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Principal Financial Group Inc (NASDAQ:PFG)
Q4 2019 Earnings Call
Jan 29, 2020, 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 Fourth Quarter 2019 Financial Results Conference Call. There will be a question-and-answer period after the speakers have completed their prepared remarks. [Operator Instructions] We would ask that you be respectful of others and limit your questions to one and a follow-up, so that we can get to everyone in the queue. 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 Principal Financial Group's fourth quarter and full-year 2019 conference call. As always, materials related to today's call are available on our website at principal.com/investor. Following the reading of the safe harbor provision, CEO, Dan Houston and CFO, Deanna Strable, will deliver some prepared remarks. Then we will open up the call for questions. Others available for the Q&A session include Renee Schaaf, Retirement 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 strategy. 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 U.S. Securities and Exchange Commission.

Additionally, some of the comments made during this conference call may refer to non-GAAP measures. Reconciliation of the non-GAAP financial measures to the most directly comparable U.S. GAAP financial measures may be found in our earnings release, financial supplement and slide presentation.

Dan?

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

Thanks, John and welcome to everyone on the call. This morning, I'll share performance highlights for the fourth quarter and full year and accomplishments that position us for continued growth. Deanna will follow with details on our financial results and capital deployment.

2019 marked Principal's 140th anniversary and a year in which we closed one of the largest acquisitions in our Company's history. We are proud to serve more than 33 million individuals, including China, and nearly 200,000 businesses in more than 80 markets around the world. And I'd like to thank both our customers and our employees for being a part of Principal's journey.

2019 was another good year for Principal. We delivered non-GAAP operating earnings of $1.6 billion, a 2% decrease compared to a strong 2018 that benefited from a large PGI performance fee. This result reflects ongoing fee pressure, continued investments in the business, and the impact from the Institutional Retirement & Trust or IRT acquisition. Throughout 2019, we continued to demonstrate strong business fundamentals, balanced investments in our businesses with expense discipline and be good stewards of shareholder capital, deploying nearly $2.1 billion, including $1.2 billion for the IRT acquisition. This acquisition doubles the size of our U.S. retirement business and positions us as a Top 3 retirement player. The integration remains on track and we'll be hard at work throughout 2020 to make sure the transition is as seamless as possible.

While working to integrate the acquisition, we continue to grow our existing U.S. retirement business in 2019. Compared to 2018, our RISP sales increased 30%, recurring deposits grew 10%, and we saw a double-digit growth in employer matches. Also I want to highlight strong results in U.S. Insurance Solutions, including record pre-tax operating earnings for the segment in 2019. Most Specialty Benefits and Individual Life had record sales in 2019. In particular, Individual Life increased sales by 17% compared to 2018. Additionally, group benefits had very strong in-group growth as our customers expanded their businesses and hired more employees.

Our 2019 Principal Financial Well-Being Index, our proprietary survey of small- to medium-size business owners and leaders, shows that business owners are expecting continued growth in 2020, while investing in their own employees. We are well positioned to help these business owners grow with our retirement and protection offerings. Over the course of 2019, AUM increased $109 billion to a record $735 billion. This was a 17% increase over 2018 and provides a strong foundation for 2020. Additionally, we ended 2019 with $146 billion of AUM in our China joint venture and $898 billion of assets under administration and the IRT business.

After going negative in 2018, total Company net cash flow returned to positive for the full year at $17 billion. This included positive net cash flow from every business unit. 2019 caps a strong decade. Principal delivered positive total Company net cash flow in nine of the last 10 years, despite a very competitive environment. RISP had its strongest year for net cash flow since 2012 and was $7 billion in 2019. This was higher than our targeted range of 1% to 3% of beginning of year account value. When the IRT retirement plans migrate to the Principal platform in 2020 and 2021, the assets will be reported in operations acquired. RIS spread at $4 billion of net cash flow in 2019, driven by strong sales in pension risk transfer, income annuities, and investment only. Principal International also generated $4 billion of net cash flow in 2019 and marked its 45th consecutive positive quarter. This result primarily reflects a rebound in Brazil throughout the year as well as strong flows in Hong Kong.

Principal Global Investors' net cash flow improved in 2019 to a positive $1.1 billion, including $2.7 billion in the fourth quarter. The New Mexico Scholar's Edge 529 Plan funded during the quarter with $1.4 billion now managed by PGI, with a majority of these assets invested in our retail mutual funds. This contributed to the best quarter for net cash flow in our retail mutual fund platform since the first quarter of 2015. Clearly, 2019 benefited from the management and distribution changes we've put in place in PGI and we're confident in the opportunities that lie ahead. The synergies between PGI and Principal International continued to evolve and drove a large platform win in Hong Kong during 2019. The team continues to look for opportunities to leverage both our global asset management expertise and the distribution force we have in local markets.

The importance of saving for retirement continues to gain traction as private pension reform discussions advanced around the world in 2019. As a leading retirement provider, we're excited about the approval of the SECURE Act in the U.S. We work closely with policy makers and regulators to expand access to retirement saving plans and deliver guaranteed income in retirement through the workplace. Today, 30% of the retirement plans we onboard annually in the U.S. are with companies that have never offered a plan. The SECURE Act seeks to improve access to workplace retirement plans by allowing small employers to join multiple employer plans and increase tax credits for start-up 401(k) plans. While the SECURE Act is an important step to expand workplace retirement plan, access and guaranteed income options, we expect market growth will take time to materialize.

