement and Income Solutions

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 record-keeping platforms 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 plan 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 & Trust team members into Des Moines. And I can't tell you the level of energy and enthusiasm that we had among 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 participants in the years to come. So we're very excited about this transition and the acquisition.

Ryan Krueger -- Keefe, Bruyette & Woods -- Analyst

Great, thank you very much.

Daniel J. Houston -- Chairman, President and Chief Executive Officer

Thank you, Ryan. Appreciate it.

Operator

The next question will come from Andrew Kligerman with Credit Suisse. Please go ahead.

Andrew Kligerman -- Credit Suisse -- Analyst

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 calculation -- we calculated 66 basis points of fees and other revenues divided by average assets in '17 and then it was 63 basis points last year. And then we look at this quarter and it was about 58 basis points. And I know that it has something to do with the average share of daily balances versus 59 basis points in 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?

Daniel J. Houston -- Chairman, President and Chief Executive Officer

We will be happy to cover that. Renee?

Renee Schaaf -- President-Retirement and Income Solutions

Sure. First off, let's maybe take a look at what happened in first quarter and then I'll make some comments about 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. And so a portion of that of the GAAP, there was about a 6% GAAP year-over-year -- 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 -- and we mentioned this in our outlook call, we anticipate seeing about 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 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 risk 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% GAAP between growth in account values and growth in net revenues and that's a result of the typical pressures within the industry on revenues that results from decoupling the record-keeping decision from the investment management decision, the open architecture, reduction in 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 1% to 2% shift due to commissions moving to a fee-based compensation arrangement.

Daniel J. Houston -- Chairman, President and Chief Executive Officer

Andrew, I think it also speaks to why we feel we have to have scale in these businesses for this very reason.

Andrew Kligerman -- Credit Suisse -- Analyst

Got it, and very helpful. And then just the next question. Actually maybe I could just sneak a one liner before the next question, but just the tax rate at 16.4% -- 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?

Daniel J. Houston -- Chairman, President and Chief Executive Officer

Yes, let me take both of those, I would say that the tax rate, we still think it's 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, it's on the lower end, but well within the range. On the pension risk transfer business, it really does break into two different groups, large and small. Think about kind of below half a 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, and 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.

Andrew Kligerman -- Credit Suisse -- Analyst

Thank you.

Operator

The next question will come from Thomas Gallagher with Evercore. Please go ahead.

Thomas Gallager -- Evercore ISI -- Analyst

Good morning. Another follow-up on RIS fee. So it looks like and it is going to be related to I guess the comment that you made about the 5% to 8% GAAP 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 a vast majority of your growth inflows is coming from 1,000 lives and larger plans. If I just look at either planned growth or asset growth, is that a fair characterization? I mean in terms of the business that's a thousand lives in smaller, are you actually seeing net outflows overall? And can you talk a little bit about what the economic difference is if revenue fee yield for these large plans versus mid to small?

Daniel J. Houston -- Chairman, President and Chief Executive Officer

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.

Renee Schaaf -- President-Retirement and Income Solutions

Yes, thank you for the 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 the first quarter if you look at that record $5.4 billion of sales, you will see that it is not dominated by any single large plan at all, but there is a really nice mix of the mid-sized plans. And that will vary from quarter to quarter. With respect to your question around the variation in the revenues that we would collect, as you might imagine, with smaller plans, we tend to not only pickup the record-keeping, but oftentimes we pick up a share -- a larger share of the asset management as well. And with the larger plans, they tend to steer more toward 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 plan market. So we feel very comfortable with the business mix. We feel very comfortable with our approach and our ability to deliver growth in both small and large plans and certainly our ability to retain that.

Daniel J. Houston -- Chairman, President and Chief Executive Officer

Yes, I think 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 that benefit even whether it's a job changer or a retiree.

Thomas Gallager -- Evercore ISI -- Analyst

Got you. And just a follow-up on that, can you break out in terms of flows, how much of your flows, if you could quantify of the -- I think it's what $3.4 billion of cash flows would have been 1,000 lives in larger versus below that size, if you're able to quantify that?

Daniel J. Houston -- Chairman, President and Chief Executive Officer

You know, that's not something we're going to provide at this point, but appreciate your comment. Thank you.

Thomas Gallager -- Evercore ISI -- Analyst

Thanks.

Operator

The final question is from Suneet Kamath with Citi. Please go ahead.

Suneet Kamath -- Citi -- Analyst

Thanks. Just want to circle back on the Wells deal. So in RIS fee, I think you 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 there is going to be some incremental expenses that you're going to have to incur to get digital on those plans? Just any color there would be helpful.

Daniel J. Houston -- Chairman, President and Chief Executive Officer

Yes, great question. And as you might expect, you get some of that doing 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. It is our promise and commitment to take best in class on all fronts. With that, Renee, do you want to add some additional color on specificity?

Renee Schaaf -- President-Retirement and Income Solutions

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 and 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're very concerned about and we're paying a lot of attention to is talent. We are picking up a very experienced team from the Wells Fargo Institutional Retirement & 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 we'll approach this very thoughtfully, very carefully and you can expect to hear a lot more on this as the months ahead unfold.

Suneet Kamath -- Citi -- Analyst

Got it. Makes sense. And then my follow up is again on RIS fee. 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 disclosure. 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.

Daniel J. Houston -- Chairman, President and Chief Executive Officer

Yes, So maybe quickly on that one. It hasn't part, as Renee described earlier, a difference on the size of the plan sponsor and if you're skewing toward the larger and 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 last few years, 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 to be a customer-centered in how we present our investment offerings. The fees are competitive. The performance is good, a little bit of a hiccup in the Q4 period. But as I look at the relative strength of the investment performance on 1, 3 and 5, that still puts us in 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.

Operator

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

Daniel J. Houston -- Chairman, President and Chief Executive Officer

Good, thank you and again from our perspective, good start to the year. We do have multiple parallel paths 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 emphasize, 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 is 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.

Operator

Thank you for participating in today's conference call. This call will be available for replay beginning at approximately 1:00 PM Eastern Time until end of day May 3, 2019. 6619999 is the access code for the replay. The number to dial for the replay is 855-859-2056 US and Canadian callers or 404-537-3406 International callers. Ladies and gentlemen, thank you for participating in today's conference . You may now disconnect.

Duration: 63 minutes

Call participants:

John Egan -- Vice President of Investor Relations

Daniel J. Houston -- Chairman, President and Chief Executive Officer

Humphrey Lee -- Dowling & Partners -- Analyst

Renee Schaaf -- President-Retirement and Income Solutions

Amy C. Friedrich -- President-US Insurance Solutions

Erik Bass -- Autonomous Research -- Analyst

Alex Scott -- Goldman Sachs -- Analyst

Timothy M. Dunbar -- President, Principal Global Asset Management

Deanna D. Strable -- Executive Vice President and Chief Financial Officer

Jimmy Bhullar -- J.P. Morgan Securities, Inc. -- Analyst

John Barnidge -- Sandler O'Neill -- Analyst

Ryan Krueger -- Keefe, Bruyette & Woods -- Analyst

Andrew Kligerman -- Credit Suisse -- Analyst

Thomas Gallager -- Evercore ISI -- Analyst

Suneet Kamath -- Citi -- Analyst

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