Outside U.S., we continue to use our knowledge and expertise to advocate for plan designs that enable workers to fund retirements that may last 40 years. Throughout 2019, several governments have made pension reform a priority, including Brazil and Chile. With our expertise and global footprint, we'll continue to partner with governments around the world to promote sustainable policies and desired outcomes for its citizens.

Turning to Slide 5, our investment performance remains very strong. At year-end, 79% of the Principal's mutual funds, ETFs, separate accounts, and collective investment trusts were above median for the five-year and 71% were above median for the three-year. Our one-year performance rebounded to 84% above median compared to 41% at the end of 2018. Additionally, for our Morningstar-rated funds, 87% of the fund level AUM had a four-star or five-star rating at year-end. This strong performance positions us well to attract, retain assets going forward.

Throughout 2019, we continued to execute on our customer-focused solutions-oriented strategy as we expanded our global distribution network and array of retirement, investment, and protection solutions. We're in more than 120 total placements with more than 70 different offerings on more than 50 different platforms. This reflects continued strong interest in our specialty solutions-oriented and alternative capabilities as well as our success in getting these investment options added to third-party distribution platforms, recommended list and model portfolios.

Additionally, the IRT acquisition enhances our ability to distribute through the consultant channel. Our increased capabilities and depth of relationships with the consultants, RIAs, and specialist firms will accelerate our ability to achieve new sales. We also advanced our accelerated digital investments throughout 2019 to create better customer experiences and drive revenue growth, while gaining efficiencies. We're now two years in and our investments are on track. We saw incremental benefits to both revenue and expenses in 2019 from these capabilities.

For example, Principal Real Start, our new digital and mobile platform to enroll retirement plan participants, has shown tremendous potential to get participants on track to save enough for retirement. Since its launch in the fourth quarter of 2018, more than a 0.25 million participants completed the experience and chose deferral rates that are 60% higher than other enrollment methods and one of four participants have elected to auto escalate their deferral rate up to 10%. Additionally, our fully digital experience for purchasing term life insurance launched in the third quarter of 2019 and is one of the first of its kind in the industry. On average, it delivers policies to customers two-thirds faster than traditional methods.

While Deanna will cover this in more detail, I want to emphasize our balanced approach to capital deployment. In addition to strategic acquisitions and investments in our business, in 2019, we returned more than $860 million to shareholders through common stock dividends and share buybacks. We enjoyed noteworthy third-party recognition throughout 2019, reflecting our Company's dedication to its core values. Pensions & Investments named Principal one of the best places to work in money management and we're one of only five companies to have made that list every year since the program was launched in 2012. We received multiple awards from Forbes, including being named one of America's Best Large Employers, one of America's Best Employers for Diversity and Number 5 on their list of Best Employers for Women. And Cogent Syndicated recognized Principal as a defined contribution service winner with the highest satisfaction score in Plan Advisor Service & Support, as well as Participant Service & Support, the two most critical categories for continued recommendation among defined contribution advisors.

While we're incredibly proud of the external recognition, Principal's record level of giving back in 2019 also speaks volumes about our Company culture. Our employees donated more than $6 million and volunteered 55,000 hours of their time in 2019 to help people around the world learn, earn, and save. This team effort shows how Principal strives not only to do business, but to do good in the communities where we live and work.

In closing, I'm very proud of our accomplishments in 2019 and I'm confident in our ability to execute on our strategy in 2020. We'll continue to balance investing in our business, while managing expenses in line with revenues to deliver long-term value for our shareholders.

Deanna?

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

Thanks, Dan. Good morning to everyone on the call. This morning, I'll discuss the key contributors to our financial performance for the quarter and full year as well as capital deployments and our capital position at year-end. Net income attributable to Principal was $301 million for the fourth quarter and $1.4 billion for the full year. Quarterly net realized capital losses of $96 million were primarily driven by derivative losses associated with hedging activities with minimal credit losses. Reported non-GAAP operating earnings were $396 million for the fourth quarter or $1.41 per diluted share. Excluding significant variances, fourth quarter non-GAAP operating earnings increased 13% and non-GAAP earnings per diluted share increased 14% compared to fourth quarter 2018. The year-ago quarter was negatively impacted by a 14% decline in the S&P 500 and unfavorable macroeconomics in Latin America.

Reported full-year 2019 non-GAAP operating earnings were nearly $1.6 billion or $5.58 per diluted share. Non-GAAP operating ROE, excluding AOCI other than foreign currency translation was 13.1% at year-end. The full-year non-GAAP operating earnings effective tax rate was 16.9%, within our 2019 guided range. As communicated on our 2020 outlook call, we expect our 2020 effective tax rate to be between 16% to 19%.

As shown on Slide 4, we have three significant variances during the fourth quarter, including negative $14 million in RIS-Fee, primarily integration costs from the IRT acquisition and a negative $3 million impact in Principal International due to lower-than-expected in encaje performance in Latin America. These were mostly offset by a $12 million benefit in PGI from a reduction in an earn-out liability for Principal Real Estate Europe, formally known as Internos. This reduction was due to a change in the timing and pattern of revenues during the earn-out measurement period stemming from two factors. Market dynamics allowed the team to sell several properties and liquidate assets in a fund, maximizing returns for our clients, which is always our priority and we had a delay in receiving regulatory approval to launch a key fund during the measurement period. Principal Real Estate Europe continues to perform well and their strong interest in their investment strategies. As a reminder, in the prior year quarter we had significant variances, primarily due to unfavorable macroeconomic factors that had a net negative $54 million impact to reported non-GAAP pre-tax operating earnings.

Looking at macroeconomic factors in the fourth quarter, the S&P 500 Index increased over 8% and the daily average increased more than 4% compared to the third quarter of 2019. On a trailing 12-month basis, the daily average increased 6%, in line with our full-year price appreciation assumption.

Moving to foreign exchange rates, I'd like to remind you that revenue expenses and pre-tax operating earnings are translated using average foreign exchange rates, while AUM is translated using the spot rate. Fourth quarter AUM benefited slightly from favorable movements in spot rates relative to the third quarter, but the average rates remained a headwind. Impacts to pre-tax operating earnings included a negative $4 million compared to fourth quarter 2018, as well as third quarter 2019 and a negative $24 million on a trailing 12-month basis.

Mortality and morbidity were in line with or better than our expectations for the fourth quarter and full year in Specialty Benefits and Individual Life. Very favorable claims benefited Specialty Benefits full-year pre-tax operating earnings by approximately $19 million, driven by $10 million of favorable group life and disability claims in the fourth quarter and $9 million of favorable group life claims in the second quarter. Over a longer period of time, loss ratios remain within our guided range.

RIS spread had an experience loss in the fourth quarter that was slightly worse than our expectations and the prior-year quarter, negatively impacting pre-tax operating earnings. For the full year, experience was below our expectations with a net negative $20 million change from 2018. Over a longer period of time, experience is in line with our expectations.

Both long-term and short-term interest rates declined throughout 2019. Our near-term earnings are most sensitive to changes in the interest on excess reserves or IOER rate. The IOER rate was lowered 85 basis points in 2019, including a 25-basis point drop in the fourth quarter. This negatively impacted revenue, primarily in the IRT trust and custody business and was reflected in our 2020 guidance for RIS-Fee.

Turning to expenses. As we've experienced in prior years, we expected total Company operating expenses to be higher in the fourth quarter than the average of the first three quarters due to seasonality of certain expenses. Excluding IRT and higher variable expenses, fourth quarter operating expenses and compensation and other expenses are in line to slightly lower than expected levels. It's critical that we continue to execute on our investments to position us for long-term growth. Our digital investments continue in 2020. We expect the net pre-tax impact to be slightly less than the $50 million to $60 million net impact in 2019, as more benefits are expected to emerge in 2020.

The following comments on business unit results exclude significant variances from both periods. Starting with RIS-Fee on Slide 6, pre-tax operating earnings of $129 million were in line with expectations. Lower DAC amortization expense was offset by a true-up of costs associated with the IRT business. Full-year 2019 net revenue growth of 11% is above our guided range as the acquisition brought on additional net revenue in the second half of the year. The quarterly margin was maintained at 25% in the fourth quarter. Longer term, we expect margins to expand once the acquisition is fully integrated and the expense synergies are realized.

Importantly, the legacy RIS-Fee business continues to perform well. The fourth quarter margin was 33% for the legacy business, above the guided range. As the acquired business begins to transition to our combined platform in 2020, it will become increasingly difficult to provide stand-alone details on the legacy business. The fundamentals of our legacy business remains strong. Compared to full-year 2018, sales of $18 billion increased 30%, defined contribution participant count increased nearly 300,000 participants or 8%, and net cash flow of $7 billion increased 140% and with more than 3% of beginning of your account values above the 1% to 3% targeted range. This was driven by strong sales, 10% growth in recurring deposits, and low contract lapses.

Turning to Slide 8, RIS-Spread's pre-tax operating earnings of $92 million were lower than expected, primarily due to unfavorable experience losses, lower-than-expected net investment income and the impact of lower annuity sales. RIS-Spread's full-year net revenue growth and margin were within our guided ranges. In 2019, account values grew nearly 13% on strong sales of $10.3 billion. This includes a record $3.9 billion of pension risk transfer sales, nearly 50% higher than 2018. Looking ahead, the pipeline for pension risk transfer sales remain strong, despite the low interest rate environment.

As shown on Slide 9, PGI's pre-tax operating earnings of $132 million were above our expectations. This was primarily due to growth in management fees and performance fees, partially offset by higher variable expenses. PGI generated $51 million of performance fees in the fourth quarter. Of this, $32 million was related to a Principal Real Estate Europe fund. Per the acquisition agreement, these were distributed to the investment team and the previous owners, resulting in an immaterial impact to pre-tax operating earnings. A portion of the other performance fees earned during the quarter were also pass through as compensation. As a reminder, performance fees are volatile quarter-to-quarter. Full-year 2019 operating revenues less pass-through expenses increased 2%. This was within our guided range and excludes the impact of the accelerated performance fee in 2018. PGI's margin ended the year at 36%, within our guided range.

Moving to Slide 10, Principal International's pre-tax operating earnings of $80 million were in line with our expectations and negatively impacted by foreign currency translation. A benefit from higher-than-expected inflation in Brazil was more than offset by elevated expenses isolated to the quarter. We believe that fourth quarter's pre-tax operating earnings, excluding significant variances, is a good starting point to use to estimate PI's earnings in 2020. Excluding the impact of the actuarial assumption review, PI's full-year margin of 39%, was at the high-end of our guided range, while net revenue growth of 5% was at the low-end of our guided range, primarily due to foreign currency headwinds.

Turning to Slide 11, Specialty Benefits pre-tax operating earnings of $98 million were strong, due to favorable claims and growth in the business. Specialty Benefits had a very strong year and continues to perform well. On a full-year basis. Specialty Benefits premium and fees increased a strong 7% over 2018 and were within our guided range. This was driven by record sales of nearly $400 million, strong retention, and in-group growth. The full-year margin was over 14%, 130 basis points higher than last year and was at the high end of our guided range.

As shown on Slide 12, Individual Life's pre-tax operating earnings of $46 million were in line with our expectations. As part of our third quarter assumption review, we lowered our long-term interest rate assumptions. This decreased Individual Life's earnings run rate by about $2 million to $3 million per quarter with the impact beginning in the fourth quarter. On a trailing 12-month basis, Individual Life's premium and fee growth of 5% and margin of 18% were within our guided ranges. Individual Life had record full-year sales of $270 million, an increase of 17% over 2018 with over 60% coming from the business market, as we continue to focus on solutions for business owners.

At $96 million for fourth quarter, Corporate's pre-tax operating losses were in line with our expectations. For the full year, losses of $380 million were higher than our guided range. As discussed on previous calls, higher security benefit expenses, as well as increased debt expense and lower net investment income related to the IRT acquisition impacted corporate losses relative to our 2019 guided range.

Looking ahead to 2020, I want to remind you that we typically have elevated payroll taxes in PGI and higher claims in Specialty Benefits in the first quarter. Capitalizing acquisition costs in our group benefits business will improve first quarter earnings for Specialty Benefits, but we continue to expect earnings in the first half of the year to be slightly less than the second half.

With lower interest rates throughout 2019, I want to provide details on some of the impacts on our general account businesses. During the fourth quarter, our new money yield of 3.2% was about 50 basis points lower than the overall portfolio yield, excluding variable investment income. This will provide some headwinds to earnings, but it will take time for the new money yield to have a meaningful impact on the overall portfolio yield and our operating earnings. We remain disciplined in updating our pricing for interest rate movements. We're conservative in the products and liabilities we have exposure to and we remain diligent around asset liability management. While higher rates are incrementally positive, our diverse business mix positions us well in this low interest rate environment.

As shown on Slide 13, we committed and deployed $240 million of capital in the fourth quarter, including $152 million for common stock dividends, $84 million in share repurchases and $4 million to increase ownership in one of our focused investment teams. This brings full-year capital deployments to nearly $2.1 billion or 150% of net income, well above our $1 billion to $1.4 billion guidance. 2019 deployments included $1.2 billion for the IRT acquisition and more than $860 million was returned to shareholders through common stock dividends and share repurchases. At the end of 2019, we had $168 million remaining on our current share repurchase authorization. As always, we will continue to take a balanced and disciplined approach to capital deployment.

As a reminder, on our 2020 outlook call, we increased our free cash flow target to 70% to 80% of net income in excess of capital used to fund organic growth. We are targeting $1.4 billion to $1.7 billion of external capital deployments in 2020. The full-year common stock dividend was $2.18 per share, a 4% increase over 2018. Last night, we announced a $0.56 common stock dividend payable in the first quarter, a 4% increase from a year ago. Our dividend yield is approximately 4% and on a trailing 12-month basis were slightly above our targeted 40% net income payout ratio. Our capital and liquidity position remained very strong, including an estimated risk-based capital ratio of 410% at year-end. We ended 2019 with nearly $1.2 billion at the holding company, nearly a $150 million in excess of our targeted 400% risk-based capital ratio and over $400 million of available cash in our subsidiaries. In addition, a low leverage ratio and no debt maturities until 2022 provides us significant financial flexibility.

As part of our 2020 outlook, we provided estimated revenue for full-year 2019 by business unit to use as a starting point for 2020. Actual results, excluding significant variances, were within these ranges. I want to remind you that our 2020 margin guidance for RIS-Fee excludes the IRT integration costs. We continue to expect approximately $55 million to $65 million of integration costs in our reported pre-tax operating earnings in RIS-Fee. We will continue to identify these integration costs as significant variances throughout the year.

Looking ahead to 2020, we continue to expect an annual growth rate in non-GAAP operating earnings per share in the high-single digits over 2019 excluding the impact of the 2019 significant variances and integration costs in 2020. 2019 was a good year and we remain confident in our diversified business model as well as our ability to execute on our strategy and consistently deliver above market growth.

This concludes our prepared remarks. Operator, please open the call for questions.

Questions and Answers:

Operator

[Operator Instructions] The first question will come from Alex Scott with Goldman Sachs. Please go ahead.

Alex Scott -- Goldman Sachs -- Analyst

Hi, good morning. First question I had was on RIS-Fee. I just wanted to see if you could provide some comments on the way the end of the year has gone in terms of any changes to the plans. I know there's been some moving pieces around the way commissions are paid in the past. Also, just thinking about the proprietary versus non-proprietary mix of assets, would you anticipate that that as a percentage of AUM would sort of begin to flat line or would that continue to move down the pace it has been moving down?

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

Yeah, thanks, Alex. This is Dan. Thanks for the question. A couple of notes before I throw it over to Renee. I don't -- when I reflect on the results for 2019, they were really positive. If you look at that plan growth on a full-year basis, over 250,000 new participants being added over that period of time and frankly the sales number is really, really strong. So, the fundamentals of the business remain very much intact. As you know we've had historically very strong proprietary asset management sales in large part because performance has been good and again it differs on size, whether it's small, medium, or large, but we feel very good about our ability to continue to provide a comprehensive bundled solution, including administration, record-keeping and asset management, and there's a lot of collaboration that occurs between PGI and RIS to make that happen, but I'll throw it to Renee. I know you're excited about what you've got going on, not only 2019, Renee, but 2020.

Renee Schaaf -- President-Retirement and Income Solutions

Yeah, absolutely. So, Alex, thank you for your question and the first question that you had was around the movement that we're seeing from commission-based compensation agreements to fee-based. And the guidance that we provided last year on this was we would typically see about -- revenue pressures of about 1% to 2% due to this, which of course doesn't impact pre-tax operating earnings because it's netted out in the expense line. But what we are seeing is exactly in line with that. And so, when we look at fourth quarter results, we see about 1% to 1.5% movement from commission to fee-based and that's exactly what we would anticipate.

Your other question dealt with the percent of proprietary assets and what we might anticipate seeing there. First off, we're really proud of the results, our sales results in 2019, and we introduced pricing and the way that it's packaged to encourage and to incent proprietary -- sales of proprietary assets. And so, if you were to look at the percent of proprietary assets for our small and medium-sized plans, you would see that they run above market, above industry, and institutional is pretty much in line with what we see in industry. Despite that, we do see downward pressure on this as kind of a normal, something we've been talking about now for several quarters. It's the result of more propensity for employers, particularly large employers to move toward passive and also the bifurcation of the record-keeping decision from the asset management and the investment management decision. If you look at net cash flows overall for target date funds, they've been fairly flat, but we're pleased with what we see in terms of how we perform to market, but we do anticipate that we'll continue to see pressure here ongoing simply because of the bifurcation between record-keeping and investment management decisions.

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

Does that help, Alex?

Alex Scott -- Goldman Sachs -- Analyst

Yeah, it is very helpful. And look, I appreciate that the flows and the sales have been quite strong there. So, I don't mean to take away from that. Second question I had was just on SECURE Act. If you could provide any more details on sort of the action plan. Are you going after multi-employer pooling? And is anything in the works there?

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

Yeah, certainly. And as you know, we advocated for the passage of the SECURE Act. We feel good about it. Really sort of three key pieces. The first of which is the formation, as you know the -- of the MEPs, multiple employer plans. We've been in that business for a very long time. So we understand how to work with contracts that have adopting employers. So the fundamentals are very much in place. There will be a change, we'll end up partnering with a third-party to help us facilitate that, but there is very much a battle plan in place to help provide small- to medium-sized employers gain coverage and improve adequacy.

The other was the in-plan income solution, which again, we've been in the annuity business for 75 years, we know how to do that. The safe harbor is going to give customers more confidence about adding that provision, and then there is a small incentive for small plan formation in the way of a tax credit. So, I'd say, all in all, we look at that as being a positive. And as I said in my prepared comments, this will take time to merge. This won't happen overnight. But just like the last major piece of pension legislation, which gave us auto-enroll and auto-escalate, these things collectively put us on a better position to cover more American workers. So, net positive for the SECURE Act.

Alex Scott -- Goldman Sachs -- Analyst

Thanks very much.

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

You're welcome.

Operator

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

Erik Bass -- Autonomous Research LLP -- Analyst

Hi, thank you. First, just one follow-up on the SECURE Act and specifically the open MEPs, do you see that as all kind of new opportunity? Or do you get a sense from any of your existing small plans that they may be looking to move into kind of an open MEPs structure to try to lower their costs?

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

Yeah, I actually think it's going to be far more new than existing. And again, you have to recognize and we, again as I mentioned earlier Eric, have some experience in this space, because there are limitations. There will be of a limited number of planned choices. There are other constituents involved in the decision-making. So, not only will we see emerge multiple employer plans with both multiple record-keepers out there providing those services, but I got to believe every single organization like Principal will participate there and as we continue with this digital transformation have our own small employer plans that are very cost effective, very convenient and would effectively allow them to have perhaps a little bit more flexibility. But Renee, you want to add some additional comments there?

Renee Schaaf -- President-Retirement and Income Solutions

Yeah. I agree that I think we'll see most of the plan take-up be with new plans and start-up plans. Perhaps, the one reason why existing plan sponsors might be interested in open MEP is if they can curtail their fiduciary liability and we're still waiting on final regs to see exactly how that may play out, but that could be a driver for -- to incent existing plans to adopt the open MEPs structure but I agree it's going to be predominantly driven by new plans and start-up plans.

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

But the regs for what I described in three buckets is over 800 pages long and it's still going to require the industry to digest that.

Erik Bass -- Autonomous Research LLP -- Analyst

Got it. Thank you. I appreciate the color there. And then secondly, I was hoping you could talk about the impact of the macro and political disruption in Hong Kong and Chile and just provide an update on what impact do you see that having potentially on near-term results in these markets and for Principal International overall.

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

It's a good question. I'll make a few comments before throwing it the Luis. And again, I think it's a reminder to all of us as you think about what is appropriate pension policy by country, you also have and although we don't -- aren't in the record-keeping business in France, you also have people on the streets demonstrating against the changes to their pension policies and we've been saying for years that the era of personal responsibility and accountability is here. Governments aren't in a position to fund it. And sure enough, as you look at Chile and Hong Kong and France and other areas around the world, including Brazil, you're seeing more pressure being placed on elected officials to come up with a reasonable retirement policy for people aging. And so, on one hand, it's a huge opportunity for Principal, at the same time, we've got to make sure that we're advocating and we're helping steer and drive pension policy and I can't think of a better person to talk about that on the international front than Luis Valdes. Luis?

Luis Valdes -- President and Chief Executive Officer-Principal International

Okay, thank you very much. Hi, Erik. A couple of things first to start with. The root cause of these social unrest in Hong Kong and Chile are, first of all, completely different. Also, I think that we have to keep in mind that in both places they do have different political systems in nature, so hence the evolution pace, path of the negotiations and solutions are going to be different, are going to take a quite amount of time and at this moment are kind of unknown.

What do we have in common in these two places? First, we have had no major disruptions in our operations in both places and we have had second, a minor short-term financial impact in both locations. I wanted to say something. We're reporting record AUMs for Hong Kong for 2019 and we're reporting in trailing 12-month basis record operating earnings for Hong Kong as well. So, this is a micro scenario in the short-term. Going into macro perspective and having said that and because the severity and the duration of this social unrest, both markets are going into a no-growth, if not in a recession for the next couple of years. So what we're doing in light of this new reality, we are recalibrating our operations in Chile and in Hong Kong with two main objectives.

First of all, to continue servicing our clients and to protect their interest and to continue improving their customer experience. And second, to keep our expenses in line with our revenues going forward. We're well prepared and we'll continue monitoring how the macroeconomics are going to evolve in those markets, but we are taking actions and [Indecipherable] expense actions in order to be pretty much more in line about what is -- might happen in those markets.

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

Hopefully that helped, Eric?

Erik Bass -- Autonomous Research LLP -- Analyst

Yes, thank you.

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

Appreciate it.

Operator

The next question is from Jimmy Bhullar with J.P. Morgan. Please go ahead.

Jimmy Bhullar -- JPMorgan Chase & Co. -- Analyst

Hi, good morning. I had a couple of questions. First, on the -- overall, your results were obviously pretty strong, but it seems like retirement earnings for each of the past -- the fee side, each of the past couple of quarters have been a little light. And I'm not sure how the Wells block is performing versus your initial expectations and specifically on how much of a headwind the low Fed funds rate is for income on trust accounts for the acquired block.

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

Okay. Good, good questions and make no mistake, there is a headwind with interest rates continuing to fall and it is having a negative impact on that trust and custody business. But again, I get back to the fact we are in this for the long haul and feel very good about the fundamentals.

Renee, you want to talk a little bit further about the integration and where we stand?

Renee Schaaf -- President-Retirement and Income Solutions

Absolutely. Thank you for the question, Jimmy, and I think first off to just speak a moment about the fourth quarter results for fee. We're very pleased with the results, particularly when you look at the legacy business, the growth that we're seeing there, the profitability that we're seeing there, really very good and very strong. Our sales results I think and our net cash flow results are particularly pleasing and we're excited about the impact that we see on TRS. Our new sales are really being fueled by TRS and that goes all across the board in terms of defined benefit sales being up 33%, ESOP sales being up 70%, our record year for sales for non-qualified. So, a lot of strength in the organic growth machine of that legacy business.

As you pointed out, when we look at the IRT business, the area of pressure that we have seen is in the interest on excess reserves and we saw an 85% decline in the basis points that would reflect for that business and so we are seeing pressures there. That's been accounted for in terms of our guidance for 2020, but it does pressure results for fourth quarter.

Jimmy Bhullar -- JPMorgan Chase & Co. -- Analyst

How much of a -- are you able to quantify how much of a headwind that is on an annual basis, if -- assuming a stable Fed funds rate this year versus where it would have been when you announced the deal?

Renee Schaaf -- President-Retirement and Income Solutions

Yeah. So, if you were to take the 85 basis points and annualize that, the impact on revenue was about $25 million to $30 million impact annualized, but to state it differently, so we have that, of course, baked in to our 2020 outlook.

Jimmy Bhullar -- JPMorgan Chase & Co. -- Analyst

Okay. And if I could ask one more, you've been fairly active with deals, but most of them have been small sort of tuck-in type transaction international markets and asset management. So, if you just comment on your interest in deals and specifically if you would be open to a large transaction, you've been mentioned as an acquirer of some of [Phonetic] like large public companies in the press recently, but just wanted to see if that's something that you would be open to as well.

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

Well, right now, what I would say is we are going through the digestion process of the Wells Fargo IRT business. Our highest priority is successfully migrating those customers, the employees, the participants and reassuring the advisors and the distribution community that we are -- they are in safe hands. And so, job one, successfully migrate those customers and so, we've got our hands full for another five quarter, say, as we transition through that limited resources to execute and bring those clients on board. But again, as Renee was saying, we're very happy about the progress.

In other parts of our business, asset management is not as connected in terms of the resources and if there is the right opportunity that presents itself to Tim Dunbar and his team around asset management, that allows us to add capabilities and scale, we would want to do that. Outside the country, in terms of replicating more of what we do for PI, we've been on the record before, we like the countries that we're in. From time-to-time, we do get presented with the opportunity to again add capabilities and scale and we we'd look at each one of those on a one-off. But bottom line is, right now, we've got our hands very full with digesting what we have on the full service side.

Does that help, Jimmy?

Jimmy Bhullar -- JPMorgan Chase & Co. -- Analyst

Yes, thank you.

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

Thanks for the questions.

Operator

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

Humphrey Lee -- Dowling & Partners -- Analyst

Good morning and thank you for taking my questions. I have a follow-up question to Eric's question earlier for Principal International. So, but looking at the kind of expenses for this quarter, they looked a little bit elevated and then specifically looking at earnings contribution by country on a local currency basis and adjusted for encaje, Chile was lower than what it had been running for the past few quarters and then also China looked a little weaker. Like I was just wondering, can you talk about what's going on there? Like from Luis' comments earlier, it didn't sound like you're seeing any structural changes or any systemic things going on in there. But I was just wondering, is there any kind of some one-off expenses or anything that you can provide some color on.

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

I'll make two broad statements before asking Luis to add to it and the first thing I would say is, when you're dealing with emerging markets, there's always a lot of volatility. There is political volatility, currency, FX, inflation, certainly encaje introduces its own set of complexity. So we're quite accustomed the fact that if you're going to do business in emerging market, it comes with a lot of volatility.

The second thing I would point out and I still remember that 10 years of which PI was such a big tailwind every single quarter. PI represents about 19% of our earnings and if I add Chile and Hong Kong together, it's about 10% of the total earnings. So the bottom line is we are at any given time going to have disruption and volatility in these various markets in which we do business. And I wouldn't look at any one quarter in any one year around expenses and somehow think that that was not something that we would manage effectively.

So, Luis, you want to take it from there?

Luis Valdes -- President and Chief Executive Officer-Principal International

Yes. Hi, Humphrey. Let me start with China first, in order to try to explain what you're asking. We have certainly -- it looks like that fourth quarter for China is kind of a low quarter. We have a delta between third quarter and fourth quarter of $2.9 million in OE pre-tax and we have a delta of $3.5 million in revenues. So, let me try to explain this very, very quickly. The whole difference is about the average AUMs for the fourth quarter. When you look in the fourth quarter end-to-end comparison with three quarter [Phonetic], it looks flat. But we have a lot of volatility the intra-quarter, particularly we have $7 billion of negative net customer cash flows in October, then we had positive net customer cash flows considering November and December. So the whole quarter we have a $3.3 billion negative net customer cash flows, but the path was completely different. So the average was pretty much more lower than you can expect.

So with that, the impact in our revenues, just because the lower average AUM, it was at $2.2 million to start with. Then you have another small impact in terms of $0.5 million in FX. Having said that, this was totally expected for the year, the $5.5 billion negative net customer cash flows in 2019 after having $33 billion -- positive billion dollars in net customer cash flows in 2018. The reason for is [Indecipherable] a profound movement from money market funds in which we're heavily weighted in the Chinese market into equity markets during 2019. We were pretty flat when the average industry had a negative 6% down from money market funds. So, we are doing, I would say, well end-to-end, but the explanation for China is average AUM for the fourth quarter.

Going into Chile, certainly, we should have a $26.1 million to explain in OE. Let me go very quickly with that. Easier to explain the delta is at $50 million in cash here. $13 million [Phonetic] positive in the third quarter, minus $3 million negative in the fourth quarter. So you have a delta of $15 million there. Elevated prepayment fees in the third quarter by $4 million and then the FX impact in terms of revenues was another $6 million just within the third quarter and the fourth quarter. So, with those numbers, you can make the math for Chile. So, in a constant basis and adjusted basis, Chile, third quarter and fourth quarter was a flat -- I would say flat growth for Chile. That is essentially the explanation for both countries.

Humphrey Lee -- Dowling & Partners -- Analyst

I appreciate the color, thank you for that. Shifting gear to PGI, net flows were positive for the full year and as you look into the pipeline for 2020, do you expect the positive flows to continue? And then, I have another question on the performance fees.

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

I know I do, I'll ask Tim to answer for himself. Tim?

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

Yeah, thanks a lot for the question. We did see a lot of momentum building in 2019 for our net cash flows. I think we talked a little bit about some of the changes that we've made to management into the distribution team and really to the infrastructure and ecosystem of our distributing our products and that bodes really well. I think the other thing I'd mention is just the strong investment performance and while it's nice to see a pop in the short-term investment performance, what I think I'm most proud of and what we really focus a lot of our efforts on is really the consistency of the long-term investment performance.

And if you look at that three-year 71%, five-year 79% and 10-year 91%, that really bodes well for the types of solutions we're trying to create for our clients and our strategy of building retirement investments for all of our clients.

So, I think that's the backdrop of how we feel about moving into 2020, which is we have some momentum gaining. Obviously, each quarter will have dynamics that will be a little volatile or a little different from quarter-to-quarter, but as we look at the backdrop, we have a strong pipeline, we have strong interest in a wide array of our diverse capabilities. So, we look pretty positively at 2020.

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

Thanks, Humphrey.

Operator

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

Andrew Kligerman -- Credit Suisse -- Analyst

Great. Good morning.

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

Good morning.

Andrew Kligerman -- Credit Suisse -- Analyst

One follow-up on the SECURE Act. A few years back, you used to provide some stats on what were your small accounts, and I think maybe we could get a sense of what the fees on those accounts were. Could you give us a rough idea of what percent of your RIS deposits relate to small accounts and what the fee ranges there? And with that answer, as we move to MEPs, what would be the differential in fees if those accounts were to move into a MEP?

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

Yeah. So I want to make sure and get a good answer here, but I certainly don't remember providing historical pricing because the reality is that we custom price nearly all of these plans, and are they TRS, are they not, what percentage proprietary a product and there is a such a wide range there. What you can sort of expect is I sort of -- even the definition of what is small, what is medium and what is large and the reality is it kind of in our mind, we break it into a third, a third, a third. About a third of that total account values are in the small, about the third in what we describe as a medium and then third, which is large. And proportionately, the basis points that you get on a smaller plan is going to be larger than the very largest plans that we have. But on average, the margins are very comparable in the end.

So getting back to the full question around MEPs, that is a question, I think that is still yet to be answered. Make no mistake, there will be a lot of cost associated with the establishment and the oversight of these MEPs. I don't want anybody to get off this call think that it's a panacea that with the passage of a MEP, there is all of a sudden going to be an incredibly low-cost option out there, because it -- I just don't think that that's going to materialize. It will over time provide choice to small employers as Renee described earlier, who may not or may feel that there is a different fiduciary role that is being completed or different investment options, but I suspect we're a year away from being able to answer your question, Andrew, on the specificity around the competitive nature of in a MEP or a small plan.

Andrew Kligerman -- Credit Suisse -- Analyst

Got you. Okay. And then maybe shifting over to Specialty Benefits and you had a really nice change in premium over the last 12 months of premium and fees of about 7%. As you look forward, where do you see most of the growth coming? Would you expect it in voluntary? And with that, are you seeing any signs of heavy competition and pricing pressure?

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

I can never remember a time where we didn't have heavy competition and pricing pressure in any of these benefits, but again a lot of credit to Amy and her team for what they're putting in place, their focus, their attention, but I'll let her specifically answer your question.

Amy C. Friedrich -- President-U.S. Insurance Solutions

Yeah. With regard to kind of starting with the pricing pressure, I think we do always see that pricing pressure. I think what -- and I feel like a bit of a broken record here talking about the small case market, but when you look at the small case market, there are just some dynamics there that sort of serve as natural gates that keep some of our other competitors out of there. You got to do things in the scale to -- you have to process 10,000 cases a year as opposed to 1,000 cases a year. You have to do some things with your in-force pricing, you have to be willing to look at it as an advantage that you can have -- make a pricing decision because you're -- most of your block is only in a one-year rate guarantee. So what I can guarantee for us is we will continue to grow in that small case market. We've built a system that works for that footprint, we have the underlying technology and we have an awesome sales force lined up against that. I would argue that some of the relationships we have with brokers and advisors who serve those markets and again, they are not always the bigger name sort of regional or national players, a lot of these are people who have businesses that serve small local communities and we've established really deep and strong relationships there.

So, as the economy continues to grow, as businesses continue to hire and add, I would continue to see that being a fuel for our premium and fee growth for SBD.

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

Thanks for the questions, Andrew.

Andrew Kligerman -- Credit Suisse -- Analyst

Thanks.

Operator

The final question will come from Ryan Krueger with KBW. Please go ahead.

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

Hi, thanks, good morning. My first question was on International. You referenced the $80 million of adjusted earnings as a good starting point going into 2020. That seems a bit lower than what was implied by the guidance in December. So, I just wanted to clarify if I was thinking about that correctly. And if so, what caused the change?

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

Luis, if you want to help clarify that?

Luis Valdes -- President and Chief Executive Officer-Principal International

Yes. Let me try to put this in perspective, because we have had this discussion and particularly, when you're looking what we have reported in Q3 first. So, it looks like we are -- we have a comparison with that. It's $92 million versus $80 million. It's important to put this in precise, very easy to explain the difference. First of all, $4 million headwind in FX, the same $4 million that we have in additional and an elevated prepayment fees and $3 million more about elevated expenses that are related with the recalibration of our business in Hong Kong and Chile. So, if you're taking that in consideration, you -- immediately you're going to make the math between $92 million and $80 million. I really believe that as we said and Deanna said, the $80 million -- $81 million that we are proposing is a good representation of our run rate into 2020 and it's pretty much more in line with our guidance that we put together in the month of December for PI.

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

Okay, thanks. And then just last one, Deanna, you mentioned, high-single digit EPS growth from a normalized level in 2019. Is the normalized level around $5.55, if I'm making all the right adjustments?

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

$5.55, so I think -- are you looking at on an after-tax basis or a pre-tax basis?

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

I was -- I think -- I thought the high-single digit growth was for adjusted...

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

EPS, you're right. Yeah. I don't have that right in front of me. I think how we would do that is we took out all significant variances in 2019 and then we normalized for the integration costs in 2020. So we can get back to you on that exact EPS, but that's how -- that's what led to that calculation.

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

Okay, great. Thank you.

Operator

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

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

Yeah. Thank you. I appreciate everyone's questions this morning. I just want to assure investors out there that we spend a lot of time aligning our expenses with our projected revenues. That's always been a hallmark of the organization. It will continue to be a focus of this management team. Second, we made a big bet with IRT and successfully migrating that over. That does not escape us and we focus a lot of time and attention to successfully migrating that business. The support and you're starting to see the realization of that digital portfolio as we digitize our business and become more relevant. We have enormous confidence that those investments will continue to pay off for investors. So, we're going to stay focused on these efforts and certainly appreciate your continued support. 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 p.m. Eastern Time until end of day, February 4, 2020. 7479802 is the access code for the replay. The number to dial for the replay is 855-859-2056 U.S. and Canadian callers or 404-537-3406 International callers. Ladies and gentlemen, you may now disconnect.

Duration: 62 minutes

Call participants:

John Egan -- Vice President of Investor Relations

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

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

Renee Schaaf -- President-Retirement and Income Solutions

Luis Valdes -- President and Chief Executive Officer-Principal International

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

Amy C. Friedrich -- President-U.S. Insurance Solutions

Alex Scott -- Goldman Sachs -- Analyst

Erik Bass -- Autonomous Research LLP -- Analyst

Jimmy Bhullar -- JPMorgan Chase & Co. -- Analyst

Humphrey Lee -- Dowling & Partners -- Analyst

Andrew Kligerman -- Credit Suisse -- Analyst

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

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